One of the fundamental principles of civil law is the principle of dispositivity, which means that a civil law relationship arises, changes, and terminates based on the will of the parties. This principle is enshrined in Article 2 of the Croatian Law on Obligations (Zakon o obveznim odnosima – ZOO), which provides that parties in legal transactions are free to regulate their contractual relationships, except where this would be contrary to the Constitution of the Republic of Croatia, mandatory legal provisions, or public morals. This principle allows parties to agree on various contractual clauses — including the contractual penalty.
The legal concept of a contractual penalty is regulated by Articles 350–356 of the Croatian Law on Obligations (ZOO) (Official Gazette Nos. 35/05, 41/08, 125/11, 78/15, 29/18, 126/21).
Unlike the previous legislation, which allowed contractual penalties only in cases of non-performance or delayed performance, the current law also permits penalties for improper performance. Other relevant provisions have remained largely unchanged, meaning that earlier case law remains applicable.
A contractual penalty is a clause by which the debtor agrees to pay the creditor a certain sum of money or provide another material benefit if they:
fail to fulfill their obligation,
delay in performance, or
perform improperly (Article 350, paragraph 1 of the ZOO).
An example of improper performance is the delivery of goods or services with material or legal defects.
The purpose of the contractual penalty is twofold:
Preventive function – to encourage the debtor to fulfill the obligation properly (a disciplinary measure).
Compensatory function – to ensure that the creditor receives a certain amount of money or other benefit, even if no actual damage has been suffered (Article 355 of the ZOO).
Therefore, when claiming a contractual penalty, the creditor does not need to prove the occurrence or extent of damage, which would otherwise be required under general liability rules.
A contractual penalty may be agreed upon for:
If the contract does not specify for which case the penalty applies, it is presumed to apply to delayed performance (Article 350, paragraph 2 of the ZOO).
Regarding form, the penalty must be agreed upon in the same form as the contract from which the obligation arises (Article 351, paragraph 2 of the ZOO). If no specific form is prescribed by law, the contractual penalty may even be agreed orally.
Parties are free to determine the amount of the contractual penalty — as a fixed sum, percentage, daily rate, or in another form (Article 351, paragraph 1 of the ZOO). However, it must be determined or at least determinable.
While the parties have broad discretion, the amount must not be disproportionately high in relation to the value and importance of the obligation, as that would contradict the purpose of the provision.
The agreement on a contractual penalty shares the legal fate of the main obligation (Article 352, paragraph 1 of the ZOO). Thus, if the main obligation is annulled, declared void, or terminated, the contractual penalty ceases to exist.
Furthermore, the penalty cannot be enforced if non-performance, improper performance, or delay occurred for reasons beyond the debtor’s control (Article 352, paragraph 2 of the ZOO).
According to Article 354 of the ZOO, the court may, upon the debtor’s request, reduce the amount of the contractual penalty if it finds that it is disproportionately high in relation to the value and significance of the obligation. This rule upholds the principles of good faith, fairness, and prohibition of abuse of rights.
When assessing whether the penalty is excessive, the court considers:
- the disproportion between the value of the obligation and the penalty amount, and
- the significance of the object of the obligation.
If you need a law firm specializing in contract law, contractual penalties, or the Law on Obligations, we provide:
Legal advice in drafting and interpreting contracts
Drafting of contracts containing contractual penalties and protective clauses
Representation in disputes arising from non-performance of contracts
Representation of creditors or debtors in lawsuits for payment of contractual penalties
Legal analysis of existing contracts under the Croatian Law on Obligations
