The arbitration courts in accordance with the provisions of Article 489 of the Civil Procedure Law on application of substantive law have to observe recommendations included in the Resolution on Penalty Clauses in Civil Law of the Council of Europe dated 20 January 1978 that has to be used as a supportive source for understanding of legal principles and of legal institution of the contractual penalty. On this matter a solid case law in Latvia is already established accepting a decrease of excessive contractual penalty.