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Under Dutch law, you can challenge an excessive penalty clause (boetebeding) in two ways. You can ask the court to reduce (matigen) it, if fairness manifestly requires this (Article 6:94(1) Dutch Civil Code, DCC). According to the Supreme Court, the result must be excessive and therefore unacceptable. A clause in general terms and conditions can sometimes be annulled as unreasonably onerous (Article 6:233(a) DCC).
Penalty clauses in the Netherlands function in commercial and legal relationships as incentives for timely performance. However, not every contractually agreed penalty can be enforced in full. The law gives debtors two instruments against excessively high penalties: reduction by the court and, for clauses in general terms and conditions, annulment. The Supreme Court has clarified in several judgments when a court may reduce a penalty.
What Constitutes a Penalty Clause in Dutch Law?
A penalty clause is any clause under which a debtor that fails to perform its obligation must pay a sum of money or render another performance. It does not matter whether the penalty is meant to compensate loss or only to encourage performance (Article 6:91 DCC). The penalty replaces the damages due under the law (Article 6:92(2) DCC). If the failure cannot be attributed to the debtor, the creditor cannot claim the penalty (Article 6:92(3) DCC).
The creditor does not need to prove its loss to claim the agreed amount. This avoids time-consuming discussions about the exact extent of the loss suffered.
Penalty clauses frequently appear in business agreements, lease contracts and partnership arrangements. In the case that reached the Supreme Court in 2018, an exclusivity agreement between two companies provided for a penalty of € 20,000 for each breach, plus € 5,000 for each day the breach continued. In the end, € 1,230,000 in penalties was claimed (Supreme Court 16 February 2018, ECLI:NL:HR:2018:207).
A reminder or other prior notice is required to claim the penalty in the same cases in which it is required to claim damages under the law (Article 6:93 DCC). Many contracts provide that the penalty is due without any reminder or notice of default. That is allowed: only the court’s power to reduce the penalty under Article 6:94(1) DCC cannot be excluded (Article 6:94(3) DCC). Parties can also agree that the creditor may claim damages in addition to the penalty. Without such an agreement, the court can, at the creditor’s request, award additional damages on top of the penalty if fairness manifestly requires this (Article 6:94(2) DCC).
What Legal Basis Exists for Moderating Penalties Under Dutch Law?
The court’s power to reduce a penalty is laid down in Article 6:94(1) DCC. At the debtor’s request, the court can reduce the penalty if fairness manifestly requires this (indien de billijkheid dit klaarblijkelijk eist). It cannot award the creditor less than the damages due under the law for the failure. The court therefore does not reduce a penalty of its own motion: you must ask for it and put forward the circumstances that justify it. The test calls for restraint. Not every difference between the penalty and the loss justifies a reduction.
According to the Supreme Court, a court may only use its power to reduce a penalty if applying the penalty clause leads, in the given circumstances, to an excessive and therefore unacceptable result (Supreme Court 27 April 2007, ECLI:NL:HR:2007:AZ6638, ground 5.3; Supreme Court 16 February 2018, ECLI:NL:HR:2018:207, ground 3.4.1).
In doing so, the court must look not only at the ratio between the actual loss and the penalty, but also at the nature of the contract, the content and purpose of the clause and the circumstances in which it is invoked.
How the clause came about can also count. That both parties are professionals does not rule out a reduction: in the 2018 case between two companies, both the district court and the court of appeal reduced the penalties, and the Supreme Court upheld the judgment of the court of appeal.
How Do Courts Judge Excessive Penalty Amounts in the Netherlands?
Dutch courts only reduce a penalty if applying it leads, in all the circumstances, to an excessive and therefore unacceptable result. The ratio between penalty and loss alone is not enough. The Supreme Court reviews in cassation whether a court applied this restrictive standard correctly; in 2007 it quashed a judgment that had reduced a penalty on the basis of the ratio between penalty and loss alone (ground 5.3). For the rest, the judgment is intertwined with assessments of a factual nature and is not reviewed for correctness in cassation (ECLI:NL:HR:2018:207, ground 3.4.3).
Courts may look, for example, at who drafted the contract, whether the penalty was negotiated and whether the drafter explained why it chose this amount. In the 2018 case, these points counted: the creditor had drafted the contract and set the amount of the penalties, there had been no negotiation about them, and it had not explained on what basis it had set these very high amounts (Supreme Court 16 February 2018, ground 3.4.2).
In that case, the creditor claimed € 1,230,000 in penalties. The district court reduced the penalties and awarded € 26,500. The court of appeal took as its starting point € 415,000 in penalties claimed for breaches involving two workers, and reduced that amount to € 21,150. The breaches were a few incidents at the beginning of the contract period, after which no further breaches occurred. The court of appeal found that the loss amounted to € 5,906.25. The Supreme Court dismissed the appeal in cassation.
The purpose of the clause also counts. In the 2018 case, the exclusivity clause was meant to protect the creditor against competition, and the breaches had not led to the loss of customers (ground 3.4.2).
Awarding only a fraction of the forfeited penalty does not automatically mean that the court ignores the function of a penalty as an incentive to perform. In the 2018 case, the Supreme Court held that the court of appeal had not ignored that function by setting the penalty at € 21,150, given the loss it had established and the fact that only a few incidents were involved (ground 3.5.2).
Which Criteria Determine Judgments on Unreasonably Onerous Terms in Dutch Law?
Penalty clauses under Dutch law included in general terms and conditions can be annulled if they are unreasonably onerous for the other party, given the nature and other content of the contract, the way the terms came about, the mutually apparent interests of the parties and the other circumstances of the case (Article 6:233(a) DCC). Annulment has retroactive effect to the moment the contract was concluded (Article 3:53(1) DCC). Not every party can rely on this ground. It is not available to a legal entity within the meaning of Article 2:360 DCC that, when the contract was concluded, had most recently published its annual accounts (or to which Article 2:403(1) DCC had most recently been applied). This also covers a small BV or NV that filed its annual accounts. Nor is it available to a party in which 50 or more persons were working at that time, or for which the Trade Register showed this (Article 6:235(1) DCC), or to a party that itself repeatedly uses the same or nearly the same general terms (Article 6:235(3) DCC). Between businesses that are not both established in the Netherlands, these rules do not apply at all, whatever law governs the contract; what counts is the establishment that must perform under the contract (Article 6:247(2) and (3) DCC). If Dutch law applies, you can then still rely on, among other things, the limiting effect of reasonableness and fairness (Article 6:248(2) DCC).
When assessing whether a term is unreasonably onerous, a court may take into account whether the penalty clause exclusively benefits the creditor without compensating advantage for the debtor. For example, when only the landlord can claim penalties for tenant violations, but no sanction threatens the landlord’s shortcomings.
The structure of the clause also plays a role. A clause that charges the same amount for every breach, from a small administrative error to a serious breach of contract, is more likely to be disproportionate.
It is therefore wise to cap a penalty and to negotiate it expressly, for example with a maximum of two months’ rent in a lease agreement. Whether a clause survives always depends on all the circumstances of the case.
An unclear indexation method can also count against the clause. Penalty clauses that index automatically each year without a clear calculation or a way to verify it can add to their unreasonably onerous character.
What Are the Procedural Steps for Challenging Penalties in the Netherlands?
As a debtor, you must actively defend yourself against an unreasonable penalty. The court does not reduce a penalty of its own motion. There are two main routes: annulment of the clause as unreasonably onerous, if it is in general terms and conditions, and, alternatively, a request to reduce the penalty.
The first step is to check whether the general terms form part of the contract and whether the user gave you a reasonable opportunity to take note of them. As a rule, the user must hand them to you before or when the contract is concluded. Providing them electronically is also possible, if you can store them and consult them later; if the contract is not concluded electronically, this requires your express consent. If handing them over is not reasonably possible, it is enough that the user informs you before the contract is concluded that the terms are available for inspection or have been filed, and will be sent on request (Article 6:234 DCC). If these requirements are not met, the penalty clause is voidable (Article 6:233(b) DCC), except against the parties referred to in Article 6:235(1) and (3) DCC.
Then collect documents as soon as possible on:
- The contract’s formation and any negotiations
- Concrete calculation of actually suffered damages
- The alleged violation’s nature and severity
- Previous contractual relationships between parties
If the case comes before a court, the court first assesses whether the penalty clause applies and whether the penalty has been forfeited. Then, if you ask for it, it applies the test of Article 6:94 DCC. You must put forward the circumstances that justify a reduction. If the creditor set the amount itself, it can count against the creditor if it does not explain how it arrived at that amount. In the 2018 case, the court of appeal held that this could have been expected of the drafter; the Supreme Court upheld that judgment.
The restrictive test also applies between professional parties. Even so, an excessive result can lead to a substantial reduction in business relationships too. In the 2018 case, the creditor claimed € 1,230,000 in penalties; the District Court of Zeeland-West-Brabant reduced the penalties and awarded € 26,500. The court of appeal took € 415,000 in penalties claimed for breaches involving two workers as its starting point and reduced that amount to € 21,150.
How Does the Penalty Relate to Actual Damage Compensation Under Dutch Law?
The main rule is that the penalty replaces the damages due under the law (Article 6:92(2) DCC). Unless agreed otherwise, the creditor cannot claim those damages in addition to the penalty. Nor can it claim both the penalty and performance of the obligation to which the penalty is attached (Article 6:92(1) DCC).
Nevertheless, parties can contractually deviate from this rule. If the contract expressly states that the penalty does not replace damages, the creditor can claim compensation for its loss on top of the penalty. This cumulation increases the importance of customization in penalty clauses.
The contract should therefore state clearly whether the penalty replaces damages or comes on top of them. Ambiguity about this can lead to legal proceedings.
If the parties agreed that the creditor may claim damages in addition to the penalty, a reduction only concerns the penalty. A fictional example: a debtor that pays a penalty of € 5,000 after a reduction may then still face an additional claim for loss actually suffered. Without such an agreement, the creditor can only obtain additional damages if it asks the court for them and fairness manifestly requires this (Article 6:94(2) DCC).
The power to reduce protects against excessive penalties, but not against the creditor’s actual loss: the court cannot award less than the damages due under the law (Article 6:94(1) DCC). This distinction can be decisive in commercial disputes where the actual loss is substantial.
What Role Do Negotiation Room and Contractual Freedom Play in Dutch Law?
Contractual freedom forms a fundamental principle in Dutch law. Professional parties who consciously agree to high penalties cannot simply reverse this position. However, the court’s power to reduce a penalty cannot be excluded (Article 6:94(3) DCC), and the way the clause came about can be one of the circumstances the court takes into account.
A court may take into account whether the parties actually negotiated the penalty clause. A lack of negotiation does not automatically lead to a reduction or annulment: it remains one of the circumstances of the case.
It can, however, count against the drafter if it cannot explain the amount of the penalty at all (Supreme Court 16 February 2018, ground 3.4.2).
It is therefore wise to discuss penalty clauses expressly during contract negotiations. If you record in writing that the parties discussed and accepted the amount and its consequences, a later challenge becomes less likely to succeed.
Additionally, parties can opt for differentiated penalty clauses where the amount depends on the violation’s severity. For example, a fixed penalty of €10,000 for breaching confidentiality obligations, but only €500 for administrative shortcomings. This can reduce the risk of a reduction by the court.
Want certainty about your legal position regarding unreasonably high penalty clauses? Our lawyers in Amsterdam analyse your contractual situation and advise on the best strategy for challenging or defending penalty provisions.
How Do You as a Contracting Party Prevent Problems with Penalty Clauses in the Netherlands?
For agreement drafters, customization is essential. Generic penalty clauses that apply the same amount to all breaches are more exposed to reduction or annulment. Instead, categorizing penalties by breach severity and impact is recommended.
Transparency about calculation forms a second success factor. If a landlord applies a penalty of €250 per day, it helps if the landlord can explain how this amount was set. For example, by referencing average repair costs, lost income or administrative burdens.
It is also wise to cap the penalty. A clause providing that total penalties never exceed three months’ rent or 10% of the contract value is more likely to be upheld.
It can also count whether both parties have compensating benefits. Mutual penalty clauses, under which both the principal and the contractor can claim a penalty for a failure, may be seen as more balanced than one-sided provisions.
The incentive should also remain proportionate. Penalties that are mainly meant as a deterrent but bear no relation to the possible loss may be reduced more readily. A realistic estimate of the possible loss is therefore a sensible starting point.
Finally, it is better to include the penalty clause in the contract itself than in general terms and conditions. A clause drafted for this one contract is not a general term and condition (Article 6:231(a) DCC). It then cannot be annulled as unreasonably onerous, but a reduction under Article 6:94 DCC remains possible.
What Are Recent Developments in Case Law on Penalty Provisions in Dutch Law?
The test for reducing a penalty has been the same for years: a court may only reduce a penalty if applying it leads to an excessive and therefore unacceptable result, and it must exercise restraint. The Supreme Court confirmed this in 2018.
In the judgment of 16 February 2018 (ECLI:NL:HR:2018:207), € 1,230,000 in penalties had been claimed. The court of appeal took € 415,000 in penalties claimed for breaches involving two workers as its starting point and reduced that amount to € 21,150. The Supreme Court upheld this. The court of appeal had not misapplied the restrictive test and was entitled to take into account that the creditor had drafted the contract, had set the penalties without negotiation and without explanation, that the penalties were excessively high in relation to the loss, that only a few incidents at the beginning of the contract period were involved, and that no customers had been lost.
Consumers can challenge a penalty clause in general terms and conditions as unreasonably onerous (Article 6:233(a) DCC), and so can other businesses, such as a sole proprietorship or general partnership with fewer than 50 workers, unless they are covered by Article 6:235(1) or (3) DCC. The parties referred to in Article 6:235(1) and (3) DCC cannot rely on this ground, and that includes a small BV or NV that had most recently published its annual accounts when the contract was concluded (Article 6:235(1)(a) DCC). Every debtor can ask for a reduction under Article 6:94 DCC.
Additionally, the Court of Justice of the European Union on May 30, 2013, set out criteria also applied in the Netherlands. This European case law strengthens protection against unfair terms in consumer agreements, where penalty clauses are specifically examined.
A reduction is therefore also possible in business relationships between companies, as the 2018 case shows (District Court of Zeeland-West-Brabant and Court of Appeal of ‘s-Hertogenbosch). With professional parties, however, restraint is appropriate.
Frequently asked questions about challenging penalty clauses in the Netherlands
What does Article 6:98 of the Dutch Civil Code mean for a penalty clause?
Article 6:98 DCC limits damages to loss that is so connected with the event on which the liability rests that it can be attributed to the debtor as a consequence of that event, also given the nature of the liability and of the loss. It concerns damages due under the law, not the penalty itself: a penalty is due on a failure in performance whether or not it serves to compensate loss (Article 6:91 DCC). Article 6:98 DCC still matters in two ways. If the contract allows the creditor to claim damages instead of or in addition to the penalty, those damages follow the statutory rules, including Article 6:98 DCC, unless the contract provides otherwise. And when a court reduces a penalty, it cannot award less than the damages due under the law (Article 6:94(1) DCC).
What is a penalty clause under Dutch law?
A penalty clause (boetebeding) is any clause under which a debtor that fails to perform must pay a sum of money or render another performance, whether the penalty serves to compensate loss or only to encourage performance (Article 6:91 DCC). Unless agreed otherwise, the penalty replaces the damages due under the law (Article 6:92(2) DCC), and it cannot be claimed if the failure cannot be attributed to the debtor (Article 6:92(3) DCC).
Does a penalty limit the right to claim damages for breach of contract?
In principle, yes. Unless the contract provides otherwise, the penalty replaces the damages due under the law, so the creditor cannot claim both (Article 6:92(2) DCC). Many contracts therefore state that the penalty applies without prejudice to the right to claim damages. Without such a clause, the court can award additional damages on top of the penalty only at the creditor’s request and if fairness manifestly requires this (Article 6:94(2) DCC).
When will a Dutch court reduce a contractual penalty?
Only if you, as the debtor, ask for it and fairness manifestly requires it (Article 6:94(1) DCC). According to the Supreme Court, applying the clause must lead to an excessive and therefore unacceptable result. The court looks at the ratio between the loss and the penalty, the nature of the contract, the content and purpose of the clause and the circumstances in which it is invoked (Supreme Court 27 April 2007, ECLI:NL:HR:2007:AZ6638, ground 5.3). It cannot award less than the damages due under the law. A clause that excludes this power is void (Article 6:94(3) DCC).
What does a penalty clause in an NDA look like?
A fictional example: “If a party breaches its confidentiality obligation, it shall forfeit a penalty of € 10,000 for each breach, up to a maximum of € 50,000, without prejudice to the other party’s right to claim full damages instead of the penalty.” A cap and a distinction according to the seriousness of the breach can make a penalty less vulnerable to reduction. The court’s power to reduce the penalty cannot be excluded (Article 6:94(3) DCC).
Primary sources
- Dutch Civil Code (Burgerlijk Wetboek), Book 3: Article 3:53
- Dutch Civil Code, Book 6: Articles 6:91, 6:92, 6:93, 6:94, 6:98, 6:231, 6:233, 6:234, 6:235, 6:247 and 6:248
- Supreme Court 27 April 2007, ECLI:NL:HR:2007:AZ6638 (Intrahof/Bart Smit), ground 5.3
- Supreme Court 16 February 2018, ECLI:NL:HR:2018:207, grounds 3.1-3.5.2
Contact our law firm in Amsterdam for personalized legal advice about your specific situation with penalty clauses. We analyze your contract, assess chances of successful challenge, and litigate if necessary at the competent court.
