Can contractual penalties for non-performance or improper performance of a contract be claimed from the debtor indefinitely?

In commercial practice, debtors often face demands for payment of contractual penalties many years after the contract has expired. In such a situation, is the debtor obligated to pay the penalties?

The general regulation governing the limitation period for claims is Article 118 of the Civil Code, which states:
“Unless a specific regulation provides otherwise, the limitation period is six years, and for claims concerning periodical performances and claims connected with conducting business activity – three years. However, the end of the limitation period falls on the last day of the calendar year, unless the limitation period is shorter than two years”. A specific provision remains, for example, Article 646 of the Civil Code, concerning contracts for specific work, according to which :”Claims arising from a specific work contract become barred by the statue of limitations two years after the specific work is handed over, and if the specific work has not been handed over – after the date on which it was to have been handed over under the contract.”

Regarding the issue at hand, the case law presents the following views:

• A claim for payment of a contractual penalty due to improper performance of a contract for specific work (which essentially acts as a substitute for compensation) is subject to the limitation rules provided in Article 646 of the Civil Code. (See e.g.: Supreme Court judgment of October 20, 2006, ref. no. IV CSK 178/06; Supreme Court judgment of November 18, 1997, ref. no. II CKN 465/97; Court of Appeal in Kraków judgment of April 14, 2016, ref. no. I ACa 1864/15);
• With regard to other types of contracts than contracts for specific work, the prevailing view is that the obligation to pay a contractual penalty is an indefinite obligation, which becomes due immediately upon the creditor’s demand for performance. (See e.g.: Supreme Court in: decision of November 19, 2018, ref. no. I CSK 249/18; judgment of June 30, 2011, ref. no. III CSK 282/10; judgment of December 16, 2015, ref. no. IV CSK 141/15; judgment of March 2, 2017, ref. no. V CSK 395/16; and resolution of November 5, 2014, ref. no. III CZP 76/14), with the following clarifications:
  • A claim arising from an indefinite obligation to pay a contractual penalty becomes due on the day the performance should have been rendered, had the creditor demanded it at the earliest possible time (Article 120 § 1 second sentence of the Civil Code in conjunction with Article 455 of the Civil Code) (see, among others, Supreme Court judgment of June 30, 2011, ref. no. III CSK 282/10);
  • In reference to the second sentence of Article 120 of the Civil Code, the relevant date is not the actual date of the demand for payment, but rather the date on which the creditor could have demanded performance at the earliest, taking into account the necessary time to perform the obligation (see e.g. Supreme Court judgment of December 16, 2015, ref. no. IV CSK 141/15).

 

Applying the above jurisprudential positions into an answer to the question posed at the beginning of this article, we explain how a debtor should act upon receiving a demand for payment of contractual penalties.

First, it is necessary to determine the nature of the contract binding the debtor with the counterparty, as well as when the obligation was performed, which is the subject of the penalty demand.

Next, the contract with the creditor should be reviewed to check whether the parties agreed on a specific payment date for the contractual penalties. This is important, because if the contract includes a due date for the penalty payment, the limitation periods described in this publication will run from the contractual due date. If it turns out that the contract does not contain detailed provisions regarding the payment date of contractual penalties, general rules under the Civil Code (Article 118 and Article 120 of the Civil Code) or specific provisions (e.g. Article 646 of the Civil Code) will apply.

If the creditor delayed in pursuing contractual penalties and made the demand after the expiration of the limitation periods specified in the aforementioned Civil Code provisions, the debtor should refuse to pay the contractual penalties.