The possibility of reducing a unilaterally offset disproportionate contractual penalty by court

In one of its recent decisions (File No. 31 Cdo 927/2016), the Supreme Court expressed its opinion of the question of whether a court may, both in accordance with the Commercial Code and in accordance with the new Civil Code, reduce a disproportionately high contractual penalty once it has been offset unilaterally.

If, in a contract, a contractual penalty is agreed the amount of which is disproportionately high, the contracting party which is obliged to pay this penalty is entitled to generally seek reduction of this contractual penalty in court. If the court concludes that the contractual penalty was disproportionately high with regard to the obligation it was related to, it will reduce such a penalty. However, what if, in the meantime, the creditor had unilaterally offset this contractual penalty against another claim, thereby ceasing the penalty to exist?

Under the aforementioned decision, the court is entitled to reduce a disproportionately high contractual penalty even if a unilateral offset has been made. The contractual penalty is reduced by the court’s decision effective from the beginning, i.e. as if it had been agreed at a reduced amount from the beginning. This means that unilateral offsetting can neither result in the termination of a claim from a contractual penalty to the extent of its disproportionate amount, nor in the termination of a claim against which an offset is made. Therefore, such claims will only cease to exist to the extent of the amount of the contractual penalty modified by the court.

This implies that, even after a unilateral offset is made, it is still possible to defend oneself in court and to seek reduction of disproportionately high contractual penalties agreed.