PROBLEMS WITH REDUCING THE AMOUNT OF PENALTY (NEUSTOYKA) BY THE COURT

Ensuring the fulfillment of contractual obligations is now of paramount importance. Therefore, it is more important than ever to do research on this issue. This article discusses ways to secure an obligation. in particular, the concept of neustoyka, in which the views of scientists are presented. forms of penalty (neustoyka) and its legal nature are discussed. It also considers the theoretical and practical aspects of the problem of reducing the amount of fines, which is currently the subject of heated debate in the Republic of Uzbekistan (Article 326 of Civil Code of the Republic of Uzbekistan), gives examples from court practice and compares with foreign experience. Reducing the amount of penalty (neustoyka) by the courts suggests the prevention of possible corruption cases and a reasonable solution to the problem. including proposals for the revision of Article 326 of Civil Code of the Republic of Uzbekistan, which shall be stated by reasoned opinions. Moreover, aspects that can be drawn from foreign experience are discussed.

PROBLEMS WITH REDUCING THE AMOUNT OF PENALTY (NEUSTOYKA) BY THE COURT

Anvarjon Omonov, a lawyer, the law firm “Maxlegal” ORCID (0000-0001-9111-7690) E-mail: maxlegal1979@gmail.com

Boburkhon Badriddinov, 3rd year student Tashkent State University of Law ORCID (0000-0002-3482-162X) E-mail: boburxonbadriddinov@gmail.com

Keywords: methods of enforcement, penalty (neustoyka), fines, fines, “Pacta sunt servanda”, reduction of penalty.

Ensuring the fulfillment of contractual obligations is now of paramount importance. Therefore, it is more important than ever to do research on this issue. This article discusses ways to secure an obligation. in particular, the concept of neustoyka, in which the views of scientists are presented. forms of penalty (neustoyka) and its legal nature are discussed. It also considers the theoretical and practical aspects of the problem of reducing the amount of fines, which is currently the subject of heated debate in the Republic of Uzbekistan (Article 326 of Civil Code of the Republic of Uzbekistan), gives examples from court practice and compares with foreign experience. Reducing the amount of penalty (neustoyka) by the courts suggests the prevention of possible corruption cases and a reasonable solution to the problem. including proposals for the revision of Article 326 of Civil Code of the Republic of Uzbekistan, which shall be stated by reasoned opinions. Moreover, aspects that can be drawn from foreign experience are discussed.

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I. Introduction From time immemorial, the enforcement of an obligation has been one of the most pressing issues of civil law . So what does it mean to enforce an obligation? As professor Rakhmonkulov admits, it is expedient to understand the performance of an obligation as an additional obligation provided for in the legislation or contract aimed at the implementation of the main obligation. In addition, professor N.F. Imamov’s opinion can be cited as follows: Ensuring the fulfillment of obligations encourages the debtor to behave appropriately, and otherwise warns him of the fulfillment of additional obligations. This leads to the borrower’s interest in the proper performance of its obligations[1]. Also, O.M. Sviridenko’s view that enforcement is an institution aimed at reducing the risk of lending is also noteworthy[2]. There are a variety of ways to enforce an obligation. If we look at Article 259 of the current Civil Code of the Republic of Uzbekistan (hereinafter - the Civil Code), we can see that the execution of contract can be secured by a penalty, a pledge, the retention of the property of the debtor, a surety, a guarantee, a deposit, and other methods specified in the legislation or the contract.

II. Research results and discussion One of the ways to ensure the fulfillment of the obligation provided for in civil law relations is a penalty. According to Roman jurists, a penalty is a conditional agreement between the parties that the debtor is liable to pay a penalty in favor of the injured party for violating the terms of the contract. According to Grimm, the purpose of this agreement is to ensure the fulfillment of the main obligation by putting pressure on the debtor [3]. Neustoyka(hereinafter – penalty) in the dictionary ( Russian neustoyal ) means “failure to fulfill a promise. “ The legal term is the amount of money that a debtor who has not performed or has not performed properly has to pay to the creditor. For example, Company “A” has a supply contract with Company “B”. The terms of the contract include a penalty for non-performance of the obligation. Although Company “B” supplied the product, Company “A” did not pay for it. In this case, company “A” will have to pay a penalty for non-fulfillment of its obligations.

Forms of penalty in Uzbekistan legislation According to Article 261 of Civil code of Uzbekistan (hereinafter, Civil code– C.C.), a penalty can be in the form of a fine or a penya (it is similar to penalty). A fine is a type of penalty that a debtor must pay in a fixed amount of money in the event of default or improper performance of an obligation. For example, 5% of the value of work not completed on time. In this case, the fact that the amount of money is expressed as a percentage should not confuse us. The important thing is that the percentage is fixed. That is, no matter how many more days the day on which the obligation is due is delayed, the penalty is a fixed portion of the amount that remains unfulfilled. To make it clearer, company “A” and company “B” agreed to build a one-room house for 100 million soums and pay a penalty of 2% of the defaulted obligation if the parties do not fulfill their obligations. Despite the fact that the company “A” received the results of the work from the company “B”, he did not pay the remaining ten million soums, even after 6 months. In this case, the company “B” has the right to demand from the customer two hundred thousand soums (2% of the unfulfilled obligation, as agreed in the contract) as a fine.

In the case of penya, the situation is completely different. In this case, the amount of the penalty is not fixed and increases by the agreed percentage of the unfulfilled obligation for each day of the missed period. As an example, let us take the situation we have considered above, that the same company “A”, received the result of the work from company “B”, but did not pay the remaining ten million soums, even after 6 months. The mutual agreement stipulates that for each day of delay, the party violating the obligation must pay a penalty in the

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amount of 0.4% of the outstanding obligation. Accordingly, company “B” will be able to claim five million soums from customer “A” for six months (180 days * 40,000 (0.4% of the unpaid obligation)). In this case, the penya is actually 7.2 million sum, but it will be 5 million under the law “On contracting and legal basis of activity of business entities”. According to the law “On contracting and legal basis of activity of business entities”, the total amount of penalty should not exceed 50 percent of the value of the undelivered goods, unperformed works or undelivered services [4]. It should be noted that if the contract provides for the payment of penalties in the form of both fines and penalties for the violation of a single obligation, the plaintiff is entitled to demand the application of only one form of penalty in accordance with Paragraph 3 of the Resolution of the Plenum of the Supreme Economic Court of the Republic of Uzbekistan “On some issues of application of civil legislation on property liability for non-performance or improper performance of obligations [5]. The legal nature of penalty The current Civil Code of Uzbekistan expresses two different natures of penalty. One is to ensure the fulfillment of obligations as specified in Chapter 22 of the C.C., while the other constitutes liability for breach of obligations, as expressed in Chapter 24 of the C.C.. While B.M.Gongalo evaluates neustoyka as a way to ensure the fulfillment of an obligation, it also emphasizes that collecting neustoyka is a measure of responsibility [6]. G. F. Shershenevich expresses similar views, that is, in his opinion, penalty is not only a way to ensure the fulfillment of the obligation, but also a means of determining the amount to be paid in the event of non-fulfillment of the obligation [7]. D. I. Grishin, on the other hand, explains more precisely the essence of the two different legal natures of penalty. He stressed that ensuring the fulfillment of the obligation as a method, neustoyka is designed to ensure the normal (proper)

performance of obligations, if the obligation is not performed properly, penalty acquires a new meaning as a penalty and becomes a liability [8]. In our opinion, this opinion is wellfounded. That is if the penalty is a means of ensuring the fulfillment of the debtor’s obligation at the time of the conclusion of the contract, the penalty becomes a liability in case of non-performance of the obligation. Penalty is also more common than other methods of securing obligations because it has the following characteristics: • the parties shall determine in advance the amount of liability for breach of the obligation at the time of concluding the contract; • in the absence of the need to prove the existence of damage caused by the breach of the obligation, a penalty shall be levied for the breach of the obligation itself; • the parties have the opportunity to determine the terms of the contract on penalty at their discretion [9]. But we think that through the decisions of the courts, in most cases, the above-mentioned features of penalty are violated. In particular, when the parties are free to enter into a contract and agree to settle the penalty, the court reduces the amount of the penalty by 3-4 times, despite the fact that one of the parties violated the terms of the contract and the other party filed a lawsuit to recover the penalty. Based on Article 326 of the Civil Code of Uzbekistan and paragraph 4 of the decision of the Plenum of the Supreme Economic Court of the Republic of Uzbekistan “On some issues of application of civil legislation on property liability for non-performance or improper performance of obligations”, that is, if the penalty to be paid is disproportionate to the consequences of the breach of the creditor’s obligation, the court is entitled to reduce the penalty [10]. However, there is no explanation as to when the neustoyka will be disproportionate to the consequences of the breach of the creditor’s obligation . Furthermore, even if the amount of the penalty is reduced to the requirements of the law (as mentioned above the total

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amount of penalty should not exceed 50 percent of unfulfillment of obligations), the court will drastically reduce the penalty.

In an open court session of the Samarkand City Economic Court on April 1, 2022, in the case No. 4-1401-2201 / 230, the plaintiff “A” Company filed a lawsuit against the responsible company “B”. In this case, Company “A” and Company “B” have signed a product supply contract. According to the contract, Company A delivered 2,809,421 sum worth of goods, but Company B did not pay for the goods. For that reason, Company A claimed 2,089,757 sum of debt and 936,211 sum based on the contract. However, the judge reduced the penalty of 936 211 sums by 280 863 sums and resoluted that 280 863 sums from the respondent in favor of the plaintiff. It should be noted that the amount of penalties has been reduced by 70%. The reason for the reduction in penalties was that Article 326 of the Civil Code states that “the penalties payable by the debtor are disproportionate to the consequences of the debtor’s breach of duty.

Where is the basis for this imbalance, and on what criteria does the judge find the amount of neustoyka to be disproportionate? How fair is it for the parties to change the terms of the contract on their own initiative without asking for a reduction in the amount of the penalty? Isn’t this a violation of the principle of freedom of contract? Russian scientist L. Chicherov argues that the court will not have the right to change the amount of the penalty if there are no grounds to change the terms of the contract in a specific dispute situation . He also considers that the court has no right to violate one of the basic principles of civil law by changing the terms of the contract on its own initiative [11]. It is impossible not to agree with Chicherov. In particular, the parties are free to conclude a contract based on Article 354 of the C.C.. Article 384 of the C.C. stipulates the procedure for amending and terminating a contract, and according to this, the amendment or termination of a contract is concluded in the same form as the contract. After the other party rejects the proposal to amend or terminate the contract, the parties may submit a request for amendment or termination of the contract to the court. In other words, if the terms of the contract need to be changed, first of all, the parties to the contract must act by mutual agreement. If the parties cannot agree, the court shall have the right to consider changing the terms of the contract at the request of the party interested in the change of contract. Given that the penalty is also a condition of the contract, we believe that it would be expedient to consider the issue of the penalty on the application of the parties, not on the initiative of the court. This is on the one hand consistent with the principles of freedom of contract and voluntariness, on the other hand it also causes a change in the debtor’s attitude towards the court. In the present case, the court may consider reducing the amount of the penalty even if the debtor does not appear in court. This leads to the idea that “nothing will change” even if the party violating the contract does not appear in court.

The Yangikurgan inter-district economic court of Namangan region will consider the economic case on the claim of the plaintiff to recover from the respondent 51 306 307 soums of principal debt, 5 028 018.09 soums of fines totaling 56 334 325.09 soums in the case number 4-1604-2102 / 1324 . Although the respendent has been duly notified of the time and place of the hearing, his representative does not appear at the hearing and the court finds it necessary to hear the case without his representative. According to the contract, the respendent undertook to supply the plaintiff with potato products worth 51,306,307 soums, and the plaintiff undertook to pay the cost of the product on time. Pursuant to this agreement, the plaintiff transferred 51,306,307 soums to the respondent in advance. However, as a result of the respondent’s failure to fulfill its contractual obligations, the plaintiff was not provided with the potato products agreed in the contract . That is, the contractual

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obligation was not fulfilled by the respondent at all. The agreement between the parties stipulates that in case of breach of the obligation, the guilty party pays a fine of 0.1 percent and pays a penalty of 0.1 percent for each day of delay, the amount of the fine and the penalty does not exceed 50 percent of the amount of product received. Based on this, the plaintiff asked the repondent to pay a fine of 5,028,018.09 soums (51,306,307 soums x 0.1% = 51,306 soums x 98 days = 5,028,018.09 soums). The court found that even if the respondent did not attend the trial, the fine should be reduced by almost 80 percent and a fine of 1,005,000 soums should be imposed.

Considerations of the issue of penalty abroad France. According to Article 1226 of the French Civil Code (hereinafter F.C.C.), penalty is a condition of the contract, through which the debtor assumes the obligation to do something in favor of the creditor in case of default in order to ensure the performance of the obligation. Initially, according to the F.C.C., the amount of penalty could not be reduced or increased by the court. However, since this situation allowed many abuses by creditors and led to inequality of the parties, this rule was amended in 1975 to determine whether the amount of the penalty can be increased or decreased by the court if the amount of the penalty is too high or too low. It should be noted that the Civil Code of the Republic of Uzbekistan does not provide for the right of the court to increase the amount of the penalty. It has also been established under Article 1231of F.C.C. that the amount of the penalty may be reduced by the court if the principal obligation has been partially fulfilled. That is, according to the F.C.C., we can see that the court has the right to reduce the penalty, given that the penalty to be paid is not disproportionate to the consequences of the breach of the creditor’s obligation, but rather that the obligation was partially fulfilled. In other words, if the debtor partially defaults on the obligation, the amount of the penalty is not allowed to be reduced by the court, even if it is disproportionate to the consequences of the breach of the obligation. Although the legislation of Uzbekistan stipulates that the extent of the debtor’s performance of the obligation should be taken into account by the courts in reducing the amount of the penalty, we believe that this rule does not fully express its essence. We have seen above in Economic Case No. 4-1604-2102 / 1324 that the amount of the penalty was reduced without taking into account by the court that the respondent had not fulfilled his obligation, at least in part. For this reason, we think it would be expedient to make the partial fulfillment of the obligation by the debtor a particularly important condition in the reduction of the amount of the penalty by the courts. This would have served to increase the responsibility of the parties to the contract to fulfill their obligations.

Germany. Paragraph 339 of the German Civil Code (hereinafter referred to as the G.C.C.) stipulates that if the obligation is not performed or is not performed properly, the debtor is obliged to pay a certain amount of money to the creditor as a penalty, the penalty must be paid due to delay. It is also stated that penalty may be in other forms than money (G.C.C. §342). Unlike in Germany, the Civil Code of the Republic of Uzbekistan stipulates that the penalty is in the form of a sum of money. German civil law also provides for the possibility of reducing the amount of the penalty by a court decision (G.C.C. §343), according to which, if the penalty is disproportionately large, it can be reduced at the request of the debtor in proportion to the court decision, not only the property other interests protected by law should also be taken into account, and it should not be allowed to reduce it after the penalty is paid. It should be noted that in considering the issue of disproportion, the court will have to consider not only the property damage suffered by the creditor, but also moral damages and other similar aspects. Also, while German civil law gives courts the right to reduce the penalty, in order for the court to exercise that right,

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the debtor must, of course, ask the court to reduce the penalty. Only then will the court be able to consider the issue of reducing the penalty, taking into account the other interests of the creditor, protected by law. If the debtor does not file a petition, the court will not be entitled to consider the reduction of the penalty, or even the reduction of the penalty. Also, in accordance with paragraph 348 of the German Commercial Code, it is not allowed to reduce the penalty in relations between entrepreneurs. However, this rule is not strict and the amount of the penalty can be reduced by the courts if the amount of the penalty is disproportionate to the consequences of the breach of obligation and the debtor is proven to have acted in good faith [12]. It would be appropriate to include in the Uzbek civil law a clause stating that the reduction of the penalty by the courts should take into account the fact that the debtor acted in good faith, that is, used all available means to fulfill the obligation and the creditor took all measures to demand timely performance.

Russia. Article 330 of the Russian Federation Civil Code (hereinafter referred to as R.F.C.C.) stipulates that a penalty (fine, penya) is the amount of money specified in a law or contract, which the debtor must pay to the creditor in case of non-performance or improper performance, especially in case of delay. Also in pursuance of Article 333 of the RFC, the court has the right to reduce the penalty if the penalty to be paid is clearly disproportionate to the consequences of the breach of obligation. If the obligation is violated by a person engaged in entrepreneurial activity, the court has the right to reduce the amount of the penalty on the basis of the debtor’s application for such reduction. This article of the R.F.C.C. has also caused controversy by a number of Russian lawyers. In particular, M. Osipov argues that there are some problems with the courts’ application of the norm to reduce the fine[13]. V.I. Eremina also argues in her article that penalty should be explained when the consequences of breach of obligation are disproportionate[14].

Among lawyers, there are two different views on the issue of reducing the amount of neustoyka by the courts. Some argue that “Pacta sunt servanda” means the contract must be followed, while others argue that “the law must be fair”. It is obvious that such a contradiction is caused by the contradiction between the nature of the contractual relationship of civil law in the application of the norm under study and the social duty of the legislator to the implementation of justice enshrined in law. Indeed, the state must also take into account the interests of the weaker side. Also, participants in civil law relationships do not always exercise their rights conscientiously. In such a case, the legislature should take steps to limit the abuse of the right. In our opinion, the purpose of allowing the courts to reduce the amount of the penalty is to prevent the subjects of civil law relations from abusing their rights and to help the debtor to continue his activities . But in practice, we think that this norm does not adequately meet the intended purpose. The reason is that as a result of the absolute empowerment of the courts in reducing the penalty, sometimes there seems to be a conflict of interest. In other words, unfortunately, we have created conditions for another to put an end to one abuse. Therefore, we believe that we need to further improve the mechanism for reducing the amount of penalties by the courts.

III. Conclusion Based on the above analysis, we consider it expedient to state Article 326 of the current Civil Code of the Republic of Uzbekistan in the following wording:

Court has the right to reduce the penalty on the basis of a written application of the debtor and taking into account that the debtor has partially fulfilled the obligation. This should take into account the fact that the amount of the penalty to be paid is disproportionate to the consequences of the breach of the obligation, the property status of the parties to the obligation, as well as the interests of the creditor.

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The court has the right to reduce the penalty to be paid to the creditor in individual cases, taking into account the interests of the debtor and the creditor. The purpose of the section “On the basis of a written application of the debtor” is, firstly, to apply the principle of amending the contract and, second, to enable the court to make an accurate and fair assessment of the situation, given that the debtor must also provide substantiating evidence in the application by filing an application. In other words, the amount of neustoyka commitment it is alleged that the obligation to prove the disproportionate consequences of the violation rests with the debtor. It will also change the attitude of the debtor to the court hearing on the issue of imposition of a penalty. The reason is that according to the current law, the court can consider the issue of reducing the penalty on its own initiative, even if the debtor is not involved in the case. This leads the debtor to believe that “even if I do not attend the trial, the court will still reduce the penalty.” If the norm is revised in the above order, the court may not reduce the amount of the penalty on its own initiative until the debtor submits a written application to the court .

This will help increase the debtor’s liability for subpoenas. It is intended to increase the responsibility of the parties to the contract and reduce disputes by making a special condition of the section “Accounting for the partial fulfillment of the debtor’s obligations.” The reduction in disputes will in turn lead to a reduction in the volume of court cases. The purpose of introducing the section “Inequality is clear” is to clarify the concept of inequality. But even this does not fully reveal the essence of the concept of asymmetry. Therefore, clear explanations should be given as to when the neustoyka is disproportionate to the consequences of the breach of obligation. Unless the essence of the term asymmetry is clarified, the confusion surrounding the application of this norm in practice will continue. We consider it appropriate to delete the following part of Article 326: “The court has the right to reduce the penalty to be paid to the creditor in special cases, taking into account the interests of the debtor and the creditor.” The term “special cases” in this section is a very broad concept and can be interpreted in any context. In order to prevent abuses in the legislation, we believe that uncertainties should be avoided.