Liquidated Damages And Penalty Clauses In International Arbitration

In international contracts, parties seek above all predictability and effective control of risk. One of the most powerful contractual mechanisms to achieve both objectives is to include a pre-agreed damages clause, commonly referred to as a liquidated damages or penalty clause. Such provisions fix in advance the sum payable where a party fails to perform a specific contractual obligation. They appear in most international contracts, particularly construction contracts, and are, unsurprisingly, among the most frequently invoked heads of claim in international arbitration.

What Are Liquidated Damages and Penalty Clauses in International Contracts?

Both liquidated damages and penalty clauses (clauses pénales) are a familiar feature of international contracts.¹ They are used routinely across sectors such as sales, construction, finance, and licensing, and often drafted with little distinction between the two. These clauses can apply to many types of contractual