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 that has a penalty clause, please contact Damin Murdock at Leo Lawyers on (02) 8201 0051 or at office@leolawyers.com.au.
DISCLAIMER: This article is not to be taken as legal advice and is general in nature. If you require specific advice, please contact us.
