The Penal Clause: A Double-Edged Contractual Tool

Key Takeaways

• A penal clause allows the parties to specify in advance the amount of damages that may be claimed in the event of contractual non-performance, in accordance with sections 1622 to 1625 of the Civil Code of Québec;
• Although it may protect the creditor by simplifying proof of the extent of the damages, a penal clause may also have the effect of limiting the compensation that the creditor may obtain;
• The amount specified in a penal clause may be reduced by a court under certain circumstances, notably when it is deemed abusive;
• The scope of a penal clause must be carefully analyzed, since certain remedies or damages may remain available depending on the circumstances;
• Carefully drafting the penal clause is essential to ensure that it adequately reflects the commercial risks and the parties’ objectives.