Penalty Clauses in Contracts

Guidance Note - Contractual Penalties

BS.DC.28

This Guidance Note on Contractual Penalties deals with the topic of specific remedies for breach of contract which are negotiated, agreed, and set out in a contract by the parties. In particular, this note deals with “liquidated damages” and other clauses which might amount in law to unenforceable “penalties”.

The note covers a number of practical steps which you might take, and various considerations you might take into account in relation to inclusion of such remedies in a commercial contract. This will be relevant when negotiating or drafting the contract, writing standard terms and conditions of trading, reviewing existing contracts containing such agreed remedies, or challenging the validity of such agreed remedies.

The guidance note explains the impact of the recent Supreme Court decisions about “penalties (the “Cavendish” and “ParkingEye” cases) in November 2015. The Annex also provides a detailed explanation of the legal background to penalties, liquidated damages and other remedies for breach of contract agreed and set out in contracts. 

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