Every construction, supply and service contract I review for a company in Montenegro contains a penalty clause, and most of them are drafted for another legal system. The English "liquidated damages" clause assumes a fixed sum that a court will not reopen; the German and Austrian drafts assume a penalty the court may moderate; the Turkish draft assumes that a merchant cannot ask for a reduction at all. Montenegrin law belongs to none of those traditions. The Law on Obligations lets the parties agree a penalty for non-performance or delay, payable without proof of loss, but forbids any penalty on a monetary obligation, lets the court reduce a penalty that is excessive against the loss actually suffered, allows the creditor to recover loss above the penalty, and ties the clause to the form and the fate of the contract it secures. A company that knows those six rules drafts a clause that survives; a company that pastes a foreign template gets a clause that is partly void, partly reducible and, on the payment side, worth nothing. This page sets out the rules as the statute states them, with the drafting consequences for the buyer and the supplier.
Sources, checked 11 September 2026. Law on Obligations (Official Gazette of Montenegro 47/08, 4/11, 22/17, 123/24 and 94/26), Articles 60, 128 to 131, 269 to 272, 277 to 286 and 383; Law on Deadlines for Settlement of Monetary Obligations (113/2024), Articles 6 to 8; the Central Bank of Montenegro's decision of 1 July 2026 on the default interest rate.
What a penalty clause is under Article 277
Article 277 allows the creditor and the debtor to agree that the debtor will pay a sum of money or provide another material benefit if it fails to perform or is late in performing (the contractual penalty, ugovorna kazna). Where the contract does not say otherwise, the penalty is presumed to be agreed for delay, not for non-performance, a presumption that decides which of the creditor's options under Article 280 apply and that a careful drafter displaces by saying expressly which breach the penalty covers. Article 278 lets the parties fix the amount as they see fit, as a lump sum, a percentage, a daily amount or in any other way, and requires the penalty to be agreed in the form prescribed for the contract whose obligation it secures: in a supply or service contract that needs no form, an email exchange is enough; in a contract for real estate, the penalty belongs in the notarial record. Article 279 makes the penalty accessory: it shares the legal fate of the secured obligation, and it lapses where the non-performance or delay is due to a cause for which the debtor is not responsible, which imports the exoneration of Article 270 for circumstances after conclusion that the debtor could not prevent, remove or avoid.
The rule foreign templates miss: no penalty on money
Article 277(3) provides that a contractual penalty may not be agreed for monetary obligations. A clause charging the buyer two per cent per week of the unpaid invoice is therefore not a penalty in Montenegro; the delay in paying money is compensated by default interest under Articles 284 to 286, and, in commercial transactions, by the regime of the Law on Deadlines for Settlement of Monetary Obligations: interest at the Central Bank's rate, 10.40 per cent for the second half of 2026, a fixed compensation of at least 40 euros per late transaction, and the nullity of clauses that exclude either. A supplier who wants a stronger sanction for late payment than the statutory interest cannot get it through a penalty; it can agree interest up to the statutory rate in force at contracting, retain title until payment under Article 11 of that Law, and tie delivery schedules to payment. The mechanics are on the late payment page.
The creditor's options under Article 280
Where the penalty is agreed for non-performance, the creditor may claim either performance or the penalty, and loses the right to performance once it has demanded the penalty; the debtor, for its part, may not pay the penalty and walk away from the contract unless that was the parties' intention when they agreed it. Where the penalty is agreed for delay, the creditor may claim both performance and the penalty, but it loses the penalty if it accepts performance without promptly declaring to the debtor that it reserves the right to the penalty. That last sentence is the operational rule for a project manager or a purchasing department: when a late delivery arrives, the acceptance note must reserve the penalty, in writing, before the goods are taken in, or the penalty is gone.
| Question | Montenegrin rule | Article |
|---|---|---|
| Can a penalty be agreed for late payment of money? | No; default interest and the late payment statute apply instead | Art. 277(3) |
| Must the creditor prove loss? | No; the penalty is due even without loss | Art. 282(1) |
| Can the creditor claim more than the penalty? | Yes, the difference up to full compensation if the loss is higher | Art. 282(2) |
| Can the court reduce the penalty? | Yes, at the debtor's request, if it is disproportionately high against the loss suffered | Art. 281 |
| Delay penalty and accepting late performance | The penalty is lost unless reserved without delay on acceptance | Art. 280(5) |
| Non-performance penalty | Creditor chooses performance or penalty; demanding the penalty ends the right to performance | Art. 280(1) to (3) |
| Form | Same form as the secured contract | Art. 278(2) |
| Debtor not responsible for the breach | The penalty lapses | Art. 279(2) |
Payable without loss, but reducible by the court
Article 282 gives the penalty its value: the creditor may demand it even when the penalty exceeds the loss suffered and even when no loss was suffered, and may demand the difference to full compensation where the loss is greater than the penalty. Article 281 gives the debtor its defence: the court will, at the debtor's request, reduce the penalty if it finds it disproportionately high in comparison with the loss the creditor actually suffered. Two consequences follow for drafting. A penalty set at a level that bears no relation to any conceivable loss will be reduced if challenged, so the creditor gains nothing by inflating it and loses credibility; and the creditor should keep the evidence of its loss even though it need not prove it, because the reduction under Article 281 is measured against the loss actually suffered and a creditor who can show real loss keeps the figure. Unlike Turkish law, which bars merchants from asking for a reduction, Montenegrin law gives that request to every debtor, company or individual. Article 283 adds that where a statute itself fixes a sum for non-performance or delay under the name of a penalty, contractual penalty or compensation, the creditor may not claim both the statutory sum and a contractual penalty unless the statute allows it.
Penalty, liability cap and changed circumstances
A penalty clause does not live alone. Under Article 272 the debtor's liability for intent or gross negligence cannot be excluded in advance, an exclusion for ordinary negligence can be annulled where it results from a monopoly or unequal bargaining, and a cap on damages is valid if not manifestly disproportionate to the loss; a penalty that is also expressed to be the debtor's sole and exclusive liability therefore operates as a cap and is tested against that article as well. Under Articles 128 to 131 a party may ask the court to amend or terminate the contract for unforeseeable changed circumstances that make performance excessively difficult, unless the parties waived that right in advance for specified circumstances, a waiver Article 131 allows within the limits of good faith, and a supplier's delay penalty is often the clause that such a request is really about; a buyer who wants the penalty to hold through a supply shock writes the Article 131 waiver into the contract. And because the penalty is accessory under Article 279, it falls with the contract: where the main contract is void or is terminated for a cause the debtor does not answer for, the penalty goes with it. The way a contractor's fixed price and delay exposure are actually negotiated is on the contractor risk page.
Drafting for the buyer
State the breach the penalty covers, since Article 277(2) presumes delay only. Set a daily or weekly rate for delay with a cap, at a level the company could defend as related to its loss, because Article 281 will cut anything else. Add a separate penalty for non-performance and say whether the buyer may claim it together with termination. Write the reservation mechanism into the acceptance procedure so that the site manager's acceptance form reserves the penalty automatically. Add the Article 131 waiver for specified circumstances such as material price increases and subcontractor default. Keep the penalty in the same form as the contract, and, where the contract is amended, amend the penalty in the same form under Article 60. Do not put a penalty on the buyer's own payment obligation in the mirror clause; it is void and signals a template.
Drafting for the supplier
Accept a delay penalty only with a cap and a grace period, and insist that the penalty be the exclusive remedy for delay within the cap, which converts Article 282(2)'s excess loss into an Article 272 cap that is valid if not manifestly disproportionate. Define the events for which the supplier is not responsible so that Article 279(2) and Article 270 operate without argument. Refuse penalties on the supplier's own monetary obligations, such as refunds, since Article 277(3) makes them void anyway and their presence invites a mirror clause. Make sure the buyer's acceptance procedure requires a written reservation, and treat any late acceptance without reservation as closing the penalty under Article 280(5). And remember that the buyer's claim for the penalty is a commercial claim under Article 383, time-barred three years from the breach, running separately for each delivery.
When the clause is invoked
Once a penalty is claimed, the dispute is about three things: whether the breach occurred and was the debtor's responsibility, whether the creditor reserved the penalty on acceptance, and whether the figure is disproportionate to the loss. The first is decided on the correspondence and the delivery records, the second on the acceptance documents, the third on evidence of loss that the creditor should have kept from the day of the breach. Enforcement of the resulting claim against a Montenegrin company is on the enforcement against a company page, the quantification of loss on the damages page, and the wider legal function this page belongs to on the outsourced legal department page.
Whose side we are on, and how we are paid
The counterparty's lawyer drafted the penalty for the counterparty. The project manager accepts the late delivery to keep the site moving and does not know that the acceptance form just released the penalty. The accountant books the penalty invoice and waits. None of them is paid to tell you, before you sign, that your penalty on late payment is void, that your ten per cent per week will be cut to the loss you can prove, or that the reservation you did not write cost you the claim.
We take no commission or referral fee from contractors, suppliers, agents or counterparties, in any form, on any file. The fee you pay us is our only income from your matter, and it does not depend on whether a penalty is paid or a contract is signed. Because our position does not move with the outcome, telling a buyer that its clause will be reduced, or a supplier that its exposure is uncapped, costs us nothing to say.
One boundary, stated plainly. We are lawyers, not licensed investment advisers and not project managers. We do not decide what delay a project can absorb. What we protect is the Montenegrin legal position: a penalty that covers the right breach, in the right form, at a defensible level, reserved when it matters, and claimed or resisted with the evidence the statute requires.
Before the next contract is signed or the next penalty is claimed
Send us the draft or the contract, the delivery and acceptance records, the correspondence about the delay and the evidence of loss on either side. We will tell you what the clause is worth under Montenegrin law, what must change before signature, whether a penalty already claimed can be resisted or reduced, and what step preserves the claim. Our corporate work in Montenegro is described on the Montenegro lawyer page.
What this page does not settle
Earnest money and withdrawal payments, penalties in employment and agency contracts, penalties in consumer contracts, statutory penalties in public procurement, the interaction with insurance and the conduct of litigation are separate subjects. The 2026 amendment to the Law on Obligations (Official Gazette 94/26) and the further bill pending in Parliament concern producer liability and do not touch the articles above.
