Czech Republic: New Civil Code brings a number of new rules concerning contractual penalties
Contractual penalties remain a key instrument in motivating the obliged party in a contractual relationship to honor their contractual obligations.
Agreeing on a contractual penalty no longer requires the written form. These penalties may therefore also be agreed orally, though this is not advisable: it may be very difficult (to the point of being impossible) to prove the existence of such an oral understanding.
When drafting a penalty clause, one must take great pains to make sure that the obligation which is secured by the penalty is defined with sufficient specificity; the same goes for the amount of the contractual penalty (or, as the case may be, the method for calculating its amount). Failure to do so means that the clause is vague and thus – in the terms of the new Civil Code – “merely apparent”. This means it will be disregarded as if it did not exist!
One should also take note of the fact that the obligations of tenants under a residential lease may no longer be secured with a contractual penalty, and any such clause would again be “merely apparent”. This also extends to any clauses in older lease agreements made before 1 January 2014 which impose a contractual penalty on a breach of obligations by the tenant, because these agreements, too, are now governed by the new Civil Code.
The obligation to pay the contractual penalty is based on the objectivity principle, i.e., it arises upon the mere breach of the underlying obligation itself, irrespective of the question of culpability, and without any examination of the circumstances that led to such breach. However, this statutory principle is non-mandatory, and may thus be overridden by the parties, who may agree on cases in which the obligation to pay a contractual penalty does not apply.
The moderation right of the courts is now enshrined in the letter of the law: upon the obliged party’s request, the court may lower a contractual penalty (down to the amount of damage actually caused), if it is found disproportionally high (in view of the value and significance of the obligation which it served to secure).
The obligation to pay the contractual penalty arises irrespective of whether the breach of the underlying obligation resulted in damage or not. However, if a contractual penalty was agreed, then the creditor is not entitled to compensation for the damage which they incurred due to the breach of the obligation to which the contractual penalty relates. This statutory rule is also optional, though, and the parties may thus agree that a breach of contractual obligations triggers both the obligation to pay damages and the obligation to pay a contractual penalty.