Penalty in Case of Agreement Dissolution Due to Non-Execution

The penalty as a judicial figure has been regulated in Art. 92. of the Obligations and Contracts Act (OCA). In its essence it is an agreed or normatively established clause serving to define in advance the consequences of an eventual non-execution on the part of any of the parties in an obligation relationship. The legal provisions of Art. 92. of the OCA are supplementary, provisional, and the parties may deviate from them. A penalty is determined also as an established preliminary responsibility of the debtor in an obligation connection in the case when the latter does not execute or does not execute correctly its obligation under the agreement.

The penalty is a consequence of the non-execution and it refers to the legal sphere of the party in fault. A party in fault in a relation of obligation is the party which has not fulfilled its obligation, which is not ready to fulfill it and which has not provided to its counter-party (contractual party) the necessary support for the consideration, off-set. A similar fault represents a delay due to non-execution.

The main task of the penalty is a preventive one. It is necessary to provide for the exact execution of the obligation. The fear that penalty shall be due in case of non-execution or low-quality execution/performance aims to have an impact on the mind and mentality of the debtor and to stimulate it to achieve the result due. According to the provision of Art. 92. of OCA the Act „provides for the execution of the obligation”.

The eventual non-execution on the part of the debtor is due to damages caused to the creditor. Agreeing a penalty clause, the parties solve in advance the problem of the responsibility of the debtor for the damages caused and agree that the creditor shall claim for these to the amount of the agreed penalty without the need for these damages to be proved, evidenced. In such sense the penalty has the function of security.

Once the non-execution on the part of the debtor is at hand, the damages become due to the amount of the penalty, in case the latter has been agreed for the specific case or at least the normatively established reimbursement for delay becomes due, which is practically the legal interest rate from the day of the delay as per Art. 86. of OCA. In the case when the agreed penalty does not cover the actual damages incurred, there is no obstacle as to the creditor to claim for these too but it shall have to prove these in the order established in the Civil Procedural Code.

The law regulates undoubtedly also the cases in which the amount of the penalty becomes too high. The penalty is not a means of enriching of the creditor, rather for its reimbursement for really incurred damages. In such case „the court may reduce its size”, reads Art. 92, Paragraph 2 of OCA.

In all case of termination of the bilateral agreements (contracts) due to the fault of one of the parties in the case when an agreed or normatively established penalty is at hand, the latter may be claimed by the correct party. Exception in the application of that principle is made when the agreement (contract) is terminated by means of dissolution since it has retroaction. The retroaction, on its part, leads to the falling off of the grounds on which penalty could be claimed. Up to the moment of dissolution as such grounds serves the agreement (contract) itself but afterwards the situation is as if the agreement (contract) has never been concluded.

Upon dissolution of the agreement (contract) due to non-execution there arises the question: could the penalty agreed in it be claimed, bearing in mind its accessory character. It provides for the execution of a certain obligation and defines the amount of the damages, which, without any proving, the creditor may claim in case of non-execution of the obligation. A penalty is considered to be due in case the following prerequisites are cumulatively at hand: the penalty to have been agreed by the parties in a relationship, the creditor to have fulfilled its obligation or to have been ready to execute and to have at hand non-execution, execution of low quality or execution delayed on the part of the debtor. It follows there from that for a penalty to exist there has to exist also a preliminary arisen valid relation of obligation. The obligation of penalty is in close functional relation to the obligation it provides for. The penalty depends on that relation and it is accessory to it. There from arises also the question whether the penalty could be claimed also in the case when the agreement (contract) has been terminated on the part of the creditor, due to non- execution or due to bad execution on the part of the debtor.

The character of the penalty is such that it becomes due in the case of complete non-execution or inexact execution, respectively delayed execution. These hypotheses point to a violation of the agreement (contract). If it has been arranged in a bilateral agreement (contract) that penalty shall become due in the case of delayed execution, then the correct party may claim for the execution and the agreed penalty for delay or the execution and the factually incurred damages due to the delay that still have to be evidenced and proven. The choice is conditioned by the fact whether the creditor can prove the availability and the amount of these damages.

In all the cases when the prerequisites for the availability of penalty are cumulatively at hand, it may be claimed by the correct party. The question of the good grounds for the claim arises when the agreement (contract) has been terminated by way of dissolution, since the latter has retroaction as per the provision of Art. 88, paragraph 1 of OCA. An exception from the principle established by the said norm represent the agreements (contracts) with periodical or long-term execution. The dissolution of the agreement (contract) in such case has no retroaction with regard to the right acquired by the creditor for reimbursement of the damages that have been incurred due to bad or incomplete execution of the agreement (contract). That right remains in existence upon dissolution of the agreement (contract).

Dissolution due to non-execution of an agreement (contract) does not represent an obstacle for claiming the payment of the penalty agreed by the parties. Bearing in mind the reimbursement character of the penalty, there is no obstacle for the parties to agree the reimbursement even in the case of dissolution of the agreement (contract) due to non-execution of a pecuniary obligation. In consideration of the fact that the defendant owes reimbursement for non-execution of its pecuniary obligation as per Art. 88., Paragraph 1, sentence 2 of OCA, and that the parties have agreed the size of the said reimbursement in the form of a penalty, the claim for the latter has good grounds as from the date, on which the defendant is in delay in the execution of its agreed obligation, and until the date of its execution.

On the other hand claiming a penalty for a future period should take into account every concrete situation in view of the characteristics of the case. An estimation of the specific relationship and its specifics is necessary and also whether such a claim is to the point in view of the possibility for a positive ruling for any reimbursement for delay for a future period until the final payment of the receivables. The size of the receivables themselves on which the reimbursement for delay is due has also to be taken into account as well as the approximate size of the latter.

In case the obligations of the party in fault have a pecuniary and not a material character, the non-execution of these equals a complete non-execution of the agreement (contract). That characteristic feature has also to be taken into account in every specific case, the specifics of the legal form of the relationship are to be taken into account – when the obligation of one of the parties finds expression in a pecuniary consideration then the lack of payment shall bring about a complete non-execution, even when some private payment is at hand because such a payment of part of the obligation reduces only the value of the pecuniary consideration and does not bring about the execution of the obligation in its entirety as the due counter consideration under the legal relationship.

The problem of whether the penalty is due in the case of a dissolved agreement (contract) due to non-execution by on of the parties under it arises also when the penalty is claimed in court-ordered procedure therefore it is necessary to discuss it in that light as well.

The court-ordered procedure is discussed in Chapter thirty seventh of Part Five of the Civil Procedural Code. The law characterizes it as facultative, one-tier and written procedure, which has been distributed for hearing by the district courts. The procedure has a restricted material scope, namely for pecuniary obligations and for obligations for the handing over of portables. The procedural representation is not obligatory.

In its essence the court-ordered procedure represents an alternative of the basic procedure of claiming. The basic difference between them is that the court-ordered procedure is not intended to solve disputes between the applicant and the debtor. There undoubtedly exists a relation between the two kinds of procedures, which finds expression in the possibility for the process to be transformed if in the process of hearing the case it is established that there exists a legal dispute between the parties.

The court-ordered procedure commences with the submission of an application for the issue of an order for execution. After discussing the application at a closed session the court pronounces itself on the application by an explicit court deed. By its ruling the court may reject the application in case it considers that no prerequisites are at hand for the issue of an order for execution, otherwise it may rule the issue of an order for execution.

The objective of the court-ordered procedure is the establishment of the fact that the receivables are not objected to and an executive ruling is to be issued for undisputed receivables. The application of court-ordered procedure aims to avoiding the conducting of court cases and proceedings and the collection of evidence on the existence and the amount of receivables that have not been objected against by the parties and due to the fact that the subject of the said procedure has to be an undisputed one because it is if one-sided character. For the protection of the debtor under that procedure the law provides the opportunity for objecting whether the consideration claimed is really due as per the order of Art. 414, paragraph 2 of the Civil Procedural Code, under which hypothesis the court-ordered procedure cannot achieve its objectives and refers to the general competitive process of claiming by means of which a control check is carried out to prove whether the consideration claimed for is due.

In a specific case representing a part of the discussed problem, by its judgment the court has ruled as inadmissible the awarding of penalty for a future period. An agreement (contract) certified by a notary has been enclosed to the application for the issue of an order for execution in which the payment of the obligation of the debtor is spread over a period. The court as ruled that, since the court-ordered procedure has been established as strictly formal and its sphere of application is restricted to claims defined in contents, it is inadmissible to award the claimed penalty for delay and the penalty for a future period instead of the legal interest for a future period until the final repayment of the obligation. It is claimed that such way of proceeding would be in discrepancy with the basic characteristics of the court-ordered procedure.

When hearing the submitted application for the issue of an order for execution as per Art. 417 of the Civil Procedural Code the court has certain procedural powers that have been specified in detail in Art. 418, paragraph 2 of the Civil Procedural Code. In view of the strictly formal character of the court-ordered procedure, the ruling as to whether the receivables claimed for in the application is among the explicitly enumerated prerequisites that have to be submitted to a control check by the court in order for an order to be issued for the immediate execution of a pecuniary obligation upon presentation of a document as specified in Art. 417 of the Civil Procedural Code, namely an agreement (contract) with the signatures certified by a notary.

The only powers that have been provided to the court in that procedure. as per Art. 418, paragraph 2 of the Civil Procedural Code, represent the carrying out of a control check of whether the submitted document is a regular one on its appearance and whether it proves takings against the debtor due for execution (collection). Upon the presentation of an agreement (contract) certified by a notary the court, having ascertained first that the document is regular on its appearance, has to rule in favor of the creditor all takings due for collection under the document, which the debtor has recognized and has undertaken the obligation to pay as per the agreements made between the parties. The clause for the penalty agreed in the agreement (contract) being due is operative between the parties and should not be ignored. Thus the court imposes a restriction on the creditor to obtain the penalty for delay due to it, as agreed following the will of the parties and made objective in the agreement (contract) signed by the parties.

The statement that the ruling of a reimbursement in the form of the claimed penalty, and not the legal interest would violate the formal character of the court-ordered procedure is not correct. The two kinds of takings have the same objective, namely to motivate the debtor to pay its obligation within the agreed terms. The character of the takings is also identical, namely the reimbursement for delayed payment. The period for which the takings are due coincides too, namely for a future period until the entire and complete repayment of the takings. Besides, it has to be taken into account that in almost all agreements (contracts) the parties agree the size of the claimed penalty.

In the case when a dispute on the obligation is at hand and the court-ordered procedure is transformed into a claim procedure or in case of initiation of an independent claim procedure, it would be advisable to include into the statement of claim an alternative claim for the ruling of the legal interest for a future period. Should the court find the claim for penalty for a future period as ungrounded there should be at hand at least an alternative claim for the ruling of the legal interest for the same future period. In the case when that claim has also been rejected there remains the possibility for the creditor to claim for the reimbursement of the damages incurred until the final repayment of the obligation in a future procedure. By ruling a rejection for the awarding of a reimbursement for delay in one procedure the right of the creditor to claim for its rights in a future procedure is not precluded.