The Assessment of the Adequacy of the Contractual Penalty

The Supreme Court of the Czech Republic recently dealt in connection with the right of the court to reduce an excessively high amount of contractual penalty with a question of the assessment of adequacy of the contractual penalty for delay with termination of work (decision of June 1, 2016, Reference Number 23 Cdo 4620/2015).

The Supreme Court repeatedly came to the decision that the adequacy of the contractual penalty cannot be deduced from its total amount, if the amount is a consequence of a long-term delay and therewith related increase over the otherwise adequate amount of the daily rate of contractual penalty.

The Supreme Court dealt also with a question of adequacy of the contractual penalty for delay with termination of the whole work, and so in the situation when one date for the termination of the work as a whole was determined, the work was made for a certain total price and no sanctions for the non-termination in certain phases was concluded. If in such case the contractual penalty was concluded in adequate percentage rate in comparison to the total price of the work for each day of delay, the contractual penalty cannot be assessed as inadequate.

According to the opinion of the Supreme Court the facts, that arose after contractual penalty had been concluded, cannot be taken into consideration while assessing the adequacy of the contractual penalty. Therefore cannot be taken into consideration even the fact that only a relative small part of the work has not been finished.

The decision of the Supreme Court was made according to the Commercial Code. Nevertheless the above mentioned conclusions are applicable also for the new legal regulation.