Encouraging contractual performance - the carrot or the stick?
What are penalties and why are they problematic?
Background: Penalties
We have a long obsession with penalties in this country, caused
in no small part by the post-traumatic stress from yet another
major tournament defeat at the hands of the dreaded penalty
shoot-out!
In contractual terms, a penalty is a clause that imposes a
financial consequence on a party for breaching the terms of a
contract. It is typically a large sum of money that is not
proportionate to the actual loss suffered by that party due to the
breach. Instead, it is designed to punish the breaching party, and
to deter non-compliance.
This doesn't sound unreasonable, eh? Well, it is important
to be aware that such terms are unenforceable unless three
questions set out in Cavendish v Makdessi [2015] UKSC 6 are
answered. Those questions are:
