There is a contractual penalty in your contract. What happens if the debt is time-barred? Is the contractual penalty still enforceable?
As the lawyers say: It depends.
What is Contractual Penalty?
Contractual Penalty serves to reinforce a contractual obligation. Think of it as a side agreement: if one party breaches a certain contractual obligation, they have to pay a contractual penalty to the other party. Contractual Penalty is a useful tool to enforce the proper performance of important contractual obligations. If one party fails to fulfil them, there is no need to find out the amount of damages incurred by the other party. In fact, it is clear to eneryone how much the party in breach has to pay.
1) Separate Claim
Contractual Penalty is a separate claim, unlike i.e. interest on late payment. If the right to Contractual Penalty arose before the debt became time-barred, the creditor may successfully claim the Contractual Penalty. Even after the debt has become time-barred.
The expiration or time-bar of the debt does not affect the Contractual Penalty already accrued; the Penalty constitutes a distinct claim subject to its own limitation period. Typically, the statute of limitations is three years, commencing from the date on which the claim could initially have been pursued (for instance, by initiating legal proceedings in court).
2) Time-barred Claim
If the right to Contractual Penalty arose after the debt was time-barred, the situation is different. Both the debt and the Contractual Penalty exist, but are not enforceable in court.
If you need advice on Contractual Penalties, do not hesitate to contact us - we are here to help you.
