What is the penalty?
In situations where the nature of the legal relationship entails a potential risk of the obligor failing to fulfill their obligations, it is possible to secure one's claims through the utilization of a Penalty.
Penalty is an amount of money determined by agreement of the parties to be paid by the obligor in the case of non-performance, overdue performance or any other kind improper performance of an obligation.
A penalty can exclusively represent a specified monetary sum, which must remain fixed in amount. Regarding the validity of agreement for a penalty, legal requirements compel the parties to formalize the agreement in written form.
Two distinct forms of penalties are delineated: penalty interest and fines. The former applies when a breach of obligation involves exceeding a stipulated deadline, while the latter entails a one-time penalty for an infringement. For instance, if a party significantly breaches a contract and simultaneously terminates it, to safeguard against such actions, a liquidated damages clause may be provided, amounting to 30% of the contract's subject matter value, or it may be expressed as a fixed sum (e.g., 5000 GEL).
It's should also be noted that the penalty clause is in alignment with all remedies conditions, and the penalizing party is not obliged to substantiate actual damages, as the penalty is imposed solely based on the breach of obligation or improper performance. However, in cases involving force majeure events, the imposition of a penalty on the party may be excluded.
The legislation of Georgia establishes imperatively that an obligee may not demand simultaneously the payment of a penalty and the performance of the obligation, unless the penalty has been stipulated to apply in those cases where the obligor does not perform the obligations in due time.
The law permits the full-scale pursuit of a penalty for contract breach due to a overdue, concurrently with the demand for fulfillment of the obligation. However, if the contract breach pertains to non-fulfillment of the obligation itself, the party can no longer insist on the fulfillment of the obligation and seek the penalty altogether.
Regulation of disproportionately high penalty
Article 418 of the Civil Code of Georgia grants contracting parties the liberty to independently establish the penalty amount, which can exceed the potential damages. Nevertheless, even though determining the penalty amount is within the purview of the parties and the principle of contractual autonomy prevails in this matter, Article 420 of the Civil Code of Georgia empowers the court to reduce a disproportionately high penalty.
As per the practice established by the Supreme Court, in such instances, the court considers the financial status of the party and other pertinent factors, notably, the ratio between the cost of fulfilling the obligation, its non-fulfillment, and the damage resulting from non-compliance concerning the amount of the penalty.
Thus, the use of penalty as a means of securing a claim can be used in all types of obligation-legal relations. It should also be emphasized that the penalty is of an accessory nature right, implying that its validity depends on the validity of the principal obligation. If the principal obligation is void or if the claim for its execution has expired due to the period of limitation, and there is no/no longer an obligation that necessitates the penalty's enforcement, then the obligation to make such payment no longer arises.
