June 2026 Legal Insights and Regulatory Developments

The Supreme Court of Georgia's judgment of 29 June 2026 in case No. as-1155-2025 is of particular interest with regard to the standard for reducing a contractual penalty, especially in the context of contracts concluded between business entities.

The dispute arose from a works contract concluded within the framework of a state procurement. The supplier was required to carry out irrigation system rehabilitation works in the Marneuli Municipality. The contract provided for a fairly high penalty for breach of the final work deadline — 0.5% of the value of the uncompleted work for each day of delay.

The supplier failed to fully complete the works within the agreed deadline. The procuring entity initially claimed a penalty of approximately GEL 948,301.

The lower instance courts significantly reduced the penalty and set it at 0.02% per day. The Supreme Court agreed that the breach should be counted from 5 January 2021, and that the penalty should be calculated for 85 days — from 5 January to 31 March 2021 — but it did not agree with reducing the rate to 0.02%.

The Supreme Court made several important clarifications.

First, the Court clarified that Article 420 of the Civil Code gives the court the right to reduce a disproportionately high penalty, but not simply a "high" penalty. In assessing this, account must be taken of the consequences of the breach, the penalty rate, the extent of the damage, the degree of the debtor's fault, its economic situation, and other circumstances.

Of particular importance is the Court's approach toward business entities: a business that freely and knowingly agrees to a specific penalty is held to a higher standard of liability than an individual. Accordingly, in the case of a legal entity, any reduction of the penalty must be based on a reasoned and well-substantiated objection.

The subject matter of the contract was also significant in this case: it concerned a GEL 2.14 million infrastructure project of national importance — the rehabilitation of the irrigation system. In the Court's assessment, timely completion of the works was of not only proprietary but also public significance. This gave the parties grounds to establish a higher level of liability for the supplier's delay.

Ultimately, the Supreme Court held that the 0.5% rate did indeed warrant reduction, but that reducing it to 0.02% was an excessive interference with contractual freedom. The Court set the daily penalty rate at 0.14%. In its view, such a rate simultaneously preserves the genuine function of the penalty and protects the contractual balance.