The penalty the contract sets: when it is collected and when a judge tempers it

It is Article 1257 of the Civil Code of 2020, within the section on guarantee clauses in the chapter on the effects of the contract. It governs the penalty agreed for breaching or being late, and the clause that fixes the damage in advance.

The parties to any contract who agreed a penalty for partial non-performance or delay of the principal obligation, or a clause pre-calculating the damage.

• That the clause be intended to avoid partial non-performance or delay in performing the principal obligation.Verified against the official source
• That there be non-performance or delay: payment of the agreed penalty corresponds exclusively to that.Verified against the official source
• To substitute the performance owed with the one in the penalty clause, that it was expressly agreed.Verified against the official source
• To agree the penalty clause and the pre-calculated-damage clause together, that this appear clearly in the contract.Verified against the official source

• The contract with the clause, because it is interpreted restrictively and because whether substitution or joinder was agreed depends on its wording.

1. 1

   Step 1: What the penalty may be

   Article 1257 does not limit it to money: the clauses so agreed may consist in the payment of a certain sum, the loss of the benefit of the term, or any other penalty. Losing the benefit of the term — that is, the whole debt falling due at once — is as valid a penalty as an amount.

2. 2

   Step 2: The judge must respect it, with one way out

   The article drafts the judicial power restrictively: although the court has the power to temper the penalties in cases of extreme economic disproportion between the penalty and the performance, it must recognize the binding force of the agreed clauses and only in such cases may it substitute or moderate them. The rule is to respect what was agreed; the exception is extreme disproportion.

3. 3

   Step 3: How much disproportion is needed: it does not say

   The article gives no percentage and no multiple for measuring extreme economic disproportion, and this guide invents none. What it does make clear is that the penalty seeming high is not enough: it must be extremely disproportionate to the performance.

4. 4

   Step 4: The penalty only covers breaching or being late

   Rule (a) bounds it: payment of the agreed penalty corresponds exclusively to non-performance or delay. It does not cover other things that went wrong in the contract.

5. 5

   Step 5: Either performance or the penalty, unless it was late

   Rule (b) gives the choice and one joinder: the creditor may choose to demand full performance or payment of the penalty, and may join both remedies in the case of late performance. If the other performed but late, both the performance and the penalty may be demanded.

6. 6

   Step 6: It is read strictly and does not substitute by itself

   Rule (c) requires the penalty clause to be interpreted restrictively: if the text does not say it, it does not extend. And rule (d) closes a frequent abuse: the performance owed may only be substituted by the one agreed in the penalty clause if this was expressly agreed. Paying the penalty does not release from performing, unless that was agreed.

7. 7

   Step 7: The other clause: fixing the damage in advance

   The last paragraph opens a different figure: besides penalty clauses, the parties may agree others related to the advance calculation of the damage caused by non-performance. Its effect is double and symmetrical: the creditor is not obliged to prove the damage, nor may the debtor be excused by showing the damage did not occur or was smaller.

8. 8

   Step 8: Both may be agreed, if it is clear

   The same paragraph allows it with a formal condition: penalty clauses and clauses that pre-calculate damage may be agreed together, provided this appears clearly in the contract. If it does not appear clearly, they are not combined.

The penalty is claimed from the other party; if it must be disputed or tempered, the Court of First Instance decides. The Code names no agency here.

• Assuming the judge will reduce the penalty: they must recognize what was agreed absent extreme economic disproportion.
• Looking in the article for a percentage measuring that disproportion: it carries none.
• Charging the penalty for something that is neither non-performance nor delay.
• Demanding both performance and the penalty where performance was not late.
• Stretching the clause to cases it does not mention: it is interpreted restrictively.
• Paying the penalty believing performance is no longer owed: the substitution must have been expressly agreed.
• As debtor, trying to escape by proving the damage was smaller where the clause pre-calculates the damage.
• Combining a penalty clause and a pre-calculated-damage clause without it appearing clearly in the contract.

These are the government pages this guide is based on.

• Poder Judicial de Puerto Rico

  Poder Judicial

  bvirtualogp.pr.gov