Construction contracts are among the most complex commercial agreements. The scale of the undertaking, the long duration of implementation, and the number of participants in the investment process mean that the risk of non-performance or improper performance of obligations is significant. Therefore, contractual provisions regarding penalties and liability limits are of particular importance. Both mechanisms serve to protect the interests of the parties, although their functions differ.
Contractual penalties – a disciplinary tool
The legal basis for contractual penalties is found in Articles 483–484 of the Civil Code. According to these provisions, the parties may stipulate that in the event of non-performance or improper performance of a non-monetary obligation, the debtor shall pay the creditor a specified amount. In construction practice, penalties are most commonly imposed on the contractor for:
- delay or default in starting or completing the works,
- delay or default in remedying defects,
- withdrawal from the contract due to reasons attributable to the contractor.
It is also common to encounter penalties imposed on the client for withdrawal from the contract due to reasons attributable to them.
The key feature of a contractual penalty is that the creditor does not need to prove the actual amount of damage – it is sufficient to demonstrate a breach of obligation. This significantly facilitates the pursuit of claims. At the same time, the court may reduce the penalty if it is grossly excessive or if the obligation has been largely fulfilled (Article 484 § 2 of the Civil Code). The Supreme Court has ruled that a penalty must not lead to unjust enrichment of the creditor (e.g., Supreme Court resolution of November 6, 2003, III CZP 61/03).
It is also worth noting that compensation exceeding the amount of the contractual penalty can only be claimed if explicitly stipulated in the contract.
Liability limits – a risk management mechanism
Another important contractual instrument is the liability limit. Its purpose is to limit the scope of risk assumed by the contractor or the client. In practice, the following are most commonly used:
- global liability limits (e.g., up to the agreed net or gross remuneration),
- exclusion of liability for indirect damages, lost profits, or data loss,
- limitation of liability during the warranty or guarantee period.
According to Article 473 § 2 of the Civil Code, it is not permissible to exclude liability for damages caused intentionally. In addition, the boundaries of contractual freedom are defined by mandatory provisions and principles of social coexistence. Courts generally accept liability limits in business-to-business relations, treating them as part of commercial risk.
In construction contracts based on FIDIC conditions, limitation clauses are standard, and their acceptance often determines the possibility of undertaking the investment.
Relationship between contractual penalties and liability limits
In practice, the question arises whether contractual penalties are subject to the general liability limit. The answer depends on the content of the contract. It is usually assumed that penalties are included in the global limit, but different solutions are also encountered, meaning the contractor is liable for them without limitation. The lack of clear regulation may lead to interpretative disputes, so this issue should be explicitly addressed in the contract.
Moreover, contracts often include limits for specific types of penalties. For example, a maximum penalty for delay in completing works (e.g., up to 10% of remuneration), a separate limit for withdrawal due to the contractor’s fault (e.g., 20% of remuneration), or a cap on the total amount of all penalties. This approach maintains the disciplinary function of penalties while protecting the contractor from excessive financial burden.
Introducing liability limits, including limits for specific penalties, allows the parties – especially the one potentially obligated to pay – to assess the risk in case of triggering the conditions for penalties or damages.
Summary
Contractual penalties and liability limits serve different functions in construction contracts. Penalties discipline the contractor and facilitate the client’s pursuit of claims in case of contract breach. Liability limits, on the other hand, protect the parties from excessive financial risk. Both mechanisms are permissible under Polish law and widely used in practice, but their effectiveness depends on precise and balanced regulation in the contract. Therefore, proper contract preparation and negotiation with the support of a professional advisor is essential, as they can identify risks and legal consequences arising from the negotiated provisions.