Formulating a contractual provision on payment of a penalty for each day of delay is not a setting by this agreement of a different term than the six-month term for accrual of penalties specified in Article 232(6) of the Commercial Code of Ukraine - SC GC

The use of the phrase ‘for each day of delay’ in the text of a commercial agreement cannot be considered as establishing a different term for the accrual of penalties (in particular, a penalty) than that specified in part 6 of Article 232 of the Commercial Code of Ukraine.

If the contract contains only the wording ‘for each day of delay’ and no provisions on the period or term for which the penalty is accrued, such accrual shall cease six months after the date when the obligation was due to be fulfilled in accordance with part 6 of Article 232 of the Commercial Code of Ukraine.

This conclusion was made by the Grand Chamber of the Supreme Court.

Under the circumstances of the case, three shareholders of a JSC (plaintiffs) exercised their right to demand mandatory redemption of their shares by the JSC, which was confirmed by a court decision recognising the securities sale and purchase agreements as concluded.

The JSC failed to pay the contractual value of the shares owned by the plaintiffs in a timely manner, and the latter filed a lawsuit to recover the value of the shares, a fine, a penalty, 3% per annum, and inflationary losses until the day the court decision is fully enforced.

The claims for penalties were filed for a period exceeding the six-month period for accrual of penalties set out in part 6 of Article 232 of the Commercial Code of Ukraine, referring to the contractual clause under which the seller, in case of delay in fulfilling its obligation to comply with the terms of this contract, is obliged to pay the buyer a penalty in the amount of double the NBU discount rate for each day of delay.

The courts of previous instances partially satisfied the claim, stating, in particular, that the calculation of the claimed penalty did not meet the requirements of part 6 of Article 232 of the Commercial Code of Ukraine.

The Grand Chamber of the Supreme Court agreed with such conclusions of the courts of previous instances and noted that in practice it is necessary to distinguish between the mechanism (formula) for calculating the penalty, which characterises such a feature as accrual for each day of delay (daily accrual), and the term for calculating punitive sanctions (in particular, the penalty), which is regulated by part 6 of Article 232 of the Commercial Code of Ukraine. The wording contained in part 3 of Article 549 of the Civil Code of Ukraine and the corresponding provisions of other regulatory acts, including the terms of the contract (if reflected or specified by the parties in the contract), only distinguish (identify) the penalty among the penalties (other punitive sanctions) and determine the mechanism (formula) for its calculation, but in no way address the issue of the time limit for which the penalty may be accrued.

If the parties have provided for a longer period of accrual of punitive damages than that specified in part 6 of Article 232 of the Commercial Code of Ukraine (stipulating that they shall be accrued until the day of actual performance, throughout the entire period of the debt, etc.), then their accrual shall not be terminated for the period of delay in the obligation exceeding six months from the day when the relevant obligation was due to be performed, and the period specified in the agreement shall apply.

In the absence of such conditions in the agreement (using/stating in the agreement only the wording on charging a penalty ‘for each day of delay’), the accrual of punitive damages (in particular, a penalty) shall be terminated six months after the day when the obligation was due to be fulfilled in accordance with part 6 of Article 232 of the Commercial Code of Ukraine.

In the case at hand, the courts of previous instances found that the terms of the agreements did not contain any additional clauses (in particular, ‘until the obligation is fully performed’, ‘until the debt is fully paid’, ‘until the debt is fully repaid’, etc.) that would indicate that they set a different period for the accrual of punitive damages than that set out in part 6 of Article 232 of the Commercial Code of Ukraine, therefore, the penalty for delay in fulfilment of the obligations under the contract by the defendant as a buyer of securities should be accrued for a period of six months from the date when the obligation was due to be fulfilled.

Resolution of the Grand Chamber of the Supreme Court of 16 October 2024 in case No. 911/952/22 (proceedings No. 12-79гс23) - https://reyestr.court.gov.ua/Review/123282018.

This and other legal opinions of the Supreme Court are available in the Database of Legal Positions of the Supreme Court - https://lpd.court.gov.ua.