As of 1 January 2014, amendments to the Civil Law came into force with a significant effect on regulation of contractual penalties. The purpose of the amendments is to eliminate excessive contractual penalties depending on whether the penalty is imposed due to complete non-performance or to undue or late performance of obligations. This will bring to an end situations when contractual penalties exceed principal obligations, as limitations are imposed on increasing payments of contractual penalties; moreover, the full amount of statutory interest and contractual penalty can no longer be claimed. In turn, courts now even have an obligation (in addition to their existing right) to decrease excessive contractual penalties.

Starting from 1 January 2015, these amendments will apply to agreements concluded until 31 December 2013 and that contain an obligation to pay a contractual penalty if the agreements operate after 1 January 2014 and no claim has been filed by 31 December 2014.

We advise market participants to review long-term agreements concluded before the amendments so that these agreements do not contradict the new regulation and would not cause unnecessary problems as to their application and amounts. Likewise attention should be paid to contractual penalties when concluding new agreements.