The Spanish Supreme Court has reiterated its doctrine on the moderation of penalty clause in a Judgment issued last March 17, 2014.

The case under appeal, dealt with by the Supreme Court, was based on a lease agreement of gaming machines including technical assistance and maintenance service entered by and between the owner of the machines and the owner of the establishment where such gaming machines would be located.

The contract stated a clause by virtue of which, in the event that the normal operation of the machines were prevented or terminated earlier than expected, the owners of the property should pay to the lessor a certain amount per day until the expiration of the lease agreement.

After several extension periods agreed between the parties, the defendants denied the lessor the necessary documentation for the renewal of the required authorization for the operation of the machines. As the documentation was not delivered, the lessor removed the  leasing gaming machines from the premises.

Afterwards, the lessor installed the machines at a different location in another premises.

However, the lessor claimed the payment derived from the penalty clause from the time he removed the machines to the foreseen completion date of the contract.

The judgment of first instance considered the claim and ordered the defendants to pay the amount claimed by the lessor as a penalty clause.

However, the judgment that was rendered on appeal, while acknowledging the breach of the contract by the defendants, partially allowed the appeal submitted by such defendants. The Court of Appeal reasoned that the penalty clause was excessive and disproportionate. As it was evidenced that the machines were installed again in different premises, the Court considered that the penalty was unfair and reduced it.

The appeal filed in the Spanish Supreme Court by the lessor was based on infringement of Section 1154 of the Civil Code.

This Section states that judges can moderate the penalty when the main obligation has been fulfilled in part by the debtor.

However, the Spanish Supreme Court’s jurisprudence in this regard has consistently held that the penalty clause cannot be moderated when it is expressly agreed for partial, delayed or poor compliance.

The Spanish Supreme Court has just approved to moderate a penalty clause when the obligation has been partly or irregularly complied by the debtor and not in those cases in which the penalty applies when  the parties have expressly agreed it when there is partial failure. This  is what happens in cases of penalties established by reason of default, which is called default penalty clause. The default penalty clause is not stipulated in case of breach of the obligation but only and exclusively for the delay in the fulfillment of the obligation.

Therefore, following the above mentioned doctrine, the Spanish Supreme Court concluded that the penalty clause should not be moderated by the court and, therefore, it ordered the defendant to pay it as claimed by the plaintiff.