Contractual penalty (līgumsods)

A contractual penalty (līgumsods) is a payment set in a contract that a party undertakes to pay if it fails to perform its obligations at all, performs them improperly or misses a deadline. It is governed by Section 1716 and the following sections of the Civil Law.

A penalty for total non-performance is a fixed sum and cannot be set as repeated or growing payments. A penalty for improper or late performance may grow, for example per day of delay, but in total no more than 10% of the principal debt or main obligation.

The parties set the amount, and it is not limited to the loss expected, but it must be proportionate and in line with fair business practice. A penalty for delay can only be claimed to the extent that it exceeds late payment interest already claimed.

As a rule the creditor claims either the penalty or performance of the contract. It can claim both if this was expressly agreed, or if the penalty was set for performance on time rather than for non-performance as such.