Supreme Court Clarifies Liquidated Damages Calculation for Late Delivery: Key Takeaways

On may 5th, the Supreme Court of the Russian Federation issued Ruling No. 305-ES25-14824 (Case No. A40-177684/2024), once again drawing attention to the nuances of calculating penalties for supply delays. This decision is particularly relevant given the fluctuations in the Central Bank of Russia’s key rate and addresses issues related to the correct determination of the parties’ liability in Commercial (economic) disputes.

Case summary: The dispute involved a situation between the State Autonomous Institution “Gormedtekhnika” (Customer) and LLC “Pharmstandard-Medtekhnika” (Contractor) concerning a contract for the supply and installation of medical equipment. The core issue was the calculation of penalties for significant delivery delays.

According to the contract terms, the penalty was set at 1/300th of the key rate of the Central Bank of the Russian Federation for each day of delay. However, when the equipment was delivered late, the Contractor applied a key rate of 7.5% in its penalty calculation, which was effective at the time of actual performance. In contrast, the Customer insisted on using a higher rate of 16%, which was in effect at the time of the breach.

Position of lower courts: The courts of first instance, appeal, and cassation supported the Customer, ordering the payment of penalties calculated at the higher rate. They reasoned that the contract did not explicitly stiprate the mandatory application of the key rate effective on the day of actual performance and relied on a literal interpretation of the contract terms. It was also noted that Government Decree No. 783 on the write-off of penalties was not applicable to relations governed by the Law on Procurement.

Supreme Court’s decision: The Economic Collegium of the Supreme Court agreed that the Government Decree was inapplicable but took a different view on the calculation of the penalty itself. The Supreme Court reiterated that, in accordance with paragraph 65 of Resolution of the Plenum of the Supreme Court No. 7 dated March 24, 2016, penalties are calculated up to the day of actual performance of the obligation.

The Court highlighted the following points:

1. Courts’ duty to verify calculations: Courts are not required to merely accept the calculations presented by the parties but must verify them and, if necessary, independently determine the penalty amount.
2. Key rate at the time of performance: If an obligation has been fulfilled (goods delivered) before legal proceedings are initiated, the penalty amount should be determined based on the key rate of the Central Bank of the Russian Federation effective on the day of actual performance of the main obligation (or in stages, if the obligation was performed partially).
3. Separation of obligations: The contract stipulated separate deadlines for the supply and installation of equipment, with liability for each of these obligations. This implies that penalties should be calculated for each breach separately, considering the key rate effective at the time of actual performance of the respective obligation.
4. Error in rate application: The Supplier referred to the 7.5% rate effective at the time of performance, while the claimant used 16%. The Supreme Court pointed out that the key rate effective at the time of actual performance should have been considered, a point overlooked by the courts of first instance and subsequent instances.

Consequently, the Supreme Court overturned the decisions of the lower courts and remanded the case for a new hearing, instructing that the penalty be recalculated considering the relevant key rate at the date of actual performance.

As a lawyer practicing in the field of contractual relations and arbitration disputes, I consider this Supreme Court ruling to be extremely important and timely. It not only confirms established judicial practice but also provides clear guidelines for courts and businesses.

Key Takeaways and Comments:

1. Penalty as a measure of liability, not an end in itself: The Supreme Court has once again reminded us that penalties are intended to incentivize the fulfillment of obligations and compensate the creditor’s losses. They cannot serve as a tool for unjust enrichment, especially when the primary obligation has already been fulfilled. Accruing penalties for a period when the obligation has actually been performed contradicts the very nature of this institution of contractual liability.
2. Importance of actual performance: The emphasis on the “day of actual performance” is a critically important point. It means that when calculating penalties for delayed delivery, one must look at the date of actual delivery, not the date when the delay began. This is especially significant in the context of fluctuating Central Bank key rates.
3. Courts’ duty to verify calculations: For me, as a practicing lawyer, the reminder to courts of their duty to independently verify parties’ calculations is particularly valuable. One cannot blindly accept figures presented by the plaintiff or defendant at face value. The court must conduct its own analysis, involve an expert if necessary, or independently calculate the penalty based on the rules established by law and the contract. This prevents situations where a literal, but unfair, interpretation of the contract leads to erroneous conclusions.
4. Imperfections in contract drafting: This case serves as a striking example of how errors can be made in formulating penalty clauses, even within standard contract templates (for procurements under Federal Law No. 44-FZ). As it turns out, ambiguity in applying the Central Bank’s key rate can become the subject of protracted commercial disputes. The clause limiting the maximum liability to 2.5% also raises questions, as it may be unfair given the complexity and duration of supply and installation obligations. This underscores the need for meticulous contract drafting and the involvement of qualified lawyers for preparing or reviewing contracts.

For businesses, this means that when calculating and claiming penalties, it is necessary to:

1. Accurately determine the date of actual performance of the obligation.
2. Use the correct key rate of the Central Bank of the Russian Federation effective on that date.
3. Prepare detailed calculations and be ready to defend them in court, conducting your own calculation if necessary.
4. Approach the wording of contractual penalty clauses carefully to avoid ambiguity and potential disputes.

This Supreme Court ruling is an important reminder that legality and fairness in penalty calculation must come first, regardless of the literal interpretation of individual contract provisions. A deep understanding of such nuances is key to successfully resolving any Commercial (economic) disputes.