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 If the contract was rescinded or terminated, it is not permissible to execute the penalty clause.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.