Considerations on penalty clauses: regulation and enforceability

Penalty clauses are regulated in the Romanian law through the provisions of the civil Code. These types of clauses are frequently inserted in commercial contracts in order to ensure that all contracting parties will respect their obligations, or will pay the pre-evaluated damages considered by the parties at the conclusion of the contract. As opposed to the common-law regulations, the continental law systems allow and support such clauses, mainly because of the liberty of the parties when concluding a contract; nevertheless, our legislation, as other European legislations allow the mutability of penalty clauses, when they are deemed excessive.

In the present study, we aimed to analyze the nature of the penalty clause in the Romanian regulations, as well as study their applicability in commercial contracts, especially when inserted in contracts that are concluded over longer periods of time for the supply of services. We aim to understand if such a clause might be deemed inapplicable if one of the parties decides upon the termination of the contract ahead of term or simply wants to reduce the clause in order to pay a lesser penalty.

The legislation states that such clauses may be amended by the court when part of the principal obligation was partly upheld by the party and its execution has profited the creditor, or when the penalty is “manifestly excessive” as opposed to the prejudice that could have been foreseen by the parties at the conclusion of the contract. Based on the current state of legislation, while analyzing doctrine and jurisprudence, we aim to underline what a manifestly excessive penalty should be.