Penalty clauses in contractual relationships serve specific functions. Freedom of negotiation is a leading principle in civil law, but it also has certain limits that the parties may not exceed. The same applies to penalty clauses. If the parties agree on a penalty that goes beyond the permissible limits of contractual freedom, it may be declared null and void by the court or, alternatively, reduced.
This article examines the reduction of a penalty due to excessiveness and the applicability of this possibility in a particular type of contract—namely, unilateral commercial contracts.
What Are One-Sided Commercial Agreements
Depending on the status of the parties to the agreement, commercial agreements are divided into one-sided and two-sided commercial agreements. The relevant status is that of a “merchant” within the meaning of Article 1 of the Commerce Act (“CA”). According to this provision, a merchant is any natural or legal person who, by occupation, carries out one or more of the transactions listed in items 1–15 of Article 1.
If both parties to the agreement qualify as merchants under this criterion, the agreement is a two-sided commercial agreement. However, if only one party has this status, the agreement is considered a one-sided commercial agreement.
One-sided commercial agreements are extremely common in practice. This circumstance is often overlooked, but it has serious implications in the context of potential disputes between the parties. One of the most important issues concerns the agreed penalty and the possibility of reducing it due to excessiveness.
Applicability of Article 309 CA
The provision that prohibits the reduction of a penalty due to excessiveness can be found in Article 309 CA. According to it, “a penalty due under a commercial transaction concluded between merchants may not be reduced due to excessiveness.” The legislator’s idea here is that a merchant, as a professional, requires less protection because they possess greater experience and are expected to have better judgment regarding the amount of penalty they agree upon.
For this provision to apply, two conditions must be met:
- The transaction must be a commercial transaction;
- The party must have the status of “merchant.”
To satisfy the first criterion, two scenarios are possible—the transaction may be absolute or relative commercial in nature.
Absolute commercial transactions are listed in Article 1, items 1–15 CA. The legislator considers them so inherently commercial that they are deemed commercial regardless of the parties’ status.
Relative commercial transactions, on the other hand, are those concluded by a merchant and related to the exercise of their business. Thus, the scope here is significantly broader than the exhaustive list in Article 1 CA, but the transactions must be carried out “by occupation.”
If a commercial transaction is in place—whether absolute or relative—we move to the second criterion: the parties’ status as merchants. At first glance, the provision appears to cover only contracts where both parties are merchants. That is, contracts that are commercial but where only one party has merchant status seem to fall outside its scope.
However, this is not the case. Decision No. 282 of 08.10.2025 in Commercial Case No. 2149/2024 of the Supreme Court of Cassation of Bulgaria reaffirms this conclusion.
The case concerns an agreement between a construction contractor, who had the status of a merchant, and a municipality, which does not have merchant status. Nevertheless, this did not prevent the court from applying Article 309 CA.
The court reasoned that only the party without a merchant status may invoke the prohibition under Article 309 CA. Since in this case it was precisely the merchant party who sought to avoid the prohibition of Article 309, the court held that this was inadmissible.
Nullity and Reduction in Case of Improper or Partial Performance
Invoking Article 309 CA is not the only way to address the issue of penalty clauses. If a penalty is excessive to the extent that it contradicts good morals, for example, it may be declared null and void.
In the cited decision, the court also recalls another scenario in which a penalty could be reduced—even if it is not null and void and even if the prohibition of Article 309 CA applies. This concerns the reduction of a penalty where the obligation has been performed improperly or partially.
However, this scenario exists only if the penalty has been agreed as compensatory—i.e., to compensate for pecuniary damages resulting from complete non-performance. If the debtor has performed, even partially, the damages subject to compensation may be lower compared to a situation of total non-performance.
In the case at hand, however, the penalty was agreed as a default (moratory) penalty, meaning it was due for delayed performance. This led the court to conclude that the merchant party could not request a reduction of the penalty amount.
The article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
