Contractual penalty

The agreement about the contractual penalty should contain as an essential element, not only the amount of the contractual penalty, resp. the way of its determination, but also the specification of the contractual obligation the breach of which establishes the right to the contractual penalty.

The Supreme Court of Czech Republic has determined repeatedly in past, that the agreement about the contractual penalty should contain as an essential element, the precise and explicit determination of the contractual obligation the breach of which establishes the right to the contractual penalty (e.g. decision No. 23 Cdo 4281/2011). On the other hand the Supreme Court came in the decision No. 32 Cdo 493/2011 in the similar case to the opposite conclusion, i.e. it is sufficient that the contractual penalty for the breach of the contract is agreed without the determination of the breach of a particular contractual obligation. Until the moment, the practice of the courts is unified, we recommend, in order to be on the safe side, to incorporate into the agreement about the contractual penalty as an essential element, also the explicit specification of the contractual obligation the breach of which establishes the right to the contractual penalty.