Penalty Clause - Romanian Law

Penalty Clause is an ancillary contractual clause through which the parties estimate and agree a penalty in advance, in case one or both of them fail to fully or partially fulfil their obligations appropriately (including at the stipulated place) or within the agreed term.

If the option is to claim the penalty clause, it cannot be obtained a higher penalty/compensation, nor can the clause be subsequently increased by court decision. Consequently, a careful assessment of potential damages from the very beginning is needed.

However, one can waive the benefit of a penalty clause if the actual damage suffered is higher. In this case, the creditor will have to prove this damage in court, no longer being exempt from proof as within the scope of the penalty clause.

Such a clause must be expressly agreed in writing—either through the contract or an addendum. For example, unilateral mentions on an invoice are not admitted if there is no penalty stipulation.

The penalty clause may consist of:

• either the obligation to pay compensation, or,
• in the event of contract termination due to non-performance, the possibility for a party to retain, as a penalty, already received advance payments, other than those stipulated as earnest money (which is governed by distinct rules).

ADVANTAGES of the penalty clause:

• It discourages the violation of assumed obligations.
   
• The creditor can claim it without being required to prove the existence or extent of the damage, as would be necessary in the absence of a penalty clause.
   
• Correspondingly, the debtor cannot defend themselves by arguing that the anticipated damage did not actually occur or is smaller than the stipulated clause (but they can request the reduction of the clause).
   
• The actual damage may even not have occurred; what is important is that the parties have agreed in advance to accept it, or at least presume it, at the anticipated level.

However, the creditor must prove the culpable non-performance.

In some situations, the creditor practically needs to prove that a contract was concluded between the parties (in which the clause is stipulated), that the stipulated execution term has been exceeded, and (if the case) that they have fulfilled their own prior imposed obligations, being impossible to prove negative acts – ex: non-performance.

Nothing prevents the parties from sending notifications, drafting reception notes with records of defects/shortcomings/other non-conformities, or resorting to evidence preservation procedures. The debtor will also have to prove a proper execution from all points of view, that is, the positive ultimate facts.

If the performance becomes impossible due to reasons for which the debtor cannot be held liable (unforeseeable circumstances, force majeure, the act of the creditor himself or a third party), the penalty cannot be claimed. Of course, these cases of exclusion of liability could be limited/circumstanced according to the law through appropriate contractual clauses.

• The choice between forced execution of the main obligation (when is allowed and it is possible) and the penalty clause belongs to the creditor of the breached obligation.
   
• The law does not condition the creditor to use their rights in a certain order – they do not need to first request an execution to prove it is no longer possible and then request the penalty clause. The choice, including the opportunity assessment belong to the creditor.
   
• The debtor cannot offer to perform the obligation stipulated by the penalty clause (alternatively, at the creditor's option) to free themselves from the main obligation.
   
• There are also situations where both the execution of the main obligation and the penalty clause can be requested – if the latter was stipulated for non-performance within the agreed term or at the agreed place.

To retain the advantage of the penalty clause in such cases, the creditor must expressly make their claims known in this regard in a short timeframe after obligation’s deadline/obligation’s late performance/performance at unagreed place.

If the execution is accepted without reservation the penalty clause can no longer be claimed.

• Thus, we observe that another type of penalty clause could also be considered conventional interest for the non-performance of obligations within the agreed term, offering the same advantages as the penalty clause.

It should also be noted that the late penalties stipulated by the penalty clause cannot be cumulated with legal interest in contractual matters, as this would practically apply a DOUBLE PENALTY FOR THE SAME THING. If a penalty clause for culpable delay in execution has not been stipulated, legal interest can still be obtained by virtue of the law.

• The possibility for the court to intervene in the amount of the stipulated penalty is limited.

The court can only reduce the penalty WHEN:

a) either the main obligation has been partially performed, and this performance benefited the creditor - thus, the debtor's liability can be reduced proportionally to the severity of the non-performance (however, practice shows that it is not always possible to effectively compensate limited to the pro-rata value of the contract – a non-performance within the term on which another workflow depends, predictable and/or contractually foreseen, may justify maintaining the clause by the court even in cases of partial performance/insignificant but repeated non-conformities, leading to the same delays).

 b) or the penalty is manifestly excessive compared to the damage that could have been foreseen by the parties when the contract was concluded (not in relation to the actual damage suffered by the creditor – as there is NO obligation for the creditor to prove such actual damage) BUT in any case, its value must remain superior to the main obligation.
The contractual debtor at fault is NOT in the position of a good-faith debtor, to respond strictly to the contract value.

To obtain a reduction of a penalty clause, the one from whom it is claimed must request this within the prescribed term by procedural norms (the term for filing the response) and further prove the incidence of one of the above cases. Clearly, granting the requested reduction is at the court's discretion and not an obligation, just as the court cannot grant only part of the stipulated penalty if a reduction has not been requested.

NOTE: in the case of relationships between professionals and consumers, the court has the possibility to invoke ex officio and to declare the absolute nullity of a penalty clause stipulated against a consumer, fully removing its effects. In this regard, the court has the legal obligation to analyse ex officio whether the provisions of contracts between professionals and consumers are abusive or not.

Penalty clauses cannot be validly stipulated in the following situations (as example, not limited to):

• To prevent the one making publicity forms recognized by law (Land Registry, Electronic Archive of Real Securities, Trade Register, etc.). Such clauses are considered unwritten – they are treated as if they do not exist at all.

For example, if you have signed a Pre-contract in which you have committed not to register it in the Land Registry, and a sanction is stipulated, such a clause does not produce effects.

• For breaking an engagement – BUT, within a year of breaking the engagement, it is possible to obtain in court the restitution in kind or the equivalent of significant value gifts made in consideration of the engagement/future marriage, compensation for causing the breaking of the engagement or for its abusive termination (e.g., reasonable expenses made for the future marriage or wedding).
   
• For certain types of special employment/related clauses (clause regarding professional training; non-compete clause; mobility clause; confidentiality clause, etc.) – given the jurisprudential benchmarks identified, we limit ourselves to pointing out that in the case of these clauses, a thorough analysis is required considering all the circumstances of each case. In some cases, penalty clauses are considered compatible with the protection offered to the employee and their rights under labour legislation, while in others they are deemed contrary and ineffective – with former employers being obliged to prove the actual damages suffered, without being able to rely on the pre-estimated amount of damage.