With regard to obligations with penalty clauses, the penalty substitutes compensation for damages and the payment of interest in cases of breach, in the absence of an alternative agreement.
Thus, article 1154 of the Civil Code should be taken into account, which establishes that: “The Judge shall equitably modify the penalty where the principal obligation should have been performed partially or irregularly by the debtor”, a mandate likewise renowned in the case law of the Supreme Court.
Accordingly, and in keeping with the case law of the Supreme Court, it is established that article 1154 of the Civil Code “only authorises such restraint by the courts when the obligation has been fulfilled in part or irregularly by the debtor and not when the penalty is directly and precisely applied to the case contemplated by the parties when stipulating the penalty, as in the case of penalisations established due to payment default”, as stipulated in, among others, Supreme Court judgment 839/2009 of 29th December. Therefore, up until now, the courts have not upheld judicial restraint when the penalty had been provided precisely to sanction total, partial or deficient breach of performance.
However, contrary to keeping with the above, the recent judgment of 25th January 2017, has introduced an exception in the doctrine regarding restraint in penalty clauses in cases of non-fulfilment of obligations, and judicial moderation of the penalisation set forth in a contract is acceptable, when: (i) although the breach is total, the compensation is radically greater than the damage caused. Furthermore, (ii) all of this has arisen from a change in the circumstances which was not foreseen when the obligation was acquired.
In order to justify the application of article 1154 of the Civil Code to this type of case, the Supreme Court explains in its judgment that it is not enough that upon the occurrence of the exact breach of contract as contemplated in the penalty cause, the amount payable derived from the penalty clause is greater than the damages caused by the referred to breach. The judgment considers that the penalty may be judicially moderated applying article 1154 of the Civil Code by analogy and that this is compatible with the principle sunt servanda (agreements must be kept). When such difference is so extraordinarily high, that it must be attributed to an unforeseen change in circumstances at the time of contracting, the resulting damages have become radically separated, in terms of quantity, from what was reasonably foreseeable at the time of undertaking the contract.
The Supreme Court judgment imposes upon the debtor claiming judicial moderation of the penalty the responsibility of proving that the amount of the penalisation is extraordinarily greater than the damage caused.
In closing, the Supreme Court establishes that the debtor may not call upon the “evidentiary availability and facility” of article 217.7 of the Civil Procedural Act (Ley de Enjuiciamiento Civil – LEC) in order to impose or transfer the responsibility of accrediting the existence and amount of the damage effectively suffered to the creditor.
Hugo Ester
Vilá Abogados
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3rd March 2017
