Penalty clause

An agreement in a contract to pay a sum of money if there is a breach of contract.

A penalty clause is an agreement in a contract to pay what can be a considerable sum of money if there is a breach of contract.

A penalty clause will not be upheld by the court and is seen as a type of threat within a contract. The case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd (1915) raised some issues regarding this and some principles emerged, one of which was that the use of the words penalty clause or liquidated damages is not conclusive and it is for the courts to decide into which of these two categories a term falls.

Another principle which emerged from this case was that an obligation to pay a sum of money which is 'extravagant and unconscionable' compared to the value of the contract may be an indication that a clause is a penalty clause.

 

 

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