Contractual penalties and damages: Can both be claimed? And, if so, to what extent?

Summary of the facts

A contractor has brought a claim seeking payment of outstanding invoices for materials supplied.

The client disputes the claim for payment, arguing that the delivery was incomplete and, furthermore, was made with a considerable delay; consequently, the client has filed a counterclaim seeking the termination of the contract on the grounds of breach and an order requiring the supplier to pay compensation for damages. After assessing the conduct of the parties, the court concludes that the supplier’s breach of contract is more serious and orders the supplier to pay damages.

The dispute

Before ruling on the award of damages, the Court of Genoa carried out a comparative assessment of the parties’ respective breaches of contract and concluded that the contractor’s delays in delivery – which had already occurred before the client suspended payments – had justified the client’s claim of breach of contract.

However, the crux of the dispute was the amount of damages. The contract provided for a contractual penalty for delays.

The client sought to add the contractual penalty to the damages for the additional loss arising from the termination of the contract.

The judge therefore had to decide whether the application of the contractual penalty precluded any other claim for damages — thereby acting as a ‘cap’ on the damages — or whether both claims coexisted and could be added together.

The court’s ruling

In Judgment No. 2380 of 27 October 2025, the Court of Genoa ruled that, unless otherwise agreed, the application of a contractual penalty precludes the possibility of claiming additional compensation for damages arising from a breach of contract. The judge clarifies that the contractual penalty effectively constitutes advance, lump-sum compensation for the loss: whilst it is not necessary to prove the amount of the loss when claiming the contractual penalty, it is also true that this covers any other compensable loss.

However, if the parties have contractually agreed — as permitted by the provision — that the defaulting party must, in addition to paying the contractual penalty, compensate the other party for additional damages, the latter is entitled to payment of both the contractual penalty and the additional damages

(a) if it can prove that it has suffered damage exceeding the amount of the contractual penalty, and

(b) provided that the contractual penalty and the additional damages, when added together, do not in any event exceed the total loss suffered.

***

The judgement also makes a significant contribution to the issue of the period during which contractual penalties apply. The judge in Liguria makes it clear that the contractual penalty provided for in the event of breach must not extend to the period following the request for termination of the contract. As soon as the non-breaching party takes steps to terminate the contract (and thereby indicates that it no longer has any interest in its performance), the daily contractual penalty for delay ceases to accrue. From that point onwards, the claim for additional damages comes into effect (provided that this is provided for in the contract).

***

This judgement, which highlights the possibility of combining compensation for punitive damages with compensation for consequential damages, provides an opportunity to reflect on how important it is that success in court often depends on a carefully drafted contract.