What is the difference between liquidated damages from penalties?

Many entrepreneurs are faced with the necessity of paying penalties and fines. What are the specifics of these obligations? What is the difference between liquidated damages from penalties?

What is the penalty?

First of all, it is worth noting that in the civil legislation of the Russian Federation of penalties and fines essentially not differentiated among themselves. Therefore, from the point of view of normative regulation considered synonymous terms. But in practice, their interpretation can vary considerably.

So, some experts believe that under the penalty should be understood:

  • absolutely any type of penalties that can occur due to the failure of the company or by the citizen of conditions of contract or legal requirements;
  • fixed, pre-agreed in the contract the amount of the penalty payment for non-performance by the counterparty of its obligations to the partner.

Thus, there are 2 interpretations of the term «penalty» in a broad and narrow sense. In the first case, the penalty can be attributed a penalty. Let us consider the essence of the latter.

to contents ↑What is the penalty?

Under penalties need to understand the kind of damages representing the punitive amount, which begins to form at the time of the violation subject of legal relations of the contract or the provisions of the law and increases over time. Typically, this penalty amount is calculated as a percentage of the amount of obligations of the subject of legal relations.

For example, if the lease contract stipulates that in the event of late payment by tenant shall be paid the daily penalty amounting to 0.1% of the contract amount, then the penalty is justified to call the penalties. The concept of fines in the narrow sense will be treated similarly — only in the text of the Treaty assume a direct indication of the term, without the use of the word «penalty».

to contents ↑the Difference between liquidated damages and penalties

The main difference of the penalty from the penalties that the sanction penalty the first type involves the payment by the entity responsible for a breach of its obligations under the contract or the requirements of the act, a fixed amount in favor of the other party. The penalty, in turn, implies payment of an amount that shall begin on the date of breach of contract or of the provisions of the law and increases over time until the obliged party fails to perform requirements under the contract or by law.

The main reason for any penalty fees — late performance of his obligations the subject of the contract or the person who must fulfil a statutory requirement — for example, to pay tax. In turn, the penalty in a narrow sense can be charged not only for late obligations, but also for incomplete or substandard their performance.

It should be noted that the term «penalty» in a broad sense, is prescribed most often in commercial contracts. Even if it involves the accrual of penalties for failure to perform obligations, cumulative, penalties, as a rule, not called.

In turn, the provisions of the laws, which provide for the occurrence of such sanctions because of their violations, often directly States that it must be paid the penalty. For example, Russian tax legislation is the penalty for late payment a company or individual dues to the Treasury: it is calculated daily based on the current key rate of the CBR.

Note that the penalty in the narrow sense — as a fixed amount, the obligation to pay which may occur in this or that subject, — tax law is often called the penalty.

Defining the difference between liquidated damages and penalties reflect the main findings in the small table.

to content ↑Comparative table

Penalty
Penalty

What is common between them?

The legislation of the Russian Federation is fundamentally not willing to differentiate fines and penalties

Under penalties might be kind of a penalty involving payment of a subject of the penalty amount that increases over time (to use the term «penalty» in the contract is optional)

What is the difference between them?

In the narrow sense is a penalty monetary amount in a fixed amount (e.g., percentage of total financial liabilities of the company before the partner)
As a kind of penalty or as an independent sanction is a monetary penalty the amount of which increases over time — up until the obliged party fails to perform requirements under the contract or by law

Written mostly in commercial contracts
Written mainly by legal regulations — for example, those governing payment of taxes

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