Fines/Penalties against contract violations in the 2015 Civil Code and 2005 Commercial Law?

LEGAL UPDATE

Fines/Penalties against contract violations in the 2015 Civil Code and 2005 Commercial Law?

Under the provisions on penalties for violations of 2015 Civil Code and 2005 Commercial Law, it can be seen that the sine quo non grounds for a penalty in the contract comprise: (1) the contract must be valid; (2) there is a breach of the contract; (3) the parties agree to impose penalties for violation in the contract.

The similarity here in violation penalty is an agreement between the parties to the contract whereby the breaching party must pay a sum of money to the aggrieved party or the aggrieved party requests the violating party to pay a fine for breach of contract.

Depending on the subject of the contract, the parties will apply appropriate laws when a contract breach occurs.

First: The purpose of the violation penalty

For the 2015 Civil Code, the penalty for violation is mentioned mainly as a measure to ensure the performance of civil obligations.

Meanwhile, in the 2005 Commercial Law, it is considered as one of the sanctions for contract breaches.

“Contract sanctions have the main purpose of punishing, affecting the consciousness of the contract subjects to educate the sense of respect for the contract, to prevent contract breaches. Therefore, just having a breach of the contract can be fined for breaching the contract if the parties agree, whether the violation has caused consequences or not”.

Fines/Penalties against contract violations in the 2015 Civil Code and 2005 Commercial Law?
Fines/Penalties against contract violations in the 2015 Civil Code and 2005 Commercial Law?

Second: About the penalty for violation

Under the 2015 Civil Code: According to Article 418 therein, the penalty for contract breach is agreed upon by the parties. Self-agreement here means that the parties are allowed to freely set the penalty without being governed by the provisions of law, clearly demonstrating the principle of the free agreement as recognized in civil law.

Under 2005 Commercial Law: Meanwhile, the stipulation in this law states that the fine rate for the violation of contractual obligations or the total fine for many violations agreed upon by the parties in the contract but such a fine rate cannot exceed 8% of the value of the part of the  contractual obligation which is breached.

Third: Relationship between contract fine and tort

According to the 2015 Civil Code, there is no independent stipulation which provides for the relationship between the contract fine and tort. However, only a short stipulation between contract fine and tort is mentioned in Article 422; it is:

“The parties can agree that the breaching party must only pay a penalty for the violation without having to pay damages or pay a penalty for the violation and at the same time compensate for the damage.

In case the parties have agreed on a penalty for the violation but do not agree on both the penalty for violation and the compensation for damage, the violating party shall only be subject to the penalty ”(Article 418.3).

While the 2005 Commercial Law has separate provisions on this relationship in Article 307:

“The relationship between the sanction of violation penalty and the sanction of compensation for damage

1. Where the parties do not agree to impose penalties for violation, the aggrieved party may only claim compensation for damage, unless otherwise provided for by this Law.

2. Where the parties agree to sanction the violation, the aggrieved party has the right to apply both the sanction of the violation and forcible compensation for damage, unless otherwise provided for by this Law” The above is the analysis of laws regulating contract breaches of the Civil Code 2015 and the 2005 Commercial Law.

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