Enforcing the penalty clause within contracts

Enforcing the penalty clause within contracts

July, 21,2019

By Mojahed Al Sebae

We are experiencing an increasing failure to enforce the penalty clause within contracts, Corporate & Commercial Partner, Mojahed, shares his insights on how non-defaulting parties can leverage from this.

• Proof of damages is not required: The existence of a penalty clause in a contract implies that the damage is actually sustained by a contracting party in the event of a breach. As a result, the non-defaulting party is not required to prove that he sustained damage, whereas the defaulting party would have to prove that such damage was not sustained by the other party.
• The contract should not be terminated: The contract has to be effective and valid between the contracting parties. The non-defaulting party should request to execute the contract and not to terminate it. If the contract was rescinded or terminated, it is not permissible to execute the penalty clause.
• Ensure the estimated compensation appears in the contract: The inclusion of a penalty clause in a contract suggests that the estimated compensation agreed upon is appropriate to the damage caused to the non-defaulting party.