Combining contractual penalties for repudiation and delay? | In Principle

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Combining contractual penalties for repudiation and delay?

Many contracts provide for a contractual penalty for reputation of the contract due to the other party’s fault and a contractual penalty for delay in performing the contract. But in such cases can both of these penalties be pursued simultaneously?

Supreme Court’s position

There is no doubt that a contractual penalty for delay in performance and a contractual penalty for repudiation of the contract can both be provided for in the same contract. But problems arise with simultaneous pursuit of both penalties in a situation where there has been delay in performance and repudiation of the contract. This issue was addressed by the Supreme Court of Poland in its judgment of 18 January 2019 (case no. III CSK 9/17). The court admitted the possibility of stacking these two penalties if the repudiation involves only the unperformed portion of the contract (effective going forward—ex nunc) and the penalty for delay is sought only with respect to the performed portion of the contract, not covered by the repudiation. In other words, if the contract is not repudiated as a whole, but only in part, it is possible to claim combined penalties for both delay and repudiation.

Repudiation of the entire contract

In the resolution of 18 July 2012 (case no. III CZP 39/12), following the position expressed in the resolution of 16 January 1984 (case no. III CZP 70/83), the Supreme Court explained that a contractual penalty provided for improper performance of an obligation, e.g. for delay in performance, cannot be stacked with a contractual penalty for non-performance of the obligation.

The resolution from 2012 was adopted based on the assumption that the repudiation of the contract abrogates in its entirety the legal relationship arising out of the contract (i.e. the contract as a whole is deemed not to have been concluded). A state recognised as non-performance of an obligation arises, and thus in that situation there cannot be said at the same time to be improper performance of the contract. Thus if the contract as a whole is repudiated, only a penalty for repudiation is due.

Partial repudiation of the contract

However, under the position taken by the Supreme Court in the judgment of 18 January 2019, the situation is different if there is only a partial repudiation of the contract, effective for the future (ex nunc), i.e. with respect to the unperformed part of the contract. In such instances, the portion of the contract already performed is not covered by the repudiation, and continues to be binding on the parties.

This will occur more specifically when the parties’ consideration is divisible or the parties have reserved a right to repudiate the contract which, when asserted, clearly is effective only going forward, thus not excluding the possibility of regarding the mutual consideration already performed by the parties as grounded in the contract.

This means that the consideration rendered by the parties in performance of the contract up until the time when the contract is effectively repudiated by one of the parties was provided on the basis of the contract and is subject to assessment according to the terms of the contract. Thus the repudiation applies only to consideration not yet fulfilled (as of the time of effective repudiation). The rendered portion of the overall consideration must therefore be regarded as consideration pursuant to the contract, constituting partial performance of the contract. In this respect, it may be further examined whether these duties were performed properly, or, for example, a contractual penalty for delay in performance is owed.

In short, if a contract is partially repudiated, it is permissible to pursue simultaneously a contractual penalty for delay in the performed portion of the contract and a contractual penalty for repudiation with respect to the unperformed portion of the contract.

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners