The decision to reduce the penalty and the amount to which it is to be reduced is within the discretion of the court - Joint Chamber of the Commercial Cassation Court of the Supreme Court

Circumstances (in their entirety), which serve as a reason for the court to reduce the penalty in each specific legal relationship (case), are individual in nature, and therefore the amount of the penalty, to which the court reduces it (by 90%, 70%, 50%, etc.), which is determined by the circumstances of the specific legal relationship established and assessed by the court, is determined by the court within the discretionary powers granted to it by the provisions of part 1, 2 of Article 233 of the Commercial Code of Ukraine and part 3 of Article 551 of the Civil Code of Ukraine, i.e. within the court's discretion.

The absence of a universal maximum and minimum amount by which the penalty can be reduced at the same time requires that this amount be consistent with the rule of law.

This is stated in the resolution of the Supreme Court composed of judges of the Joint Chamber of the Commercial Cassation Court.

In this case, PJSC filed a claim with the commercial court against LLC to recover a penalty and a fine due to the LLC's failure to fulfill its obligations under the contract for the purchase of equipment manufacturing (repair) services.

The defendant applied for a reduction in the amount of the penalty (penalty fee and fine), asking that it be taken into account that the total cost of the works under the contract was three times less than the amount of the penalty fee, which was contrary to the principle of fairness and reasonableness.

The courts of the previous instances partially satisfied the claim, in particular, the penalty was recovered in a reduced amount: UAH 51,403.68 instead of UAH 4,340,755.20.

The complainant filed a cassation appeal, arguing that the courts not only reduced the amount of penalties in the disputed legal relations by 99%, but also released the defendant from paying them, which violates the balance of interests of the parties and does not comply with legal norms, case law, and the essence of the responsibility that the parties foresee when entering into a transaction.

Considering the case, the Commercial Cassation Court of the Supreme Court noted that reduction of the amount of the penalty claimed for recovery is the right of the court, and in the absence of an exhaustive list of circumstances as grounds for reducing the amount of the penalty by the court (part 3 of Article 551 of the Civil Code of Ukraine), the commercial court, having assessed the evidence provided by the parties and the circumstances of the case in their entirety, at its own discretion, decides on the presence or absence in each particular case of circumstances under which the penalty may be reduced.

When a court considers the issue of reducing the amount of the penalty claimed for recovery, it is necessary to consider and assess the validity of both the grounds for reducing the penalty that are expressly provided for by law (part 3 of Article 551 of the Civil Code of Ukraine, Article 233 of the Commercial Code of Ukraine) and the grounds for reducing the penalty that are not provided for by law but are claimed as grounds for reducing the penalty and are specific to the particular legal relationship in dispute.

According to court practice, the courts point out that a 99% reduction in the amount of the penalty effectively eliminates the purpose of the penalty as a civil liability for breach of duty, which can be considered a way of avoiding liability and will lead to a violation of the balance of interests of the parties.

The Joint Chamber noted that the reduction of the penalty by the court to a certain amount is carried out with its determination in a certain amount of money to be recovered, while the transfer of the reduced amount of the penalty into shares and, accordingly, appeals in disputes on the reduction of the amount of the penalty by such categories as the share or percentage by which the penalty is reduced, does not reflect the objective state of the totality of circumstances that are the subject of judicial investigation when deciding on the reduction of the penalty.

At the same time, the Court noted that the legislator grants the court the right to reduce the amount of the penalty, but not to release the debtor from its payment. At the same time, a set of circumstances in a particular legal relationship (formal signs of the debtor's delay, the creditor's breach of an obligation - Article 616 of the Civil Code of Ukraine, etc.) may indicate that it is unfair to impose a penalty of any significant amount on the debtor. Determining the fair amount of the penalty is within the discretion of the court.

Factors justifying specific conditions for a penalty: the circumstances (in their entirety) on the basis of which a penalty for breach of obligations is imposed, its amount and the circumstances (in their entirety) on the basis of which the court reduces the penalty are individual in each specific legal relationship (case). Consequently, the amount of the penalty to which the court reduces it (by 90%, 70% or 50%, etc.) in each particular legal relationship (case) is individually assessed, since this amount (part or percentage by which the penalty is reduced), which is determined by the circumstances in a particular legal relationship established and assessed by the court, is determined by the court within the discretionary powers granted to the court in accordance with the provisions of parts 1, 2 of Art. 233 of the Commercial Code of Ukraine and part 3 of Article 551 of the Civil Code of Ukraine, i.e. within the court's discretion.

In view of the above, the Court noted that the individual nature of the grounds that determine the reduction of the penalty (recoverable for breach of obligation) by the court in a particular legal relationship, as well as the discretionary nature of the court's determination of the amount to which the court reduces it, lead to the conclusion that there is no universal maximum and minimum amount of penalty by which it can be reduced, which at the same time requires that this amount comply with the principles of the rule of law.

In light of the foregoing, and taking into account the circumstances of the case, the Joint Chamber agreed with the conclusions and reasoning of the courts in the contested decisions to partially grant the defendant's request to reduce the arithmetically correct and reasonable amount of the penalty claimed for recovery from UAH 4,340,755.20 to UAH 51,403.68.

The Resolution of the Supreme Court as part of the panel of judges of the Joint Chamber of the Commercial Cassation Court of January 19, 2024 in case No. 911/2269/22 - https://reyestr.court.gov.ua/Review/116445536.

This and other legal positions of the Supreme Court can be found in the Database of Legal Positions of the Supreme Court - https://lpd.court.gov.ua.