Penalty for breach of contract is a remedy for violations. However, in order to apply the penalty, the contract must be valid and has fines term.

Legal grounds:

• Commercial Law 2005;
• Civil Code 2015.

The parties to a commercial contract must respect and comply with the agreements entered into. In the event of a breach of contract, the aggrieved party may apply a punitive clause to protect its interests.

There are many types of sanctions for violations. Among them, fines are common measures. When applying fines, the following issues should be kept in mind:

1. Basis for application of penalty for breach of contract

Article 300 of the 2005 Commercial Law provides for penalties for violations as follows:

Penalty for breach is the fact that the aggrieved party requests the violating party to pay a fine for breach of contract if there is an agreement in the contract.

Article 418 of the 2015 Civil Code also provides for penalties for violations as follows:

Penalty for breach is an agreement between the parties in the contract whereby the breaching party must pay a sum of money to the aggrieved party.

According to the above provisions, in order to be able to apply sanctions for violations:

• The contract must be valid;
• The contract contains an agreement on sanctions for violations;
• There is a breach of contract in accordance with the prescribed penalty.

Therefore, note that if the contract does not have a penalty clause, the penalty for violation cannot be applied

2. The relationship between fines and compensation

Article 307 of the 2005 Commercial Law provides:

If the parties do not agree on penalties for violations, the aggrieved party shall only have the right to claim compensation for damage, unless otherwise provided for by this Law.

According to the above regulations, fines and compensation are two different sanctions, which can be applied simultaneously or separately:

• Penalties for violations have the main purpose of deterrence to prevent and punish violations. Penalties for violations can only be applied if the parties have a specific agreement in the contract;
• Compensation for damage has the goal of compensating for actual material benefits that the aggrieved party has suffered.

Notes in commercial business relations:

• The usual maximum penalty is 8% of the breached contract value. Except for the case of fines for violations in the assessment service.
• The amount of compensation is not controlled but depends on the actual damage.