Penalty Clauses in Commercial Contracts

Abstract

This article analyses and compares the rules applying to contractual penalties in Austria, Germany, France, Italy and England, as well es under the UNIDROIT Principles on International Commercial Contracts, PICC and the Principles of European Contract Law, PECL. Also, the different approaches found in these legal systems are scrutinised with regards to their practical implications for contracting parties. More specifically, some civil law regimes unduly restrict the signalling function of contractual penalties. This is quite surprising in B2B contracts and while this aims at protecting a contracting party from promising a large penalty, it also restricts the use of one of the cheapest marketing instruments available to a contracting party.

Keywords: Contractual penalty, liquidated damages, signalling function, freedom of contract, damages, pacta sunt servanda, Cavendish Square Holding BV v. Talal El Makdessi, ParkingEye Ltd v. Beavis