Contractual fines do not allow for the possibility of exemption due to an unpredictable or insurmountable obstacle arising independently of the will of the liable party, as is the case for damage compensation. So what are the options of defence against a contractual fine under the current circumstances? In general, we can find support even today in general private law principles. The law offers several institutes of protection against a contractual fine. The most important ones are:

• Moderation, i.e. reduction of the fine by the court;
• Protection from dishonest practices; and
• The right to renew negotiations regarding the contract, although this is rather theoretical.

However, reduction of the fine concerns only the excessiveness of the fine in the context of the value and importance of the secured obligation. If the contractual fine is excessively high, the court can decrease it (but only if the liable party suggests it) to the level of the damage incurred. According to the Czech Supreme Court, excessiveness applies only with respect to circumstances that already existed at the time when the contractual fine was arranged, i.e. when the contract was concluded. A substantial change of circumstances after the conclusion of the contract (such a pandemic) is not relevant. In any case, it makes sense to address the relation between the fine and the damage incurred.

The second institute is the protection from dishonest practices. The Civil Code says that an obvious abuse of rights is not legally protected. However, that does not mean that such a right to a contractual fine cannot be granted by a court. If the liable party pays the fine willingly, or the party entitled to receive it offsets the fine, it will not be unlawful. The Supreme Court addressed this issue – based on the Commercial Code, but we believe that it applies even now. The Supreme Court was of the opinion that “facts that occurred subsequently (after the conclusion of the contract) could – based on their nature – lead to the conclusion that the application of the right to a contractual fine represents (fully or partially) exercising a right contrary to the principles of honest business practices, and as such it is not under legal protection”.

Based on the Supreme Court’s interpretation, the application of a contractual fine is contrary to honest business practices (and constitutes an abuse of rights) if it neglects the functions of a contractual fine (function of security, compensation and sanction), and instead the right is exercised for other reasons than achieving economic goals or satisfying other needs, where the main or predominating motivation of the creditor is to cause damage or a disadvantage to the liable party (so-called vexatious exercise of rights), or when it is clear that the exercise of the right will lead to unacceptable consequences manifesting in the relations between the participants as well as in the external position of one of them.

The last institute we would like to mention is the right to renew negotiations regarding a contract due to a substantial change in circumstances after its conclusion. It needs to be pointed out that the law does not explicitly mention a change in circumstances that causes an especially marked disproportion in the rights and obligation of the parties by placing one of them at a disadvantage either due to an excessive increase in the costs of performance, or an excessive decrease in the value of the subject of the performance. It does not explicitly mention a fine for a delay in the performance. The question therefore is to what extent a contractual fine can be seen as a type of performance or component of the costs of performance. In any case, it is worth recommending the use of the right to renew negotiations regarding a contract for example with respect to extending the delivery deadline, which may lead to a fine if it is not met; this right can be sought even before a court. If the case is successful, no delay has occurred and the fine thus becomes unsubstantiated. The court may even cancel the entire contractual obligation.

It will be interesting to see how the current crisis will be reflected in the practice of negotiating business contracts in the future. If the counterparty insists on a provision entitling it to a contractual fine, we can certainly recommend making sure the contract contains the possibility of exemption from the fine in the event of an unpredictable or insurmountable obstacle, as is the case with respect to damage compensation. Such a clause can contain examples or an exhaustive list of specific obstacles, or instead a list of situations that will not be considered obstacles.

The article was published on the epravo.cz on 14 May 2020.