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The Penalty Clause

The Penalty Clause is a commonly used provision in both civil and commercial agreements. As the doctrine defines it, the Penalty Clause is "the accessory agreement permitting the parties to establish in advance the damages to which a creditor will be entitled in case of non-performance, delay in performance, or improper performance by the debtor of its contractual obligations". The Penalty Clause is regulated by the provisions of the Romanian Civil Code under articles 1066-1072 and 1087.

Under Romanian law, there is no express provision that allows a judge to change, at a party's request, or by virtue of its authority, the level of the damages established in the Penalty Clause. On the contrary, in accordance with the provisions of Article 1087 of the Romanian Civil Code "a judge cannot award damages below or above the level established in the Penalty Clause".

The predominant opinion in Romanian doctrine is that a court of law cannot change the amounts stipulated in the Penalty Clause. The main argument for this interpretation is Article 969 of the Romanian Civil Code, which states that the parties' conventions have the power of law among them. Secondly, the provisions of Article 1087 are imperative. Furthermore, every time the legislator intended to raise exceptions to the imperative provisions regarding the penalty clause, it introduced express provisions to the contrary (for example Law 193/2000 regarding abusive clauses and Law 509/2002 regarding permanent commercial agents). Another reason would be that if one accepted that the Penalty Clause can be changed, the consequence would be that such a clause would be superfluous and would lose its punitive character.

However, there are opinions in Romanian case law according to which the Penalty Clause can be reviewed by a court of law and the above-mentioned principles should not be deemed absolute. The grounds for this theory are that, even if Article 1087 is imperative, its provisions are not public policy rules (règles d'ordre public) and therefore, the court may modify the Penalty Clause depending on circumstances. Further arguments were brought by Romanian courts of arbitration in justifying several awards. In one of these awards, which at the same time confirmed the rule of the irreducibility of the penalty clause, the arbitration court ruled that the respective clause was abusively high and, therefore could not apply (Civil Award no. 158 of 19 October 1999 rendered by the Romanian Court of Arbitration attached to the Chamber of Industry and Trade in Bucharest). Such clauses are void because they are contrary to good faith and equity principles. The Penalty Clause could be changed also on the basis of hardship (impreviziune). However, this theory is also subject to debates in Romanian legal circles.

Another issue that may be raised is the validity of the parties' mutual agreement to stipulate further damages in excess of the Penalty Clause. There is no general agreement in Romanian case law as to whether such an agreement is valid or not. Law 469/2002 regarding some measures for the strengthening of the contractual discipline speaks about this situation, but fails to bring clarifications, which is emphasised by the famous scholar Carpenaru. However, the parties should be aware of the risk that this provision may be declared void by the courts of law, in accordance with Article 1087 of the Romanian Civil Code.

By Sofia Purcaru

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