How to protect my contractual rights in Serbia

One contract is worth as much as it is actually enforceable. In order for the contract to be enforceable, the subject of the contract, deadlines for fulfillment of obligations, time and place of execution, manner of execution, as well as all other circumstances important for a legally regulated relationship that becomes binding for the participating parties, must be precisely defined. However, even that is not enough if the relationship is not secured by sanctions, and which contracting parties will force each other to adhere to the relationship in the manner regulated by the contract.

Mutual trust stands in the way of securing a contractual relationship. Trust is a virtue in someone’s relationship, but only if it is truly grounded. Often, trust, which is unjustifiably shown to someone, is the biggest opponent and the biggest obstacle to the good execution of contractual obligations. Therefore, trust as a virtue should remain for interpersonal relationships, while business relationships, no matter how long they last, must be secured by appropriate contractual clauses.

In addition to the right to compensation, there are legal possibilities whose contracting can prevent court proceedings, all with the aim of faster and immediate satisfaction due to non-compliance with the contract. Precisely one of the most effective means can be a contractual penalty, if the manner and circumstances for its application are thoroughly agreed upon, as well as the amount of the contractual penalty to be justified.

Contracting

“The creditor and the debtor may agree that the debtor will pay the creditor a certain amount of money or obtain some other material benefit if he fails to fulfill his obligation or if he is late with its fulfillment (contractual penalty)” provided by Article 270 of the Law on Obligations (No. 29/78, 39/85, 45/89 – Decision of the USJ and 57/89, “Official Gazette of the FRY”, No. 31/93, “Official Gazette of Serbia and Montenegro”, No. 1/2003 – Constitutional Charter and “Official Gazette of RS”, No. 18/2020 “ZOO”).

As it follows from the legal provision itself, a contractual penalty can be agreed in order to ensure the fulfillment of an obligation within the agreed deadline or the fulfillment of an obligation in general, in an agreed manner, in the agreed procedure and quality.

In the first situation, when compliance with the deadline is ensured, it is necessary to additionally agree on the exact circumstances that can release the debtor from meeting the agreed deadline, and thus from the contractual penalty for non-fulfillment within the deadline. These are usually force majeure, as well as other circumstances that the debtor cannot fulfill, nor can he be blamed. Otherwise, the contractual penalty could cause the situation as if it had not been agreed, bearing in mind that the uncertainty of circumstances that allow the debtor to perform the obligation beyond the deadline due to an event beyond his control would lead the debtor to challenge the contractual penalty before the court considering that the conditions for its execution have not been met. Therefore, it is necessary to agree on all the circumstances of the application of the contractual penalty in a comprehensive manner in order to apply it immediately.

In the second situation, when the contractual penalty of the obligation in the agreed manner, it is necessary to thoroughly define the manner of fulfillment of the obligation, as well as the manner in which it is determined whether the obligation is fulfilled in accordance with the contract. Any other way of contracting a contractual penalty in such circumstances would most likely lead to circumvention of the contractual penalty and litigation.

Therefore, the contractual penalty must be contracted in such a way that the debtor himself becomes aware when the circumstances for its application have arisen, that non-execution of the contractual penalty or challenge in court can only produce additional costs for him which in the given circumstances would exceed the contractual penalty amount.

The amount of the contractual penalty

As provided by the cited legal article, the contractual penalty may be a certain amount of money or other material benefit that the debtor will fulfill or fulfill to the creditor.

The legislator does not require that the contractual penalty be agreed in a specific amount or other material benefit, but there is a requirement that it be determinable, which means that in that case the comprehensive parameters for its determination must be agreed.

On the other hand, Article 274 of the Law on Obligations prescribes “At the request of the debtor, the court will reduce the amount of the contractual penalty if it finds that it is disproportionately high considering the value and significance of the subject of the obligation” so contractual penalties must reflect the value of the obligation whose performance is secured. Otherwise, the debtor is given the opportunity to request before the court to reduce the amount of the contractual penalty to a fair amount, determined according to the value of the obligation and the impact of the specific obligation on the entire business and the actual harmful consequences for the creditor.

Conditionality of the contractual penalty

The conditionality of the contractual penalty implies that in the event of termination of the contract on any grounds, the right to request a contractual penalty also ceases. Even in situations when the contract is terminated due to non-fulfillment, by strict application of this rule, it is concluded that the execution of the contractual penalty agreed in case of non-fulfillment of the obligation cannot be required.

This situation cannot be resolved by harmonizing case law, nor it’s not correct to seek answers in this way, which would be on a line of least resistance. Exclusively by amendments to the Law on Obligations, which would additionally define the rights of the creditor, protect and harmonize with other provisions of the Law on Obligations, this situation can be overcome, because it is obvious that the creditor has the right to protection in both ways. acquired, and excessive formalism does not lead to the protection of the rights of participants in legal transactions, but exclusively to circumvention of rights and endangering legal security.

Contractual penalty and other rights

When a penalty is agreed in the event of default, the creditor may request either performance or a contractual penalty. He loses the right to demand fulfillment of the obligation if he has requested the payment of the contractual penalty.

In the situation when the penalty is agreed in case of non-fulfillment, the debtor has no right to pay the contractual penalty and withdraw from the contract, unless it was the intention of the contractor when they agreed on the penalty.

When the penalty is agreed in case the debtor is late with the fulfillment, the creditor has the right to demand both the fulfillment of the obligation and the contractual penalty. The creditor may not demand a contractual penalty due to delay if he has received the fulfillment of the obligation, and has not without delay informed the debtor that he retains his right to a contractual penalty.

The creditor has the right to demand a contractual penalty even when its amount exceeds the amount of damage he has suffered, as well as when he has not suffered any damage. If the damage suffered by the creditor is greater than the amount of the contractual penalty, he has the right to demand the difference until full compensation of the damage.