Leigh Ellis is a London solicitor providing business legal advice at Gillhams Solicitors, a law firm in the City of London. He advises on agreements, terms and conditions of business and contracts.
Penalty clauses are terms of contracts that seek to impose upon a party to the contract the obligation to pay a sum of money in the event that the contract has been breached, and the terms of the contract cannot be properly classified as a liquidated damages clause.
Sums specified as being payable under penalty clauses are not recoverable, as opposed to liquidated damages, which are.
Penalties and Liquidated Damages
The commercial purpose of such clauses is to relieve the party not in breach of having to prove their damage: the contract specifies the sum payable and in practice reduces the instances of money claims proceeding to court to be litigated. Liquidated damages clauses must be a genuine pre-estimate of the loss to be suffered by the party in the event of a breach. The failure to do so runs the risk of the clause being classified as a penalty clause. Whether the term is a penalty clause or not is determined as at the time the contract was formed and not at the time the contract was breached.
Tests
Simply because a contract clause is stated to be a penalty clause is not determinative that it is so. Penalty clauses are oppressive in nature, and serve the purpose of deterring the party labouring under the threat of their imposition from breaching the contract. Several tests have been developed to cater for the various forms that contractual penalties may take, and the factors that may be taken into account may include:
1. whether the sum payable is extravagant when compared to the greatest loss that would be suffered by the innocent party
2. the sum payable is greater than the sum that ought to have been paid
3. when a single lump sum is payable, for any number of breaches of contract and those breaches include both serious and trivial damage. To avoid a term of a contract being determined to be a liquidated damages clause, one size does not fit all.
The measure of the calculation should reflect the claimant’s net loss. Sums otherwise payable under a contract for performance are not penalty clauses as there is no increase in the sums payable under the contract (although the consequences may be oppressive) and sums payable in circumstances that are not connected to a breach are also not properly characterised as liquidated damages or penalty clauses.
Making the Calculation
As a matter of public policy, terms of contracts cannot be used for parties to profit from the breach of a contract by a person. Where the claimant has made a genuine effort to determine their loss and has acted in good faith, the clause will not be classified as a liquidated damages clause regardless of how unreasonable it may appear to others.
- Related Videos
- Related Articles
- Ask / Related Q&A
Affiliate Compensation Disclosure - New FTC Guideline Effective Soon
By: Dan Counts | 30/10/2009Do you have a blog or own a website with affiliate links? New U.S. Federal Trade Commission (FTC) guidelines go in effect soon and they will affect you. Learn how to protect yourself and your sites.
Bylaw Legal Form - The Internet Solution
By: Oli Osorhan | 27/10/2009Getting a legal form is easier than ever. Learn the advantage of the Internet and bylaw legal forms for use.
Spend Savvy First Time Buyers Choose Cheap On line Conveyancing
By: Lucy Bower | 14/10/2009First time home owners have to shop around for the best deals on everything from carpets to conveyancing in the recession. Web sites routinely offer better deals than the high street.
Legal Eagle Seth Lesser Defends Privacy Online
By: Zandra Lewistky | 02/10/2009Seth Lesser, a partner at New York, New Jersey and District of Columbia law firm, Klafter Olsen & Lesser, has been lead or co-lead for plaintiffs in many prominent “Internet privacy” cases throughout his career.
Last Minute Discount Travel Deals To Stretch Your Travel Budget
By: Brad Alexzander | 24/09/2009Discount Travel Techniques that guarantee big savings on family vacations, international flights, holiday accommodation, entertainment, and recommended last minute discount travel deals
Dealing with false and malicious online defamation
By: Megan Cassidy | 30/08/2009This article goes over the challenges and obstacles faced by individuals and businesses dealing with the growing trend of false and malicious online defamation.
New online legal service slashes the cost of your legal budget
By: Miriam Taylor | 28/08/2009Scotlawman is newly updated website that provides wide range of legal documents and legal advice in Scotland. The Scot Lawman web site is easy to use and there is no complicated sign-up process – users can jump straight into buying the legal documents they need.
Save Yourself Time; Find your Birth Certificate Online
By: Olivia Larson | 13/08/2009There are few things quite as annoying as hearing just how long it will take to get legal documents through the mail. If you choose to get your birth certificates online though, the time is significantly shortened. Almost all states have an online service that allows you to find not only birth certificates, but also other legal documents like death certificates, court decisions and marriage licenses.
Infringement Of Uk Trade Marks By Foreign Domain Names
By: Leigh Ellis | 08/02/2009 | Cyber LawUK trade marks grant the trade mark owner the exclusive right to use the trade mark in the UK. When the trade mark is used on foreign websites, it is a question of law whether or not the trade mark is infringed under with UK law, thus giving rise to liability for trade mark infringement.
Terms of Business and UK Regulatory Compliance Online
By: Leigh Ellis | 14/09/2008 | National, State, LocalWe find that businesses contact solicitors for two primary purposes. The first is to ensure that their business properly establishes their terms of business and indirectly to comply with regulatory requirements, such as the Data Protection Act, Distance Selling Regulations. Another instance is where a contract has been proposed, or needs to be prepared for a particular transaction, and the legal terminology is beyond the their experience and understanding, due to its technical legal nature.
Remedies for Breach of Contract in the UK
By: Leigh Ellis | 30/08/2008 | National, State, LocalUnder UK law, a variety of remedies are available for the innocent party against the party in breach. In this article, Gillhams Solicitors step through some of the remedies available in litigation under UK law.
Managing Contracts and Liability - Law of Mistake in the UK
By: Leigh Ellis | 30/08/2008 | National, State, LocalMistakes at law may affect the validity of the formation of a contract. The effect of a mistake on the validity of a contract depends on the type and nature of the mistake made. The general rule is that where a mistake has been made by the parties, at common law the contract may be deemed void, as if the contract had never existed. Equity takes a more flexible approach in that contracts containing certain mistakes may be treated as voidable, where either party can terminate the contract. How
Difference Between Privity of Contract, Novation and Assignment Under UK Law
By: Leigh Ellis | 30/08/2008 | Internet LawThe doctrine of privity of contract is the relationship that exists between parties to a contract. Only those parties to the contract are bound by it and are able to enforce the contractual obligations under the contract. The concepts of novation and assignment, although not exceptions to this rule, are contrary to the principles outlined in it and have developed to overcome restrictions imposed by the doctrine.
UK and European Trade Mark Protection and the Law
By: Leigh Ellis | 30/08/2008 | TrademarksThe fundamental purpose and function of trade marks is to provide consumers with the means to demarcate the goods and services of one trader from another. It allows consumers to recognise your products or services as yours alone and thus avoid confusing it with the products or services of a competitor. Trade marks provide an exclusive way in which your goods or services can be identified as originating from you.
Use of Competitors’ Trade Marks and Comparative Advertising in the United Kingdom and Europe
By: Leigh Ellis | 06/07/2008 | Intellectual PropertyOrdinarily use of competitors’ trade marks amounts to a trade mark infringement and/or passing off. However the Trade Marks Act 1994 (‘TMA’) and European legislations legitimise use of competitors’ trade marks provided that the use takes place in a particular way, and certain tests are satisfied.
Terms of Contract and Penalty Clauses in English Law
By: Leigh Ellis | 12/02/2008 | Internet LawRegardless of contracts are formed by email, on a website or verbally, provisions imposing a penalty or forfeiture are unenforceable under English law. Penalties may take the form of an excessive sum to be paid if a party to the contract fails to perform, and forfeiture exists where a contract term purports to relinquish the property of the party in breach to the party not in breach.