Is it a Penalty Clause?

Is it a Penalty Clause?

Is someone trying to hold you liable for breaching a clause which you believe may be a penalty? Many commercial contracts have clauses that stipulate compensation in the event that a contractual term or an obligation is breached.

The general rule is that if the clause is a liquidated damages clause it is enforceable and the sum set out in the clause is recoverable. If, however, if it is a penalty clause it will not be enforced beyond the actual loss of the innocent party.

A clause is potentially a penalty clause if:

  • the predominant function of the clause is to deter a party from breaking the contract;
  • the compensation stipulated is not a genuine pre-estimate at the time the contract was entered into;
  • the sum specified is extravagant and unconscionable in comparison with the greatest loss that could have been proved to have followed from the breach;
  • if the breach of contract consists only of not paying a sum of money, and the amount stipulated as compensation is greater than the sum that ought to have been paid;
  • a single lump sum is made payable by way of compensation whether the occurrence of event or events that trigger the clause are serious or trifling; and
  • in a sales contract, the buyer is obliged to either take delivery of a minimum quantity of product or pay a specified minimum amount.

Before paying any compensation demanded under such clauses, or signing a contract which has a penalty clause, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870; visit our WebsiteLike our Facebook Page; or join our Building and Construction Mailing List.

This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.