What is a contractual penalty and when to use it

A contractual penalty is a clause where a party agrees to pay a set amount if they breach a contractual obligation – regardless of actual damage.
It is a deterrent and enforcement tool.

Common use cases:

• missed deadlines

• breach of confidentiality

• failure to provide deliverables

• unauthorized modifications

• non-performance or late payment

Legal framework

Governed by Sections 2048–2052 of the Czech Civil Code.
Key principles:

• must be agreed in writing,

• enforceable even without proven damage,

• court may reduce excessive penalties.

Key elements

• Clear definition of the obligation

• Fixed or calculated penalty (per breach/day)

• Optional cap or limitation

• Timing of penalty accrual

• Clause on combining with damages (optional)

Common mistakes

• Vague or missing penalty clause

• No signed agreement → unenforceable

• Overly general formulation → risk of invalidity

• Excessive amounts → judicial reduction

• Not aligning with main contract

Recommendations

• Be clear and specific

• Avoid excessive penalties

• Add clause on cumulative damages if needed

• Sign the contract and retain evidence

Practice tip

One of the most powerful enforcement clauses – but only when clear, fair, and specific.

Penalty clause template – available for a symbolic fee

I offer a Czech-English penalty clause template for different contract types.

Includes optional clause for combining with damages.

Contact me for a fast, enforceable solution.

FINAL THOUGHTS – WHAT NOW?

A contractual penalty clause isn’t just a formality – it’s a legal shield, if drafted properly. And a trap, if not.

Do you want to be sure your contract will hold up even in a crisis? Get in touch and let’s schedule a meeting. I am a specialist on contract law – more information here.