Penalty Clauses
Damages and Remedies:
- Damages: is the legal term for the amounts one owes in order to put the non-breaching party
in the same economic position as If no breach had occurred.
Damages = losses sustained + gains prevented – losses or missed opportunities that could
have been avoided or mitigated.
- Remedies: is broader term than damages. It covers a wide range of rights and obligations that
can arise when a party breaches its contractual obligations, including claims for damages.
They include, among other things:
1- Rights to compel performance or to provide substituted performance;
2- Rights to terminate for cause;
3- Rights to fee or price reduction or refunds;
4- Rights to compensation for direct or indirect damages, and
5- Rights to ‘indemnification’ for losses and expenses related to third party claims
What is the difference between the two?
- Damages is only for monetary amount of money; however, remedies include all the rights and
obligations that can be taken from the breaching party and that include the monetary and non-
monetary indemnification.
Risks and benefits?
- Risk:
Poorly drafted remedies clauses might provide a non-breaching party less than what
might have been available under the law, particularly if those stated remedies are later
case, fairly or unfairly, as ‘exclusive’ remedies under the agreement.
Example:
o a Remedies clause superficially providing for right to (i) terminate for cause and
(ii) receive a refund of all fees paid, could be viewed restrictively by a court as
being the exclusive remedies for breach, as negotiated by the parties.
How to address this concern:
o Add language to the effect that ‘the remedies described here are in addition to all
other appropriate remedies under the Agreement or under the applicable law”.
- Benefits:
It’s important to consider what do you want to achieve
Contracts with clear and meaningful remedies provide:
1
, Penalty Clauses
Incentives for better performance
Leverage for forcing faster performance corrections, and
Greater certainty regarding the outcome of potential litigation or other dispute resolution
processes, all of which reduce the likelihood of disputes in the first place
So how to write the remedy clause?
- First see what kind of breaches that might be committed by a buyer or seller
- Then negotiate and introduce remedies that must be given for those breaches
- And lastly incorporate them in the contract and agreed from both parties.
What is penalty clause?
According to the council or Europe Resolution the penalty is when a party fails to
perform then he is bound to pay sum of money.
- How does the penalty differ from compensation?
there is absolutely a difference between both, In the common law the penalty is prohibited
but the compensations are allowed. In contrast, such agreements are generally enforced
in civil law jurisdictions, without any distinction between liquidated damages and
penalties—though they may be reduced if excessive, even as penalties. So, what is the
objective then?
The different is when you penalize, you want it not only money, but rather you want a
higher punishment for that breach, and this is not the case in the compensation where only
money are given and then the breaching party is free to go.
The distinction between the two terms is clearer under the Common Law System. Under
the Common Law System, where the amount fixed is a genuine pre-estimate of the loss in
case of breach, it is liquidated damages. However, if the amount fixed is without any
regard to possible loss but is mostly intended to deter the other party in order to refrain
from committing breach, it is a penalty. In other words, if the specified sum by both
parties of the contract represents a fair and genuine pre-estimate of the damage (tort)
likely to result due to a breach, then it is liquidated damages. On the other hand, if the
specified sum is extravagant and it’s not proportional with the damage likely to occur,
then it is a penalty.
The Liquidated damages clauses in commercial agreements are generally enforceable in
all legal systems and they are very common in construction contracts so for instance If a
contractor fails to complete the project in time, he will be vulnerable to pay liquidated
2
Damages and Remedies:
- Damages: is the legal term for the amounts one owes in order to put the non-breaching party
in the same economic position as If no breach had occurred.
Damages = losses sustained + gains prevented – losses or missed opportunities that could
have been avoided or mitigated.
- Remedies: is broader term than damages. It covers a wide range of rights and obligations that
can arise when a party breaches its contractual obligations, including claims for damages.
They include, among other things:
1- Rights to compel performance or to provide substituted performance;
2- Rights to terminate for cause;
3- Rights to fee or price reduction or refunds;
4- Rights to compensation for direct or indirect damages, and
5- Rights to ‘indemnification’ for losses and expenses related to third party claims
What is the difference between the two?
- Damages is only for monetary amount of money; however, remedies include all the rights and
obligations that can be taken from the breaching party and that include the monetary and non-
monetary indemnification.
Risks and benefits?
- Risk:
Poorly drafted remedies clauses might provide a non-breaching party less than what
might have been available under the law, particularly if those stated remedies are later
case, fairly or unfairly, as ‘exclusive’ remedies under the agreement.
Example:
o a Remedies clause superficially providing for right to (i) terminate for cause and
(ii) receive a refund of all fees paid, could be viewed restrictively by a court as
being the exclusive remedies for breach, as negotiated by the parties.
How to address this concern:
o Add language to the effect that ‘the remedies described here are in addition to all
other appropriate remedies under the Agreement or under the applicable law”.
- Benefits:
It’s important to consider what do you want to achieve
Contracts with clear and meaningful remedies provide:
1
, Penalty Clauses
Incentives for better performance
Leverage for forcing faster performance corrections, and
Greater certainty regarding the outcome of potential litigation or other dispute resolution
processes, all of which reduce the likelihood of disputes in the first place
So how to write the remedy clause?
- First see what kind of breaches that might be committed by a buyer or seller
- Then negotiate and introduce remedies that must be given for those breaches
- And lastly incorporate them in the contract and agreed from both parties.
What is penalty clause?
According to the council or Europe Resolution the penalty is when a party fails to
perform then he is bound to pay sum of money.
- How does the penalty differ from compensation?
there is absolutely a difference between both, In the common law the penalty is prohibited
but the compensations are allowed. In contrast, such agreements are generally enforced
in civil law jurisdictions, without any distinction between liquidated damages and
penalties—though they may be reduced if excessive, even as penalties. So, what is the
objective then?
The different is when you penalize, you want it not only money, but rather you want a
higher punishment for that breach, and this is not the case in the compensation where only
money are given and then the breaching party is free to go.
The distinction between the two terms is clearer under the Common Law System. Under
the Common Law System, where the amount fixed is a genuine pre-estimate of the loss in
case of breach, it is liquidated damages. However, if the amount fixed is without any
regard to possible loss but is mostly intended to deter the other party in order to refrain
from committing breach, it is a penalty. In other words, if the specified sum by both
parties of the contract represents a fair and genuine pre-estimate of the damage (tort)
likely to result due to a breach, then it is liquidated damages. On the other hand, if the
specified sum is extravagant and it’s not proportional with the damage likely to occur,
then it is a penalty.
The Liquidated damages clauses in commercial agreements are generally enforceable in
all legal systems and they are very common in construction contracts so for instance If a
contractor fails to complete the project in time, he will be vulnerable to pay liquidated
2
