Why are contractual fines good for business and what should you watch out for?
Contractual fines are a great tool in case one party violates a contractual obligation.
Well, here it’s good to pause and tell yourself a few things to be careful about with contractual fines.
1. When it is vaguely defined
Certainty is essential in every contract, but making an advantage out of uncertainty is the road to hell.
Example: An exemplary example is the provision that a contractual penalty may be imposed “for any breach of contractual obligation.”. I am not saying that it is an invalid provision, but it leaves room for speculation – is such a contractual penalty sufficiently certain?
Basic rule – negotiate clear and specific conditions when the contractual penalty is paid. Always. You will reduce the risk of disputes with the other party.
2. When it is disproportionately high
First of all, what is an disproportionately high contractual penalty?
Example: We do not have a completely clear answer here, but if someone would like to give you a contractual penalty in the amount of e.g. 3 times the performance according to the contract, so you should sharpen your attention. In principle, think about whether the amount of the fine is proportionate to what the other party is compensating for.
Basic rule – if I am not sure whether the amount of the imposed fine is appropriate for the business we are doing with the other party, it is ideal to turn to the court, which can reduce the disproportionately high fine.
3. When fine is not for a breach of contract
Example: A fine example is the contractual penalty for termination/withdrawal from the contract. Termination/withdrawal from the contract is the so-called exercise of the contractual party’s right not to be in a contractual relationship and not by breach of contract. Therefore, such a provision of the contract would be invalid.
Sometimes there is such a “mismatch” that a contractual penalty is imposed for something that is not actually a breach of contract.
Basic rule – if you see such a provision in a contract, it is most likely invalid.
PS: The photo is from Barcelona AD 2016, I don’t know if even the Lord God would not give a contractual penalty for the work that took so long, although the resulting cathedral will certainly be beautiful.
