The rules on contractual penalties under Act No. 89/2012 Coll., the Civil Code, as amended (the “CivC”) derive from the previous legal regulation, but sharpen its meaning by introducing a distinction between “securing” and “confirming” obligations in line with case law. As in other areas, there is a noticeable loosening up of the statutory rules and an emphasis on contractual regulation by the parties themselves. Legal relationships created before the CivC took effect which involve a contractual penalty - and any rights and duties arising from these contractual penalties - continue to be subject to the previous law. The contractual parties can agree, however, that the CivC will regulate their rights and duties. The law classifies acknowledgement of a debt or a contractual penalty as confirmation of the obligation. This confirmation of a debt does not secure the creditor’s claim financially, but it does provide the creditor with other benefits such as a lump sum determination of the damage incurred, suspension and extension of the statute of limitations and reversal of the burden of proof in case of any litigation. 

When agreeing on the contractual penalty, the parties must decide on (i) the duty whose breach the contractual penalty will cover (ii) the amount of the contractual penalty or the manner of its calculation. If a breach of the confirmed duty occurs, then the creditor may demand payment of the contractual penalty regardless of whether it incurred damage from the breach. The CivC also rules out the loss of the right to the contractual penalty in the event of an unintentional breach of contractual duty, unless the parties agree otherwise. 

Under the CivC, a court may reduce a disproportionately high contractual penalty based on a petition by the debtor. In so doing, the court will take into account the value and importance of the secured duty. The contractual penalty may, thus, be reduced to the amount of the damage incurred at the time of the court decision. 

The right to receive the contractual penalty is bound by a general statute of limitations of three years. This period applies to each individual right to the contractual penalty independently of the principal obligation. The contractual penalty becomes due without any delay after the creditor demands its payment by the debtor. This contractual penalty is not attached to any receivable; it exists solely as a separate claim of its beneficiary and must be sought before a court independently. 

Another change in the CivC regulation of the contractual penalty is that non-monetary contractual penalties are now explicitly allowed. Unless the parties agree otherwise, a creditor may not, however, receive compensation for damage caused by a breach of duty which is covered by a contractual penalty. The parties are now also permitted to agree orally on the contractual penalty.  Even so, arrangements in writing are still strongly recommended.

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