Liquidated damages or fee to be refunded

Compensation for damages, indemninity payment, penalty forfeit in the light of the VAT act
What is the scope of public assets?

As the question was raised by one of our clients, we will publish it with the help of a hypothetical case.

The agent was appointed by the principal to fulfil a task for which a deadline was established. Simultaneously, the principal paid HUF 100,000 as advance payment of commission and determined penalties for delay as the compliance with the deadline was important for him. They agreed that if the agent did not accomplish the task by the deadline set, the parties would regard the performance as failed and the agent should pay HUF 200,000 as contractual penalty to the principal. The agent did not even start to accomplish the task by the deadline. The principal is reclaiming the advance payment and he is also claiming the contractual penalty for delay.

The question is whether the principal can claim both penalties. Section 6:187 (3) of the Civil Code states the following: “In addition to contractual penalty, the obligee shall be entitled to demand payment for damages not covered by the contractual penalty.” Thus, the question is if the reclaimed commission can be regarded as “damages”. At first sight it may seem so as the breach of contract by the agent resulted in the decrease of the asset of the principal.

However, if we model the process, the principal rescinds the contract due to non-performance and lapse of interest and the parties – where possible – shall restore the original state. Thus, the amount of HUF 100,000 to be recovered is not a compensation for damages and it shall not be included in the contractual penalty.

Resolution no. 57 Economic Department of the Municipal Court of Budapest comes to a similar conclusion in connection with a different case.

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