Dictionary

  • Penalty

    Money exacted by the state or by a private party as punishment for some breach of public law or private undertaking respectively. This meaning can be extended to cover any punishment, whether pecuniary or otherwise.

    A penalty clause is a contractual provision which seeks to penalise a party for breaching the contract by requiring them to pay an excessive amount when compared to the greatest estimated loss from that breach (not a genuine pre-estimate). As a rule, penalty clauses will not generally be enforceable.

    The High Court has said that a clause can be a penalty even where it is not triggered by breach, therefore widening the scope of what can be considered a penalty clause. Inferring from other High Court decisions, a clause will be a penalty clause:

    1. Where it enforces an additional detriment on a party where failure of a primary stipulation occurs
    2. Where it is used as security for the satisfaction of said primary stipulation
    3. Where compensation can be made for the failure of the primary stipulation

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