The Supreme Court Allows the Reduction of a Penalty Provided for in a Settlement Agreement

On 28 April 2026, in case No. 5-KG26-28-K2, the Civil Chamber of the Supreme Court of the Russian Federation[1] formulated a new position on the possibility of applying Article 333 of the Russian Civil Code to a penalty provided for in a court-approved settlement agreement.

Background

A settlement agreement is traditionally viewed as a means of finally resolving a dispute. Once approved by a court, it acquires the binding force of a court ruling and may be enforced on the basis of a writ of execution.

In this context, court practice previously tended to follow the approach that a subsequent reduction of a penalty agreed by the parties in a court-approved settlement agreement constituted an impermissible interference with the terms of that agreement.

The courts proceeded on the basis that the penalty provisions in a settlement agreement are agreed by the parties voluntarily and that any objections to the amount of the penalty must be raised at the stage of entering into and approving the settlement agreement[2]. A subsequent reduction of the penalty under Article 333 of the Russian Civil Code would, in effect, alter the terms of the approved settlement agreement, create a risk of conflicting court rulings and undermine the principle of legal certainty.

New Position of the Supreme Court of the Russian Federation

In case No. 5-KG26-28-K2, the Civil Chamber of the Supreme Court of the Russian Federation stated as follows:

• Article 333 of the Russian Civil Code does not limit its application depending on the type of penalty and contains no prohibition on its application to a penalty provided for in a settlement agreement;

• the application of Article 333 of the Russian Civil Code in such a situation does not amount to a review or circumvention of the terms of the settlement agreement, since the terms of the settlement agreement are determined at the time of its approval by the court, whereas the proportionality of the penalty to the consequences of the breach is assessed during or after its performance, following the debtor’s breach, by comparing the consequences of that breach with the amount of the penalty accrued under the rules set out in the settlement agreement.

Commentary

On the one hand, this approach is consistent with the compensatory nature of civil liability and the general purpose of Article 333 of the Russian Civil Code — to prevent a penalty from turning into a means of unjust enrichment for the creditor.

On the other hand, this position is not free from controversy. A settlement agreement is entered into precisely for the purpose of finally resolving a dispute on the terms agreed by the parties. If, after the agreement has been approved, the debtor is able to challenge the amount of the agreed penalty, this may reduce the predictability of settlement agreements and weaken their role as a tool for the final resolution of disputes.

In addition, the new position was formulated by the Civil Chamber of the Supreme Court of the Russian Federation, whereas the opposite approach had previously been consistently applied in commercial court practice. In this regard, it cannot be ruled out that divergent approaches may persist in the courts in the near future, especially in commercial disputes.