The contractual penalty in contracts (Art. 160 ff. CO)

Definition and function

A contractual penalty may be agreed if a contract is not fulfilled or not fulfilled properly. The legal basis for this can be found in Art. 160 ff. CO. The contractual penalty is due if the condition agreed by the parties – non-performance or improper performance of the secured main obligation – occurs. The contractual penalty thus has an accessory character, i.e. it is in addition to an existing legal obligation. The contractual penalty is owed solely because of the non-performance or defective performance, i.e. no damage is presupposed. Consequently, the creditor is exempt from proving a corresponding damage. The contractual penalty fulfils two functions: On the one hand, it represents a lump-sum compensation for damages, on the other hand, it fulfils a punitive function to secure the performance of the contract. The agreement on a contractual penalty can be concluded together with the main contract or in advance or subsequently in a separate agreement.

Amount and reduction

According to the case law of the Federal Supreme Court, the amount of the contractual penalty can in principle be freely determined by the parties. This is a consequence of the principle of freedom of contract. However, the judge may reduce excessively high contractual penalties at his discretion based on Art. 4 CC. According to the Federal Supreme Court, however, restraint is required here. However, an intervention may be justified if the agreed amount of the contractual penalty is so high that it exceeds the reasonable amount that can still be agreed with justice and equity or if there is a blatant disproportion between the agreed amount and the interest of the claimant to adhere to it to the full extent. A blatant disproportion is given if the entitled party would obviously enrich itself if the full contractual penalty were awarded. An assessment must always be made on a case-by-case basis – the application of rigid rules is inadmissible (e.g. 10 % of the work price in the event of a delay in delivery, BGer 4A_273/2019 dated 17.04.2020 E. 5.2). In particular, the type and duration of the contract, the seriousness of the fault and the breach of contract, the creditor’s interest in compliance with the prohibition as well as the economic situation of the parties involved, namely the obligor, shall be assessed. Any dependencies arising from the contractual relationship and the business experience of the parties involved must also be considered. A reduction is more justified vis-à-vis an economically weak party than among economically equal and business-savvy contractual partners.

Conclusion

The assertion of a contractual penalty is only possible if such a contractual penalty has been explicitly agreed and the condition for the contractual penalty to come into force has been fulfilled. Damage is not a prerequisite. Although the amount of the contractual penalty is in principle subject to contractual freedom, it must be proportionate in view of the circumstances. However, restraint is required in the judicial exercise of discretion regarding the reduction.