Point of law: whether penalty in case of partial failure to perform a government contract should be calculated based on the total price of the contract or with due regard to contractor’s partial performance of his obligations?

Alternative attitudes: 1) penalty clause making the total price the basis of calculation is enforceable; or 2) regard should be paid to the fact of contractor’s partial performance; the contractual clause that provides otherwise is clearly unfair, because it was imposed upon the contractor who was a weak party to the governmental contract in comparison to the customer.

Ratio decidendi: the second approach is legally correct. The calculation of penalty if based on the total  price of governmental contract without due regard to partial performance would contradict the principle of legal equity, because it puts the creditor in an advantageous position in relation to the debtor, whereas no penalty should  may be turned into a tool of creditor’s enrichment – this would contradict the compensatory function of contractual penalties.

Practical consequences: the Judgment does not provide for the possibility to reverse inconsistent court decisions in prior analogous cases by virtue of Art 311 of the Commercial Procedure Code. Therefore, its ratio decidendi has only prospective force.

Note: this dispute was the very last one that has been considered and resolved by the Supreme Commercial Court of the Russian Federation before its abolition which took place on 5 August 2014.