Penalty Clauses in Bulgarian Contracts — When Due & How to Calculate

What you will learn in this article

• The legal framework of penalty clauses under Art. 92 OCA
• Types of penalty clauses — for non-performance, delay, and defective performance
• Prerequisites for enforceability
• Court reduction of penalties and the merchant exception (Art. 309 CA)
• Voidability criteria under Interpretive Decision 1/2009 SCC
• Limitation period (3 years)
• Distinction from earnest money, withdrawal fees, and statutory interest
• Practical drafting tips for both creditor and debtor

Legal framework

The penalty clause (neustoika) is one of the most widely used legal instruments for securing contractual obligations in Bulgarian law. Regulated in Art. 92 of the Obligations and Contracts Act (OCA), it serves a threefold function — securing, compensatory, and sanctioning.

Key statutory provisions

• Art. 92 of the OCA — the principal regulation of penalty clauses in civil relations
• Art. 309 of the Commerce Act (CA) — prohibition on reducing penalties between merchants
• Art. 111(b) of the OCA — three-year limitation period for penalty claims
• Interpretive Decision No. 1/2009 of the SCC — criteria for voidability of penalty clauses

Definition and functions

Under Art. 92(1) OCA: “A penalty clause secures the performance of the obligation and serves as compensation for the damages from non-performance, without the need to prove them. The creditor may also claim compensation for greater damages.”

This provision establishes three functions:

1. Securing function — the penalty clause incentivizes the debtor to perform
2. Compensatory function — the penalty replaces the need to prove actual damages
3. Sanctioning function — the penalty punishes the debtor for non-performance

Types of penalty clauses

Penalty for complete non-performance

Due when the debtor entirely fails to perform their obligation. This type typically carries the highest amount and is alternative to performance — the creditor may choose between the penalty and specific performance, but cannot claim both simultaneously.

Penalty for delayed performance (moratory penalty)

Due for the period of delay — from the date the obligation became due until the date of actual performance. Typically calculated as a percentage per day, week, or month of delay. The moratory penalty is cumulative with performance — the creditor may simultaneously demand performance and the penalty for delay.

Penalty for defective performance

Due when the debtor has performed but not in the agreed manner or quality.

By method of calculation

• Fixed penalty — a specific monetary amount (e.g., EUR 5,000 upon non-performance)
• Percentage penalty — calculated as a percentage of the value of the unperformed obligation
• Daily (moratory) penalty — a percentage or amount per day of delay. For daily penalties, it is essential to include a cap (maximum amount) to prevent accumulation of a disproportionate penalty

Prerequisites for enforceability

For a penalty claim to arise, the following cumulative conditions must be met:

1. Valid contract — the penalty clause is accessory and presupposes a valid principal obligation
2. Express penalty clause — the penalty must be expressly agreed. It does not arise by operation of law
3. Non-performance — complete, delayed, or defective, depending on the type agreed
4. Culpable non-performance — by default, the penalty is due only for culpable non-performance. Force majeure excludes liability (Art. 81 OCA)
5. No need to prove damages — the mere fact of non-performance is sufficient

Court reduction of penalties

General rule (Art. 92(2) OCA)

Under Art. 92(2) OCA, if the penalty is disproportionately large compared to the damages suffered, or if the obligation has been partly or improperly performed, the court may reduce the penalty amount. The court considers:

• The amount of actual damages suffered
• The degree of performance (in case of partial performance)
• The creditor’s interest in timely and proper performance
• The good faith of the parties

Exception for merchants (Art. 309 CA)

Art. 309 of the Commerce Act introduces a categorical prohibition: “A penalty due under a commercial transaction between merchants cannot be reduced for excessiveness.”

This means that in relations between merchants, the court cannot reduce the penalty even if it is manifestly disproportionate. Critically, Art. 309 CA only prohibits reduction for excessiveness. It does not preclude the penalty from being declared void for contravening good morals.

Voidability — Interpretive Decision 1/2009 SCC

Interpretive Decision No. 1/2009 of the General Assembly of the Commercial Division of the SCC established that a penalty clause is void for contravening good morals (Art. 26(1), third proposition, OCA) when it is stipulated outside its inherent securing, compensatory, and sanctioning functions.

The SCC identified the following illustrative criteria:

• Nature of the obligations — whether the obligation is monetary or non-monetary
• Amount of the secured obligation — the ratio between the principal obligation’s value and the penalty amount
• Type of non-performance — whether for complete non-performance, delay, or defective performance
• Method of determining the penalty — fixed, percentage-based, uncapped, etc.
• Presence or absence of equivalent conditions — whether both parties bear similar penalty obligations

Limitation period

Penalty claims are subject to a 3-year limitation period under Art. 111(b) OCA. The limitation period begins to run from the date the claim becomes due — for a moratory penalty, this is each day of delay; for a penalty for complete non-performance, this is the date performance became definitively impossible or the creditor exercised their right of rescission.

The 3-year limitation is shorter than the general 5-year limitation (Art. 110 OCA), requiring the creditor to act promptly.

Penalty and damages compensation

Under Art. 92(1), sentence 2 OCA, the creditor may claim compensation for greater damages — i.e., damages exceeding the penalty amount. However, the creditor must prove the actual amount of damages.

The creditor may choose between:

• Claiming the penalty only — without proving damages
• Claiming the penalty plus additional compensation — for damages exceeding the penalty (with proof)
• Waiving the penalty and claiming full damages — for all actual damages (with proof)

Distinction from similar legal instruments

Withdrawal fee (Otmetnina) — under Art. 308 CA, a provision allowing a party to withdraw from the contract upon payment of a specified amount. Unlike the penalty, the withdrawal fee is a right, not a consequence of a breach.

Statutory default interest — under Art. 86 OCA, compensation for delay on monetary obligations that arises by operation of law, without express agreement.

Practical drafting tips

For the creditor

1. Clearly specify the type of non-performance that triggers the penalty
2. Set a reasonable but sufficient amount — an excessively high penalty risks being declared void
3. For moratory penalties, include a cap
4. Address cumulation with damages expressly
5. Differentiate penalties for different breaches

For the debtor

1. Negotiate a cap on moratory penalties (e.g., not more than 10–20% of the contract value)
2. Ensure reciprocity — if you owe a penalty, the counterparty should too
3. Link the penalty to culpable non-performance — exclude force majeure
4. Precisely define which breaches give rise to a penalty obligation

Frequently asked questions

Conclusion

The penalty clause is an indispensable tool in contractual practice, providing creditors with a swift and efficient remedy upon non-performance. Proper drafting requires a balance between the interests of both parties — high enough to incentivize performance, but not so high as to risk voidability.

Key aspects: the 3-year limitation period; the prohibition on reduction between merchants under Art. 309 CA; the possibility of voidability under ID 1/2009 SCC criteria; and the creditor’s right to claim additional damages with proof.

If you need assistance with drafting or reviewing penalty clauses, the team at Innovires Legal can provide a consultation. Contact us.

This article is for informational purposes only and does not constitute legal advice. For specific questions regarding penalty clauses and contractual liability in Bulgaria, please consult a qualified lawyer.