Authors: Artem Timoshenko, Daniil Litosh

In 2023, more than 180 final decisions on cases with claims for forfeit payments were rendered in Kazakhstani courts[1], indicating that forfeit payment is one of the main and most frequently used methods of securing obligations. This article elucidates the concept of forfeit payments, possible cases of their imposition, as well as the amount that the creditor can claim.

1. The Concept of Forfeit Payment

A forfeit payment is a specific amount of money determined by legislation or agreement, which the debtor is obligated to pay to the creditor in case of non-performance or improper performance of an obligation, particularly in case of delay in performance.[2] Upon demand for payment of the forfeit payment, the creditor is not required to prove any damages incurred to him.[3] Thus, the forfeit payment can be enforced in a fixed monetary amount, as a percentage of the property under the main obligation, or in any other form of property expression[4] (by agreement of the parties).

2. Forfeit Payment as a Means of Securing Performance of an Obligation

Forfeit payment by its nature is a means of securing an obligation, that is, a measure of a pecuniary nature that stimulates proper performance by the debtor and protects the interests of the creditor.[5] Accordingly, forfeit payment possesses the following distinctive features of means of securing obligations, such as:

• The invalidity of an agreement on forfeit payment does not invalidate the secured obligation;
• Termination of the principal obligation results in the termination of the obligation to pay forfeit payment;
• Forfeit payment can only arise from a contract or legislative provision (as will be discussed below);
• Forfeit payment is a measure of legal liability, as its payment follows from non-performance or improper performance of the obligation, and others.

3. Requirements for the Form of an Agreement on Forfeit Payment

Due to the characteristic of “autonomy” or “independence” of forfeit payment as a security measure (as mentioned above), the form of the agreement on forfeit payment must be in writing regardless of the form of the agreement on the principal obligation.[6] Moreover, failure to comply with the written form renders such agreement void, meaning it is invalid from the moment of conclusion, and a court decision is not required to establish the absence of legal relations between the parties.[7] Meanwhile, it is worth mentioning that this requirement applies to contractual, not statutory, forfeit payments (see below).

4. Statutory Forfeit Payment

The Civil Code provides that forfeit payments can arise from an agreement between the parties or be provided for by legislation. Therefore, if there is no agreement on forfeit payment (contractual) between the parties, the right to claim statutory forfeit payment is implied.[8] It is generally assumed that the enforcement of statutory forfeit payment is associated with the application of norms regarding the wrongful use of someone else's funds.[9] Statutory forfeit payment is tied to the base refinancing rate established by the National Bank of the Republic of Kazakhstan. Additionally, it should be emphasized that an agreement between the parties regarding the impossibility of claiming statutory forfeit payment will be considered invalid[10].

5. The Possibility of Reducing the Amount of Forfeit Payment

It is important to consider that forfeit payment is designed to encourage the debtor to fulfill the obligation properly and protect the legitimate interests of the creditor. However, if the creditor does not take actions towards a possible amicable settlement of the dispute and intentionally remains inactive to increase the amount of forfeit payment during the statute of limitations period[11], the court may apply the norm on reducing the amount of forfeit payment[12], being guided by Article 297 of the Civil Code.

6. Determining the Amount of Forfeit Payment to be Recovered

Non-conduct of forfeit payment, alongside non-performance of the secured obligation, also constitutes a separate breach of the obligation. Therefore, the general norms regarding the deadline for fulfilling obligations apply to the conduct of forfeit payment. The day of fulfilling the obligation to pay forfeit payment will be the day of proper performance by the creditor of the principal obligation, as well as the conduct of the forfeit payment in full amount according to the calculations provided for by the contract or legislation, for example, payment of the due amount for the entire period (if forfeit payment is accrued daily/monthly) of delay in performance.

Thus, in practice, creditors file lawsuits for the recovery of forfeit payments either on the day of filing the lawsuit or on the day of the anticipated conclusion of the case (approximately 3 months), taking into account procedural deadlines.[13]However, there are instances in judicial practice where courts reject both alternatives, or:

(i) based on actual performance that occurred before the filing of the lawsuit[14], or

(ii) based on a shorter period of actual delay in fulfilling the obligation[15].

Consequently, plaintiffs face the problem of compensating for damages caused by the lack of recovery of forfeit payments during the court proceedings and subsequent enforcement proceedings. This fact violates the rights and legitimate interests of the parties.

7. Proposed Method of Increasing the Amount of Forfeit Payment During the Judicial Proceedings

The Civil Procedure Code provides for the possibility of increasing the claims by filing a corresponding application at any stage of the proceedings until the court is adjourned to deliver a decision.[16] In this regard, increasing the claims should be understood as a quantitative increase in the object of the claim under consideration.[17] It is also necessary to consider that increasing or decreasing the amount of claims cannot be considered as a change in the subject matter of the claim, as it involves specifying the scope of the claim.[18]

Upon the completion of substantive consideration of a case, the plaintiff is entitled to submit an application to increase the amount of forfeit payment for the period of judicial proceedings by making the corresponding additional payment of the state fee. Despite the fact that this possibility is provided for by legislation, there is no unequivocal practice on this issue, and there are also no elements of deep doctrinal interpretation.

Taking into account all the aforementioned, it can be concluded that forfeit payment is a commonly used method of securing performance of obligations. It represents the amount that the debtor must pay to the creditor in case of non-performance or improper performance of the obligation. An agreement on forfeit payment must be in writing, and failure to comply with this requirement renders it invalid. Forfeit payment may arise from a contract or by legislative provision. The court has the right to reduce the amount of forfeit payment in case the creditor fails to take actions for amicable dispute resolution or if the forfeit payment exceeds the actual losses incurred by the creditor, as well as in other significant circumstances. It is important to consider that forfeit payment is intended to encourage the debtor to fulfill the obligation, and its amount is determined based on general norms regarding the deadline for performance. Additionally, legislation provides for the possibility of increasing claims, including the amount of forfeit payment, during the judicial proceedings, which should be used by the disputing parties to shape proper judicial practice and theoretical interpretation of the described norm.