The contractual penalty as a big stick

It regularly happens that contracts contain a penalty clause. The purpose of a penalty clause is often twofold: on the one hand, an (additional) incentive...

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It regularly happens that contracts contain a penalty clause. The purpose of a penalty clause is often twofold: on the one hand, an (additional) incentive to perform and, on the other, a way to fix in advance the extent of the damage suffered by the creditor if the debtor does not fulfil his obligations. In this article, you will read what the points of attention are when agreeing a penalty clause and what possibilities the court has to mitigate penalties.

Starting point: freedom of contract

The starting point is that parties have freedom of contract. They are therefore allowed to make their own agreements on (the amount of) a penalty that the debtor has to pay if he defaults on his obligations. A good example is the penalty of 10% of the purchase price included in the standard NVM purchase agreement for houses. Among other things, the buyer owes this penalty if he does not take delivery of the house or does not take delivery on time. But when it finally comes down to it, the debtor will often not pay the agreed penalty without a fight. Usually because the fine owed is perceived as excessive by the debtor. In that case, what are his options?

Judge’s power to mitigate

The law provides that the court may mitigate the fine on the debtor’s claim ‘if fairness clearly demands it’. The Supreme Court, our highest court, has ruled that this statutory basis for mitigation should be applied with restraint. Only if the application of a penalty clause in a concrete case leads to an excessive and therefore unacceptable result may the court use its power of mitigation (HR 27 April 2007, ECLI:NL:HR:2007:AZ6638).

Case law shows that the following circumstances play a role in whether mitigation is at issue:

  1. Was the size of the fine negotiated?
  2. Which party drafted the fine provision?
  3. Was the fine set for one specific offence?
  4. What is the relationship between the fine and the creditor’s damages?
  5. What is the relationship between the fine and the importance of the performance on which it is set?
  6. What is the extent of the breach that gave rise to the fine?
  7. What is the relationship between the parties?

Incidentally, the mitigation power is not unlimited. At a minimum, the creditor is entitled to compensation for the actual damage suffered. Therefore, the court may not mitigate the penalty to a lower amount than the creditor is entitled to under the law.

The penalty clause in the consumer relationship

When contracting with consumers, extra vigilance is required. This is because consumers receive special protection under the law. The stipulation of a fine with a consumer, for example in general terms and conditions, quickly results in an ‘unreasonably onerous clause’ that is voidable. If the consumer then successfully nullifies the penalty clause, the creditor is left empty-handed. The penalty clause then did not in fact exist, so the consumer did not owe the penalty either.

Points of attention when drafting a penalty clause

When agreeing a contractual penalty, it is therefore essential that the agreement is properly written down, otherwise, as a creditor, you will miss the boat. But it is also wise to stipulate that if the actual damage exceeds the penalty amount, the debtor must compensate the actual damage. Moreover, in order to avoid mitigation, it is advisable to determine a separate penalty amount per obligation and adjust the amount of the penalty amount to the value of the performance the debtor has to perform.

Wille Donker advocaten would therefore be happy to help you draw up a penalty clause that (legally) stands up