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April 26, 2023

The Senate of the Supreme Court of Latvia in its recent judgment has stated that agreements on liquidated damages are inadmissible under Latvian law.

In its judgment in civil case SKC-3/2023 the Senate of the Supreme Court of Latvia has considered the question of compatibility of the concept of liquidated damages with Latvian legal system. The question to be answered by the Senate was whether the Latvian legal system allows the institute for compensation of the damages previously assessed (liquidated damages), which would exempt the plaintiff from an obligation to prove damages and the court from assessing them. The Senate concluded that such agreements are not compliant with Latvian legal system and are therefore inadmissible.

The Senate explained that the freedom of the parties to a contract to choose the content of the contract extends to the extent that it is not restricted by the mandatary provisions of law. Mandatory provisions of the Civil Law of Latvia determine what losses and in what cases are to be compensated. Civil Law of Latvia requires to establish not only the breach of contract itself, but also the existence of damages and the causal link between the damages and the breach (preconditions for damages).This means that Latvian law precludes an institute for compensation of damages previously assessed by the parties, namely, the parties cannot agree that, in the event of breach of the contract, the party will be obliged to pay a specific amount of damages provided for in the contract without having to prove the preconditions of damages.

The Senate further explained that the institute of previously assessed damages is in general characteristic for the countries of Anglo-American legal systems, whilst most of the national legal systems in continental Europe instead provide for contractual penalty.

The Senate has stressed that if the parties wish to agree upon an amount of money which one party will have to pay for a default (not limited to the amount of damages caused by breach of the contract), the parties may agree upon contractual penalty. However, the contractual penalty must also be proportionate and consistent with honest business practices, and it also has mandatory specific rules for determination and recovery, including limits on the amount (see Articles 1716 to 1724.1 of the Civil Law of Latvia).

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