The penalty clause: where and when?
A penalty clause is a clause in a contract which states that a party must pay a penalty if it fails to fulfil a contractual obligation. Penalty clauses come in all shapes and sizes and can often be recognised simply by the word ‘penalty’. Penalty clauses can, for example, be found in lease agreements, purchase agreements, settlement agreements, money loan agreements, employment contracts and general terms and conditions.
In this article we will explain, based on three agreements, how to recognise a penalty clause and when it can be invoked:
1. Penalty clause in a contract of sale of a house
The following penalty clause is almost always included in NVM contracts for the sale of residential property:
“On dissolution of the contract of sale on the basis of attributable failure, the defaulting party shall forfeit for the benefit of the other party an immediately payable penalty of ten percent (10%) of the purchase price without judicial intervention.”
We regularly receive cases in which the seller claims the penalty because the buyer has failed to take possession of the property due to the fact that he/she is unable to arrange financing (and has not included a financing reservation). The starting point in that case is that the seller can dissolve the contract and claim 10% of the purchase price of the property.
2. Penalty clause in rental agreement
Penalty clauses are also regularly found in general terms and conditions of rental agreements (residential and business premises). Think of a provision with the following purport:
“The tenant shall owe an immediately due and payable penalty of €25 per calendar day for each obligation he fails to fulfil.”
If a tenant fails to pay his rental payments or uses the rented property contrary to its purpose, for example, the landlord can claim the penalty.
3. Penalty clause in money loan agreements
Penalty clauses also occur in money loan agreements. Consider the situation where party X borrows an amount from the bank to finance his/her home and owes penalty interest if payment is not made on time:
“In the absence of timely payment as referred to in Article (…), party X shall forfeit an immediately payable penalty interest of 6% of the overdue amount.”
For example, if X does not pay interest or repay on time, the bank can claim the penalty interest.
Mitigation of penalty
The starting point is that the full penalty must be paid. However, a court can decide to moderate the amount of the fine if granting the fine leads to an excessive and therefore unacceptable result. This depends on the circumstances of the case.
Do you need advice on penalty clauses?
Do you have a case in which you are claiming an amount of penalty or are actually owed the penalty? Or do you need help in drafting a penalty clause? Then you have come to the right place. As lawyers with experience in contract law, we regularly come across penalty clauses. Gentia Niesert, lawyer in contract law, will be pleased to help you.
