When an international company enters into a contract with a Colombian business, supplier, distributor, contractor, or strategic partner, it needs to understand what happens if one party fails to perform. Contractual penalties in Colombia provide an important mechanism for allocating the financial consequences of contractual breach, but Colombian law does not treat them exactly like liquidated damages or penalty clauses in every other jurisdiction.

One of the most important provisions in a Colombian commercial contract is the contractual penalty clause, known as the cláusula penal. International companies may recognize the concept from their own contracts, but the Colombian legal framework has specific rules governing when the penalty becomes payable, whether the company can demand performance of the underlying obligation at the same time, whether it can recover additional damages, and when a court may reduce the agreed amount.

A clause that looks straightforward under another legal system can therefore produce a different result in Colombia. Understanding contractual penalties in Colombia before signing can make a significant difference to the commercial value of the agreement.

How contractual penalties work in Colombia

Article 1592 of the Colombian Civil Code defines a cláusula penal as a provision through which a person agrees to give or do something if they fail to perform, or delay performing, a principal obligation.

In practical terms, the parties agree in advance on a contractual consequence if a defined event occurs.

Imagine that a US company hires a Colombian manufacturer to produce COP 100 million worth of products. The parties agree that the manufacturer must deliver the order by September 30 and that a specified penalty will apply if the manufacturer fails to comply with the contractual delivery obligation.

The benefit is straightforward. The parties establish the financial consequence of a particular breach in advance instead of leaving the parties to negotiate or litigate the consequences after the relationship has deteriorated.

Article 1599 also provides an important advantage. When the parties properly stipulate a penalty, the party seeking to enforce it does not generally have to prove that the breach caused a specific amount of loss. The party in breach cannot avoid the penalty simply by arguing that the nonperformance caused no damage or even benefited the other party.

That does not mean that a company can automatically charge a penalty whenever it believes that its counterparty breached the contract. The company must still establish that the contractual conditions triggering the penalty occurred.

This makes the drafting of the triggering event particularly important.

What functions can contractual penalties serve in Colombia?

Colombian law does not treat every cláusula penal as serving exactly the same purpose. Colombian jurisprudence recognizes that a contractual penalty can perform different functions depending on how the parties structure the agreement.

• The penalty may serve a moratory or coercive function, encouraging timely performance and establishing a financial consequence for delay.
• It may also serve a guarantee function, giving the parties an agreed financial mechanism connected to compliance with a contractual obligation.
• Finally, it may serve a compensatory function, establishing in advance the financial consequences associated with a particular breach.

These distinctions matter because the consequences can differ depending on the purpose of the provision.

A daily penalty for late delivery, for example, can operate differently from a penalty that applies when a supplier completely fails to perform. The first may be intended to address delay while the obligation to deliver remains outstanding. The second may instead provide the agreed financial consequence for nonperformance.

For this reason, an agreement should not simply state that “a penalty of 10% shall apply in the event of breach.” The parties should first determine what the penalty is supposed to accomplish.

That question becomes particularly important when international companies adapt global contract templates for use in Colombia.

Can you demand the principal obligation and the penalty at the same time?

This is one of the most important rules concerning contractual penalties in Colombia.

Article 1594 of the Colombian Civil Code establishes the general rule. Once the debtor is in default, the party entitled to enforce the contract generally must choose between demanding performance of the principal obligation and demanding the penalty.

The law provides two relevant exceptions.

• First, the parties may stipulate the penalty specifically for mere delay. In that situation, the party entitled to enforce the contract can generally demand performance of the principal obligation together with the agreed penalty for the delay.
• Second, the parties may expressly agree that payment of the penalty does not extinguish the principal obligation.

Consider a Colombian supplier that agrees to deliver specialized equipment to a foreign company. The contract provides for a daily penalty for each day of delay and makes clear that the penalty applies to the delay without replacing the supplier’s obligation to deliver the equipment.

In that situation, the commercial purpose differs from a penalty intended to replace the principal obligation after complete nonperformance. The buyer can generally seek delivery while also claiming the agreed penalty for the delay.

The drafting needs to make that intention clear.

For international companies, this means that the phrase “penalty for breach” may not provide enough certainty. The contract should distinguish between a penalty intended to address delay and a penalty intended to operate as the financial consequence of nonperformance.

Can you recover a contractual penalty and additional damages?

This is a separate issue from the relationship between the penalty and the principal obligation.

Article 1600 of the Colombian Civil Code establishes the general rule that a party cannot claim both the contractual penalty and damages at the same time unless the parties have expressly agreed otherwise.

The party seeking enforcement generally has the choice between claiming the penalty and claiming damages.

This distinction becomes particularly important when an international company’s global contract contains both a penalty clause and a broad damages provision.

Imagine that a Colombian distributor agrees to pay a penalty equal to 15% of the annual contract value if it commits a specified material breach. The same agreement also states that the distributor is responsible for “all losses, damages, costs and expenses” arising from that breach.

Those provisions should not automatically be read as giving the company an unrestricted right to recover both amounts. If the parties intend to permit the company to claim the penalty and additional damages, the contract should say so expressly and explain how the remedies interact.

Expressly permitting both remedies does not, however, mean that the company automatically receives compensation twice for the same loss. If the company seeks damages beyond the amount represented by the penalty, it may still need to establish the additional loss under the applicable rules.

For companies negotiating contractual penalties in Colombia, the drafting objective should therefore be to avoid uncertainty about whether the penalty replaces damages or operates alongside a separate claim for additional losses.

What does no double recovery mean in practice?

The easiest way to understand the Colombian rules is to separate three different questions.

Can the company demand the principal obligation and the penalty? Generally, no. Article 1594 requires the party entitled to enforce the contract to choose between them once the debtor is in default, subject to the exceptions for mere delay and for an agreement stating that payment of the penalty does not extinguish the principal obligation.

Can the company demand the penalty and damages? Generally, no. Article 1600 allows both only when the parties expressly agreed to permit that combination.

Can the company recover losses exceeding the penalty when the contract permits additional damages? Potentially, yes, but the company may need to establish the additional loss under the applicable rules.

These are different legal questions. A contract should address each one rather than treating the penalty as a generic “remedy for breach.”

What happens after partial performance?

Partial performance creates another important issue when drafting contractual penalties in Colombia.

Article 1596 of the Civil Code provides that when the debtor performs only part of the principal obligation and the other party accepts that partial performance, the debtor has the right to a proportional reduction of the penalty stipulated for nonperformance of the principal obligation.

Imagine that a Colombian service provider agrees to deliver ten defined project milestones but completes eight. If the other party accepts those eight milestones, the company should not assume that it can automatically demand the full penalty stated in the contract.

The law expressly addresses proportional reduction in this situation.

The same issue can arise in contracts involving multiple deliverables, purchase orders, construction stages, implementation milestones, or recurring services.

When negotiating a penalty, international companies should therefore consider whether the amount should relate to:

• The total contract value
• The value of the affected obligation
• The value of the affected purchase order
• The number of days of delay
• The specific milestone that was not completed
• A defined percentage subject to an overall cap

A penalty linked to the affected obligation can sometimes provide greater commercial precision than a penalty calculated automatically from the value of the entire agreement.

Can a Colombian court reduce a contractual penalty?

Yes. The applicable rule depends on the nature of the obligation and whether the contract falls under the Civil Code or the Commercial Code.

Article 1601 of the Civil Code establishes a specific rule for situations in which the principal obligation requires one party to pay a determined amount and the penalty also consists of a determined monetary amount. In that situation, the debtor can seek a reduction of the penalty to the extent that it exceeds twice the amount of the principal obligation.

Commercial contracts have an additional rule under Article 867 of the Commercial Code.

Where the principal obligation is determined or determinable as a specific monetary amount, the contractual penalty cannot exceed that amount. Where the principal obligation is not determined or determinable as a specific monetary amount, a judge may reduce the penalty if it is manifestly excessive in light of the other party’s interest in performance. The same provision addresses situations in which the principal obligation has been performed in part.

The distinction matters for international companies because contractual penalties in Colombia do not operate under a single universal formula.

The amount should reflect the commercial risk the parties are actually allocating. A very high percentage may create negotiation problems and, depending on the contract and applicable rule, may create questions about judicial reduction.

A better drafting strategy starts with the underlying risk and then establishes a proportionate contractual consequence.

When does a contractual penalty become payable?

For positive obligations, Article 1595 generally links the penalty to the debtor’s default, or mora. A company should therefore not assume that every contractual deviation automatically triggers the penalty.

The contract should identify the relevant deadline, performance standard, notice requirements, cure periods, and circumstances that constitute default when those matters are relevant to the transaction.

Consider a software implementation agreement requiring a Colombian service provider to complete a defined stage by October 1. If the contract gives the provider five business days to cure a specified deficiency after receiving written notice, the penalty mechanism should reflect that contractual structure.

Clear drafting helps the parties determine when the penalty actually becomes enforceable.

It also gives the company’s internal legal and commercial teams a clearer process for documenting a potential breach.

What if the contract uses foreign governing law?

International companies sometimes assume that choosing New York, English, Delaware, or another foreign law automatically removes Colombian law from the analysis.

That assumption deserves careful review.

Article 869 of the Colombian Commercial Code establishes a specific rule for contracts entered into abroad that are to be performed in Colombia. The place of performance can therefore become relevant even when a transaction contains substantial international elements.

This issue becomes especially important when a foreign company contracts with a Colombian counterparty, the agreement is performed principally in Colombia, and the parties select foreign governing law and international arbitration.

The company should review the governing law clause, place of performance, dispute resolution provision, and enforcement strategy together.

A foreign governing law clause does not eliminate the need to consider Colombian law where Colombian rules apply to the performance or enforcement of the transaction.

Five questions to ask before signing a Colombian contract

Before accepting contractual penalties in Colombia, international companies should review at least these five issues.

1. What specific event triggers the penalty?

Avoid vague references to “any breach” where possible. Identify the obligations that justify the penalty and distinguish material nonperformance from delay or other forms of breach.

2. Is the penalty compensatory or related to delay?

Determine whether the penalty is intended to address delay, compensate for the consequences of a breach, or operate as the agreed consequence of nonperformance.

3. Can the company demand performance and the penalty?

Under Article 1594, the general rule requires the party entitled to enforce the contract to choose between the principal obligation and the penalty once the debtor is in default. If the parties intend to permit both, the contract should clearly establish the applicable exception.

4. Can the company recover the penalty and additional damages?

Article 1600 generally prevents simultaneous recovery unless the parties expressly agree otherwise. If the parties want to preserve a claim for additional damages, the contract should address that intention expressly.

5. What happens if the counterparty performs only part of the obligation?

The contract should address partial performance and, where appropriate, connect the penalty to the affected obligation rather than automatically applying the same percentage to the entire agreement.

Contractual penalties should allocate risk, not simply punish breach

The biggest mistake an international company can make is treating a penalty clause as boilerplate.

A contractual penalty allocates risk between the parties. The amount, triggering event, relationship with the principal obligation, treatment of delay, treatment of partial performance, and relationship with damages can all affect the company’s position if the commercial relationship deteriorates.

For a supplier agreement, the relevant risk may involve delayed delivery or failure to meet technical specifications. For a technology services agreement, the parties may focus on missed milestones or service interruptions. A distribution agreement may require a different approach involving minimum performance obligations, exclusivity, regulatory compliance, or unauthorized sales.

The same percentage should not automatically appear in every agreement simply because it appeared in a previous template.

A more useful question is: What financial consequence makes commercial sense for this particular breach, and how should that consequence interact with the company’s other contractual remedies?

That is the real value of carefully drafted contractual penalties in Colombia.

Your Colombian contract should work in the real world

International companies entering Colombia often arrive with sophisticated agreements developed by headquarters, international counsel, or global legal teams. Those agreements may be excellent documents. The problem arises when the company treats the agreement as finished before considering how its provisions interact with Colombian law and the way the transaction will operate locally.

Contractual penalties provide a good example.

A provision that looks straightforward in another jurisdiction can raise very different questions under Colombian law. Can the company demand performance and the penalty? Does the penalty address delay or replace the principal obligation? Can the company also claim damages? What happens after partial performance? Could the agreed amount exceed the statutory limit or become subject to judicial reduction?

These are not drafting details to leave until a dispute begins.

At Colombia Legal Edge, we help international companies draft, review, negotiate, and adapt commercial contracts for the Colombian market. Our approach combines Colombian legal knowledge with the practical expectations of international businesses, so the contract reflects both the applicable legal framework and the commercial reality of the relationship.

For companies entering Colombia, local contract review should mean more than translating an agreement into Spanish. It should mean understanding how the agreement will operate when the relationship works well and what rights and remedies will actually be available if it does not.

If you are negotiating a contract with a Colombian company, supplier, distributor, contractor, or business partner, we can help you identify the provisions that deserve attention before you sign.