Ways to Defend Against Contractual Penalties
- Introduction
The institution of a contractual penalty is an instrument that simplifies the legal and factual situation arising when damage results from the non-performance or improper performance of a non-monetary obligation. Its compensatory function is, of course, embedded within this mechanism, even if it is somewhat less obvious. A contractual penalty may also serve to discipline or even penalise a contractual partner.
This does not mean, however, that a contractual penalty is absolute or beyond challenge. The debtor has various means of defence, both under general provisions and specific regulations, including transport law and the CMR Convention. In practice, contractual penalties are common in the TSL industry, and the proper use of the legal mechanisms discussed below can have a decisive impact on the outcome of many disputes.
- Challenging the Basis of Liability
The primary defence against an unjustified contractual penalty is to demonstrate that the conditions triggering the penalty have not been met. Put simply, the “triggering conditions” of a contractual penalty describe the situation whose actual occurrence entitles the creditor to impose the penalty, for example:
“(…) if the carrier fails to appear for loading on 31 February 2027, then (…)”
In such a situation, it must be demonstrated that the triggering conditions have not been fulfilled—in other words, that the carrier did appear for loading on that day, assuming, of course, that it was the loading location specified in the contract and not a warehouse arbitrarily selected by the carrier.
If, however, a party imposes a contractual penalty on us, we must assume that it has evidence demonstrating that the conditions triggering the penalty have been met. In such a case, it is necessary to examine the wording of the penalty clause and determine whether its construction permits an interpretation that is more favourable to us.
It is worth remembering that ambiguities are generally interpreted against the party that drafted the contract, while in the TSL industry such provisions are, as a rule, imposed by the ordering party. In this context, attention should be paid to the purpose of the contractual penalty and the interests of the ordering party that the penalty is intended to protect.
Moreover, pursuant to Article 471 of the Polish Civil Code (leaving aside the exonerating circumstances provided for under the CMR Convention or Polish transport law), if the carrier demonstrates that the damage or delay resulted from circumstances for which it is not responsible, there are no grounds for attributing liability to the carrier and, consequently, for imposing a contractual penalty.
- Alleged Conflict with Mandatory Provisions of Law
Another form of defence is to invoke the invalidity of the contractual penalty clause, including on the basis of Article 58 of the Polish Civil Code.
In broadly understood transport law, mandatory provisions that restrict contractual freedom predominate. Article 41 of the CMR Convention provides that any provision that directly or indirectly derogates from the provisions of the Convention is null and void.
A classic example is a contractual penalty imposed in connection with a delay in delivery. Liability for delay in delivery is limited under Article 23(5) of the CMR Convention to the amount of the carriage charges. Contractual penalties that, in practice, circumvent these limits and result in the carrier being liable beyond the scope provided for by the CMR Convention can often be effectively challenged as being contrary to mandatory provisions of law. Virtually identical limitations arise under Polish domestic transport law.
The structure of a contractual penalty itself is also not unrestricted, and this applies not only to the conditions triggering the penalty but also to the sanction itself. The amount of the contractual penalty must be fixed, for example PLN 100 per day of delay, or the method of calculating it must be specified, for example 1% of the freight charge per day of delay.
In the latter case, however, caution is required, as the rate should, as a rule, be capable of being calculated as early as the date on which the contract is concluded. It is not permissible to make the amount of the contractual penalty dependent on the discretion of the contractual partner, for example by providing that the penalty amounts to PLN 100–300 per day of delay.
In transport practice, one frequently encounters general clauses providing for a “penalty for delay” without precisely specifying when the penalty begins to accrue, how the days are to be calculated or whether there is a cap on the penalty (which does not mean that such a cap is always required as a matter of principle). In such situations, the debtor may effectively argue that the lack of clarity prevents the broadest and most restrictive interpretation from being adopted.
- Reduction of a Contractual Penalty
The final line of defence is to seek a reduction of the contractual penalty. Pursuant to Article 484 § 2 of the Polish Civil Code, if the obligation has been performed to a substantial extent or the contractual penalty is grossly excessive, the debtor may demand that it be reduced.
A penalty is considered “grossly excessive” where there is a clear disproportion between the amount of the penalty and the extent of the breach and the creditor’s interest. When assessing this, the court takes into account, among other things, the degree of fault, the actual consequences of the breach, and the amount and nature of the damage.
In the transport sector, the reduction of contractual penalties plays an important role in cases involving penalties calculated as a percentage of the value of the goods or the entire contract, particularly where the breach was incidental and did not cause any actual loss to the ordering party.
It is worth remembering, however, that the reduction of a contractual penalty is by no means guaranteed, as the application of this mechanism ultimately depends on the discretion of the judge hearing the case. In essence, the party seeking a reduction must persuade the court that the circumstances of the case justify granting such protection.
Łukasz Strzelczyk
Attorney-at-Law at Trans Lawyers Law Firm
