In its judgment file no. 31 Cdo 927/2016 dated 11 April 2018, the Grand Panel of the Civil and Commercial Division of the Supreme Court of the Czech Republic addressed the issue, whether a contractual penalty used for an unilateral set-off may be lowered by the court.

According to its earlier case law (e.g. the judgment of the Supreme Court of the Czech Republic file no. 32 Odo 1007/2006 and decisions derived therefrom), it was not possible for a court to lower an unreasonably high contractual penalty if such penalty had been used for an unilateral set-off.

The Supreme Court now expresses the opinion that such lowering of a contractual penalty by court has its effect ex tunc rather than ex nunc, i.e. as of the day of the agreement on the contractual penalty. If a contractual penalty is unreasonable, its unilateral set-off cannot result in expiration of the debt deriving from the contractual penalty or the debt, against which such unreasonable penalty is being set-off.

According to the Supreme Court, a court is entitled to decide on lowering an unreasonably high contractual penalty even in cases, where the creditor has unilaterally offset the contractual penalty against a debt owed to the debtor.

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