Penalty Fees in Lithuania

Penalty Fees as a Form of Civil Liability and a Means of Securing the Performance of Obligations

Penalty fees are a monetary amount established by law, contract, or court decision that the debtor must pay to the creditor in the event of non-performance or improper performance of an obligation (penalty, late payment interest).

As a means of securing the performance of obligations, penalty fees are most commonly used in contractual relationships between legal entities, and less frequently in relationships between natural and legal persons or between natural persons, for example, in residential lease agreements, utility bill settlements, or loans provided to individuals.

The purpose of penalty fees is to motivate the debtor to properly and timely fulfill their obligation, as the penalty is considered an additional obligation to the main one. This means that even after paying the penalty, the debtor is not released from performing the primary obligation, unless otherwise provided by law or contract.

Penalty fees may be expressed as a specific monetary amount or as a percentage of the secured obligation amount. For missed deadlines in fulfilling an obligation, penalty fees may be calculated for each day, week, or month of delay. The agreement on penalty fees must be made in writing.

According to their legal basis, penalty fees can be divided into three groups:

1. Statutory penalty fees – arise from a law or subordinate legal act. Such an act specifies the types of violations for which these penalties apply, their amount, and the procedure for collection. The provisions on statutory penalties are usually mandatory, and the parties to the obligation cannot agree otherwise unless such a right is granted by the relevant legal act;
2. Contractual penalty fees – arise from a contract concluded by mutual agreement of the parties. The contract specifies the amount of the penalty, the violations for which it applies, and the procedure for its enforcement;
3. Court-imposed penalty fees – arise when a court issues a decision imposing such a sanction on a debtor who has breached the obligation. The amount and procedure for enforcement are determined by the court’s decision.

If a penalty fee has been stipulated, the creditor cannot simultaneously demand payment of the penalty and actual performance of the obligation, except when the debtor is late in fulfilling it. When a claim for damages is made, the penalty amount is offset against the damages. If the penalty is clearly excessive or the obligation has been partially fulfilled, the court may reduce the penalty, but only to a level not lower than the damages caused by non-performance or improper performance. Penalties cannot be reduced if they have already been paid.

If the contract that gave rise to the obligation is declared invalid under the law, the agreement on securing the obligation with a penalty fee also becomes invalid.