Reduce a disproportionate contractual penalty: what to do under Georgian law

What to do

1. Has a lawsuit already been filed? The response to the claim (shesagebi) is due within the court's deadline, no more than 14 days (complex cases: 21 days) (Civil Procedure Code of Georgia (CPC), Art. 201). Ask for the reduction in the response. Basis: a penalty is a sum of money agreed by the parties for breach of an obligation (Civil Code of Georgia (CC), Art. 417); an agreement on a penalty must be in writing (CC, Art. 418); a transaction without the mandatory form is void (CC, Art. 59).
2. For loans and instalment sales, first apply the statutory ceiling, which is stronger than the contract: for loans, all sanctions may not exceed 0.27% of the outstanding principal per day (CC, Art. 625), and in total for a single arrears period may not exceed 1.5 times the outstanding principal (CC, Art. 625); the same ceilings apply to instalment sales by an entrepreneur (CC, Art. 505¹). Anything above the ceiling can be challenged as unlawful, and the remainder can then be reduced.
3. Reduction: the court may, taking the circumstances into account, reduce a disproportionately high penalty (CC, Art. 420). However, a penalty may exceed the possible damage (CC, Art. 418), so you must prove manifest disproportion (in relation to the debt, actual losses, the length of the delay, partial performance and the creditor's fault); the party relying on disproportion must prove it (CPC, Art. 102).
4. Structure of the claim: the creditor cannot demand both the penalty and performance if the penalty was not set for delay (CC, Art. 419); the right to damages is always preserved (CC, Art. 419).
5. Individuals and standard terms: in standard terms used against a natural person who is not an entrepreneur, a term setting an amount above the damage is void (CC, Art. 348); the same applies to consumers (Law of Georgia on Consumers' Rights Protection, Art. 22); the rest of the contract remains in force (CC, Art. 62). Limitation: the limitation period for contractual claims is three years (six years for immovable property) (CC, Art. 129).
6. Where to apply: the district (city) court or magistrate court, in the response to the claim or in a counterclaim.
7. Evidence: the signed contract with the penalty clause, the creditor's calculation, payments and partial performance, correspondence about the reasons for the delay, data on the creditor's actual losses.
8. Pitfalls: considering a penalty above the losses void in itself; not raising the reduction and not proving disproportion in the response to the claim; in a loan case, seeking a “reduction” instead of first cutting off everything above the statutory ceiling.

Be sure to check

• the court may reduce a disproportionately high penalty; the debtor must prove the disproportion
• an agreement on a penalty must be in writing
• a penalty may exceed the losses, so exceeding the losses alone is not enough
• for loans and instalment sales, statutory ceilings on sanctions apply
• in court, raise the request for reduction in the response to the claim within the set deadline