Penalty clauses and liquidated damages in contracts

Abstract

Chapter 1 gives an insight on the p1inciple of Obligations in general, with a main focus on Obligations in relation to Contract Law. A comparison is made between the Civil and Common law systems, and their differences and similarities are outlined. The second part of Chapter 1 examines the nature of contracts and the requirements for a contract to be concluded. The importance of the intention of the parties is a focal point. The concept of damages and the type of provision made for damages is explored. The nature and definition of Penalty clauses is examined in Chapter 2. Several cases are referred to in order to provide the Court's interpretation of penalty clauses. Reference is made to Italian and French law in respect of penalty clauses, and similarities and differences are observed. The nature of Liquidated Damages is also dealt with in this chapter and the position under English Law is examined where penalty clauses are struck down and only clauses which are held to be liquidated damages are upheld. To support this, a number of cases are mentioned indicating the English Courts' disapproval of penalty clauses. The concept of limitation of liability is also entered into. Chapter 3 deals with the accessory nature of penalty clauses and their dependence on the validity of the principal obligation. This aspect of penalty clauses is also common under Italian and French law. The Maltese provisions which regulate penalty clauses and their application is the subject of Chapter 4. The reasoning behind the applicability of penalty clauses in contracts is examined and cases are referred to, where the Courts state the importance of having penalty clauses in cases where one of the contracting parties fails to perform what he obliged himself to perform under the contract or delays in performance. A penalty clause may be stipulated either for non-performance or for delay in performance or for forbearing to do something. The abatement or mitigation of the penalty clause under Maltese Law is considered in Chapter 5. Another part of this Chapter examines the power entrusted to Judges in countries like Italy, France, and Germany to reduce penalty clauses in situations where the established penalty is excessive and disproportionate. Chapter 6 deals with the comparison between liquidated damages and penalties and an examination of the rules used by the Courts to distinguish between liquidated damages and penalties. To illustrate these guidelines, several types of cases are quoted. The nature of the divisibility or otherwise of the penalty clause is considered in Chapter 7 and Chapter 8 refers to the EC Directive on Unfair Terms in Consumer Contracts and to Unidroit. As Conclusion, Chapter 9 enters into the merits of the advantages and disadvantages of having penalty clauses and liquidated damages, and examines the reasons why they should be upheld or otherwise.