Concept and Legal Classification of the Penal Promise
The penal promise is a term from German civil law that refers to a contractual agreement in which one party commits in advance to make a specific payment or other performance if they breach a particular (lawful) obligation to act. Penal promises typically serve to secure contractual obligations and are often included in contracts to reinforce binding effect. The statutory foundations and frameworks for penal promises are mainly found in Sections 339 ff. of the German Civil Code (BGB), under the term “contractual penalty.”
Contractual Penalty (Penal Promise) in German Civil Law
Definition and Delimitation
The penal promise (also referred to as a “contractual penalty”) is a contractual element in which the debtor agrees to pay a specified sum of money or provide another performance as a sanction if they do not fulfill a primary obligation arising from the contractual relationship, or do so improperly. The contractual penalty differs from claims for damages, as it is owed as a lump-sum sanction regardless of proof of loss.
Penal promises are to be distinguished from so-called true and untrue security interests as well as from fines and penalties in public law. The penal promise is only possible between private parties and does not apply in administrative or criminal law.
Statutory Foundations
The relevant regulations for the penal promise are found in Sections 339 to 345 BGB:
- Section 339 BGB – If the debtor promises the creditor a contractual penalty for non-performance or improper performance, the creditor is entitled to demand the penalty if the debtor fails to perform or does not perform as owed.
- Section 340 BGB – The contractual penalty is only forfeited if the secured performance is due and still possible.
- Section 341 BGB – Concurrent enforcement of performance and contractual penalty; creditor’s right of choice.
- Section 343 BGB – Possibility for the court to reduce a disproportionately high contractual penalty.
These provisions set out both the requirements and the limits for the validity of a penal promise.
Functions and Purposes of the Penal Promise
Sanction and Coercive Function
The penal promise primarily serves a sanctioning function: The debtor is threatened with a severe sanction if they do not properly fulfill their contractual obligations. At the same time, it acts as a means of exerting pressure to foster contractual fidelity and discipline by increasing the likelihood of the contract being properly fulfilled.
Substitute for Damages and Simplification of Evidence
Another function is to facilitate the enforcement of rights: Unlike classical claims for damages, in the case of a forfeited contractual penalty, it is generally not necessary to prove the amount of the loss. This simplifies enforcement for the creditor and eliminates difficulties of proof regarding the occurrence or amount of damage.
Security Function
The penal promise can also serve to secure specific performance contents, for example in confidentiality clauses, non-compete agreements, or cease-and-desist obligations.
Conclusion and Validity of a Penal Promise
Valid Contractual Content
According to the principles of German contract law, a penal promise does not require any particular form—agreement between the parties is generally sufficient, usually reached in the main contract or in a separate contractual penalty declaration.
Requirements for Validity
- Definiteness: The obligation underlying the contractual penalty must be clearly identifiable.
- Clarity of the Penalty Amount: The penal promise should specify the amount or the calculation basis for the penalty to be paid.
- Legal Compliance: The penal promise must not be immoral or unlawful (§ 134, § 138 BGB).
- Proportionality: Excessive contractual penalties may be reduced to an appropriate level under Section 343 BGB.
Control of Standard Terms
If the penal promise is used in standard terms and conditions (AGB), it is additionally subject to content control in accordance with Sections 305 ff. BGB. Unreasonable disadvantages or non-transparent provisions can lead to invalidity.
Enforcement and Assertion of the Penal Promise
Due Date and Forfeiture
The contractual penalty becomes due as soon as the debtor breaches the contractually agreed obligation. The principle of forfeiture applies: the penalty becomes immediately owed upon the breach, without requiring a reminder.
Right of Choice and Competition with Other Claims
According to Section 340 BGB, the creditor may demand both performance and the contractual penalty. In addition, it is possible to assert claims for damages to the extent that damage not covered by the contractual penalty has occurred.
Reduction of the Contractual Penalty (§ 343 BGB)
If the contractual penalty imposes a disproportionately high sanction, the debtor may apply to have it reduced to an appropriate amount by the court in accordance with Section 343 BGB. Appropriateness is determined by the extent, severity, and frequency of the breach, as well as the interests of the contracting parties.
Special Forms of the Penal Promise
Contractual Penalty for Injunctive Relief Claims
In numerous industries, especially in competition and intellectual property law, penal promises are used to secure cease-and-desist obligations. Here, the penal promise functions as an effective means of ensuring compliance with prohibitions on certain conduct.
Contractual Penalty and Employment Law
In employment law, penal promises in the form of contractual penalties are widespread in relation to notice periods or non-compete clauses. The admissibility of such agreements, however, is subject to special employment-law protection provisions, particularly with regard to proportionality and clarity of the clauses.
Contractual Penalty in Construction and Contract for Work Law
In construction and work contract law, penal promises are often used to secure completion deadlines (delay). The contractual penalty serves as lump-sum compensation for delays and is regularly included in standard construction contracts.
Limits and Invalidity of the Penal Promise
The penal promise is legally excluded or invalid in certain situations:
- Limit of Admissibility: The penal promise must not take on the character of a prohibited criminal act or violate accepted standards of morality.
- Exclusion in Statutory Regulation: If the law provides definitive sanctions and legal consequences for breaches of duty, an additional penal promise may be inadmissible.
- Disproportionate Penalties: Excessively high penalties may lose their effect in whole or in part and will be reduced to an appropriate level.
Legal Consequences of Breach of the Penal Promise
If the main contractual obligation is breached and the contractual penalty is concurrently forfeited, the debtor is obliged to pay the agreed sanction. Payment of the penalty does not generally release the debtor from fulfilling the primary obligation, unless the parties have agreed otherwise.
International Aspects
Contractual penalties are also widespread in international private law. Cross-border contracts should check whether the agreed penal promise is permissible and enforceable under the respective national law.
Recommended Reading
- Palandt, Bürgerliches Gesetzbuch, 83rd Edition 2024, §§ 339-345 BGB.
- MüKoBGB/Busche, Münchener Kommentar zum BGB, 9th Edition 2022, §§ 339-345 BGB.
Conclusion
The penal promise is a versatile instrument in German civil law, used to secure and enforce contractual obligations. It enables simplified enforcement of claims and increases contractual fidelity. The validity of a penal promise requires clarity, definiteness, and an appropriate level of sanction. The statutory provisions in Sections 339 ff. BGB form the legal framework and provide protection mechanisms against excess and abuse.
Frequently Asked Questions
Is a penal promise generally permissible under German law?
A penal promise is fundamentally impermissible and void under German civil law pursuant to Section 331 BGB. The law prohibits penal promises, as no one may be contractually obliged to submit to a penalty for a specific act or omission. The background is that sanctioning misconduct is exclusively reserved for the state’s claim to punishment, and freedom of contract is restricted to this extent. Neither monetary penalties nor other burdensome sanctions may be agreed contractually as a reaction mechanism to specific conduct; such clauses are generally invalid due to violation of a statutory prohibition (§ 134 BGB).
What are the differences between penal promises and contractual penalties?
Although the term “penal promise” is often confused with contractual penalty, the two are substantially different. The contractual penalty (Section 339 BGB) is expressly permitted by law, unlike the penal promise. It serves as a means of ensuring contractual fidelity and becomes due if the debtor culpably breaches a contractually agreed obligation. The penal promise, on the other hand, refers to payment of a penalty for a specific behavior that goes beyond the actual contractual obligation, for example for general misconduct or actions not involving a breach of a primary civil law obligation. While the contractual penalty is related to performance of a contractual obligation, the penal promise is the promise of a penalty as an end in itself and remains legally impermissible.
Are there exceptions to the prohibition of penal promises?
As a rule, the penal promise is prohibited. However, there are some situations in which similar agreements can be legally valid, provided they do not fulfill the requirements of a penal promise within the meaning of Section 331 BGB. These include, in particular, the contractual penalty regulated in Section 339 BGB, as well as agreed fixed-sum damages and certain clauses under employment law, provided they do not have a punitive character but are instead compensatory in nature. State-imposed or authorized penalties, such as administrative fines in official contexts, are also permissible. However, once the agreement takes on the character of a genuine penal promise, the statutory prohibition applies and it becomes invalid.
What legal consequences does the inclusion of a penal promise in contracts have?
Including a penal promise in a contract renders this obligation void under Section 331 BGB. This means that, in the event of a breach, the contractual party does not enter into any legal obligation to pay the agreed penalty, and the other party cannot sue for or demand the penalty. The remainder of the contract remains generally valid, unless the penal promise is so essential that the contract would not have been concluded without it (“overall invalidity” under Section 139 BGB). The invalidity is mainly limited to the agreed penal promise.
How does a penal promise differ from liquidated damages clauses?
Penal promises and liquidated damages clauses differ substantially in legal nature and purpose. While the penal promise is demanded irrespective of the actual occurrence of a loss, and serves as a sanction for undesirable conduct, a claim for damages requires that the claimant has actually suffered loss. Furthermore, damages always serve compensation (making good the loss suffered), whereas the penal promise has a purely repressive or deterrent character. Only liquidated damages clauses that are related to the occurrence and amount of damage (§ 309 No. 5 BGB for standard terms) are permissible—the penal promise remains impermissible.
What impact does the prohibition on penal promises have on general terms and conditions (AGB)?
The prohibition of penal promises is particularly relevant in the drafting of general terms and conditions. Under Sections 307 to 309 BGB, terms in AGB providing for a penal promise or causing unreasonable disadvantage are invalid. This applies, for example, to clauses that stipulate lump-sum payments for breaches with no reference to a duty violation or actual damage suffered. Therefore, internal company rules or customer contracts should correctly structure any such “penalties” as contractual penalties or fixed damages to withstand a validity review.
Can a penal promise be valid in international contracts?
Whether a penal promise is valid in international contracts depends on the applicable law. While German law provides for a clear prohibition, other legal systems have different rules (e.g., punitive damages or liquidated damages in Anglo-American law). If German law is stipulated in a cross-border contract, the prohibition of Section 331 BGB applies. If the agreement is subject to foreign law, it must be carefully examined whether penal promises are valid and enforceable there. Enforcement in Germany may still fail due to ordre public—that is, a violation of fundamental principles of German law.
What should be particularly observed in contract drafting with regard to penal promises?
When drafting contracts, care must be taken to avoid clauses that could be classified as penal promises within the meaning of Section 331 BGB. Instead, permissible alternatives such as contractual penalties (Section 339 BGB) or fixed-sum damages related to breach of duty and actual proven loss should be used. If in doubt, it is advisable to seek legal advice to avoid legal effects being denied to important contractual components in the event of a dispute. In international contracts, it should also be clearly stipulated which law applies and whether any clauses are enforceable under German law.
