Article 34 of Federal Law No. 44-FZ requires that a government contract include terms governing the parties’ liability. When a breach occurs, the contracting authority is obligated to send the supplier a demand for payment of a penalty. However, a government contracting authority is by no means always correct in its demands.
Grounds for Exemption from Liability
The parties are relieved of penalty obligations if they can demonstrate that the breach resulted from:
- Force majeure — extraordinary and unpreventable circumstances (flooding, military action, epidemic)
- The other party’s fault — if the contracting authority itself breached its obligations, making timely performance objectively impossible
Example: the contracting authority delayed handing over a construction site — the contractor cannot commence work. In such a case, a penalty for missing the performance deadline is unlawful.
Reduction of Penalties Through Court Proceedings
Article 333 of the Civil Code of the Russian Federation (GK RF) authorizes a court to reduce a plainly disproportionate penalty upon the debtor’s motion. The court evaluates:
- the extent to which the penalty exceeds the contracting authority’s actual damages
- short-term commercial lending rates
- the rate of inflation
Some contracting authorities attempt to withhold penalty amounts directly from payment — bypassing judicial oversight. This does not preclude the supplier from challenging the withholding as unjust enrichment and recovering the amount through a separate claim.
Common Errors in Calculating Penalties
The most frequent error: the contracting authority sets the performance period in business days, while calculating the penalty in calendar days — artificially inflating the penalty coefficient. Such a calculation is readily challenged in court.
Contract Performance Security
If the contracting authority holds a cash security deposit, it may withhold amounts from it for breaches. However, the debtor retains the right to challenge the amount of the withholding, using Article 333 of the Civil Code and the rules governing unjust enrichment.
Key Recommendation
Before signing a government contract — carefully review all penalty terms and assess your exposure. The disparity in negotiating positions in public procurement is real: a supplier generally may not modify the terms of standard procurement documentation. It is all the more important to understand for what, in what amount, and under what circumstances a penalty may be imposed — and how it can be challenged.
Received a demand for payment of a penalty under a government contract, or has the contracting authority withheld funds from your security deposit? Do not pay without a thorough review. We will assess the validity of the demand and protect your interests before the FAS and in court.