Contractual penalty regulation in Latvia

On 1 January 2014, amendments to the Latvian Civil Law came into force significantly affecting all contracts where the parties have agreed on contractual penalties.

Articles 1716, 1717, 1722, 1724, 1764, 1843 of the Latvian Civil Law were amended. According to the previous law, there were not any restrictions on contractual penalty and the late payment penalty as to amount. Consequently they could have exceeded the extent of the debt. New regulation provides restriction to the extent of the contractual penalty, although, the Latvian government - Saeima does not clarify how to adjust the new regulation in contracts which are concluded before 2014.

Amendments clarify that the new system of contractual penalties will be dated from 2015 – it is related to contracts which had been concluded and there had not raised a claim in court until 31 December 2013 and these contracts are in force also after 1 January 2014 till 31 December 2014. Latvian businessmen estimate positively this transition date.

Limits of penalty amount

The limit of the contractual penalty is set 10% by law. There is a possibility that payment will be paid partly, also the 10% limit can be calculated from the part which has not been paid in time, or calculated from the total contract payment, which is indicated in legal agreement. The question is, if the 10% limit is calculated from the original debt (contract payment) or the one which will be accumulated till 2014.

The 10% limit could affect businessmen differently. It can give a chance debtor not to fulfil the contract. These rules can significantly reduce lending facilities; banks and enterprises will need to think how to ensure the transactions in other ways. As a result, that can also affect costs of goods and services in Latvia.

New regulation does not allow claim losses and penalty

The Latvian Civil Law determines when a principal obligation terminates, the agreed contractual penalties shall also automatically terminate. 

The new regulation establishes the procedure for partial payments to pay the penalties.

1)      the unpaid interest from the partly payments must be paid,

2)      the basic amount and

3)      finally, the contractual payment.

From now on, there is a duty not rights for the courts of Latvia to reduce the contractual penalty. There is a possibility, that new disputes in courts will be about which of the regulations to adjust, because it is not clear how and if the new regulation will be adjusted to contracts which are concluded until 1 January 2014.

All in all, penalties usually became as a source of profit, because they were disproportionate quite often, so the new penalty regulation was necessary.

Keywords: contractual penalty in Latvia, Latvian Civil Law, Obligations Law in Latvia, amendments to the Latvian Civil Law, late payment penalty in Latvia, extent debt Latvia, contract law in Latvia, enterprises in Latvia, disputes in courts Latvia, losses in Latvia