Penalty due

ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora

Based on the Law of the Republic of Lithuania, a penalty is one of the kinds of security of obligations. Pursuant to the Civil Code of Lithuania (hereinafter - the Code), the penalty is a sum of money determined by laws or a contract which the debtor shall be bound to pay to the creditor in the case of failure to perform an obligation, or defective performance thereof. This definition of the penalty describes that the penalty could be determined by laws, by the court or by a contract. The Code also describes that there exists two forms of penalty - a fine and a forfeit. The penalty may be established in the form of a concrete sum of money (fine), or expressed in percentage terms on the amount of the secured obligation (forfeit). The penalty stipulated for a delay in performance of an obligation may be established for every day, week, month, etc., that exceeds the time-limit of the performance. The clause by which a penalty is agreed upon must be made in writing.

The penalty is a secondary obligation and depends upon the main obligation, therefore, where the transaction from which the obligation has arisen is declared void within the procedure established by laws, any agreement upon the security of performance of such an obligation by way of penalty shall be equally void.

Under the construction of the rules of the Code where an obligation with a penal clause is established, the creditor may not demand both the real performance of the principal obligation and the penalty, except in cases when the debtor is in delay of the performance of the obligation. Any stipulation of parties contrary to the provisions of the Code shall be void. The sum stipulated in the penal clause shall be set-off into damages in the case where compensation of damages is claimed.
The amount of penalty stipulated may be reduced by the court when it is manifestly excessive, or if the creditor has already benefited from partial performance of the obligation, though the sum may not be reduced below the damages payable for the failure to perform the obligation, or for defective performance thereof. No reduction of the penalty paid shall be allowed.