RECENTLY White Baos Abogados has appeared before the Supreme Civil Court and was successful as can be confirmed in decision number 317/2020.
Their client was selling a hotel to a third party, but as the purchaser was initially unable to complete the purchase, the contract was extended but included a penalty clause which allowed for the seizure of a €700,000 advance payment by way of penalty.
As the purchaser did not proceed but instead attempted to sue their client for breach of contract, White Baos Abogados countersued requiring the termination of the contract due to the buyers breach and the retention of the advance paid, in accordance with the penalty clause and the case was won in the Denia Court.
The other party lodged an appeal and the Alicante Provincial Court indicated that the penalty clause should be modified proportionally, according to article 1154 of the Civil Code (Cc) which states, “The Judge will equitably modify the penalty when the main obligation has been partially or irregularly fulfilled by the debtor.”
This court indicated that it understood that as part of the price was paid, the contract was partially fulfilled, and the penalty should, therefore, be modified proportionally, and ruled that part of what was paid by the buyers would be returned to them, indicating that the penalty should not be claimed in its entirety.
White Baos went to the Supreme Court, contesting this decision and won as the Appeal Court ruled that the Alicante Provincial Court was wrong, due to the following;
The penalties agreed in the contracts fulfilled a liquidating function, therefore, they replace the compensation for damages, thus, it is not necessary to prove the damages suffered since the parties agree to them in advance and by mutual agreement (art. 1152.1 Cc).
When a penalty or compensation for non-compliance is agreed, if the non-compliance occurs, in the terms agreed then the penalty clause must be imposed without being modified by a judge. Thus, in this case (the loss of the advance payment), it was confirmed that the buyers did not pay the balance of the purchase price.
Therefore, in order to modify the penalty, in accordance with article 1154 Cc, the obligation guaranteed (payment of the rest of the price) should have been partially fulfilled, which did not happen in this case.
It was not relevant that part of the price had previously been paid since these payments were already taken into account when agreeing the penalty clause.
If you want specialised advice on purchase in Spain, legal claims related to property sales contracts, penalty clauses, etc. contact our lawyers (www.white-baos.com), and we will help you.
The information provided in this article is not intended to be legal advice but merely conveys general information related to legal issues.