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ARTICLE · 03 OCTOBER 2017

Beware: Does your contract contain an unenforceable penalty clause?

Madgwicks
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If the default clause is found to be a penalty, the provision is unenforceable and the consequences can be significant.

AustraliaCorporate/Commercial Law
Catherine Ballantyne
Catherine Ballantyne

Most people think they are protected if they have contracts which contain clauses that outline the consequences if a party defaults on their obligations

In brief: Most people think they are protected if they have contracts which contain clauses that outline the consequences if a party defaults on their obligations. However, they may be using contracts which contain unenforceable penalty clauses. An often litigated issue is whether the clauses dealing with the default payments create a penalty. If this clause is found to be a penalty, then this provision is unenforceable and the consequences can be significant.

The recent case of Simcevski v Dixon (no 2) [2017] VSC 531 deals with this issue in the context of a sale of real estate. The principals of this case, however, can be applied to all contracts.

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