xr Trans-Lex.org Law Research Trans-Lex.org Law Research - Docid: 945000 -

No. VI.4 - Promise to pay in case of non-performance

When the contract contains a clause providing that a party who fails to perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual loss. If the amount is grossly excessive in relation to the loss resulting from non-performance, and the other circumstances, the specified sum may be reduced by an arbitral tribunal or court to a reasonable amount notwithstanding any agreements of the parties to the contrary.

1 The Principle covers a broad range of clauses which can be categorized as penalty clauses ("clause pénale"; "Vertragsstrafeversprechen") and liquidated damages clauses ("Schadenspauschalierung") under many domestic laws. Under common law, penalty clauses are considered invalid due to their in terrorem effect, intended to put pressure on the debtor as an incentive for timely performance. Some civil law systems, such as German law, contain provisions which invalidate penalty clauses when they are contained in standard terms.

2 In international business, these clauses are extremely often used because time is of the essence for the seller or the ordering party who has resold the goods before he has received them from his seller or is under some other type of time pressure which makes timely performance essential. For that reason, these types of clauses are not regared as invalid per se in transnational law.

3 In line with the very purpose of such clauses, the agreed sum is forfeited, irrespective of the actual loss suffered by the aggrieved party. This means that the non-performing party cannot escape its obligation to pay the agreed sum by arguing that the aggrieved party has sustained a smaller loss than the sum agreed upon in the clause or no loss at all.

4 If, however, the agreed sum is grossly, i.e. clearly and obviously, excessive in relation to the loss caused by the non-performance and also in relation to the other circumstances of the case, the non-performing party may apply to the court or arbitral tribunal to have the sum reduced to a reasonable amount, even if the parties have excluded that right by agreement. In determining whether the sum is grossly excessive, the court or arbitral tribunal necessarily enjoys a certain degree of discretion. The power of the court or arbitral tribunal is limited to a "reduction" of the sum, which excludes both a total elimination (a "reduction to 0") and an increase of the agreed sum.

Please cite as: "Commentary to Trans-Lex Principle , http://www.trans-lex.org/945000"
Court Decisions
Elsey v. J.G. Collins Insurance Agencies Ltd. (1978) 83 D.L.R. (3d.), at 1
Philips Hong Kong Ltd. v. Att. Gen. of Hong Kong 61 Build L. R. (1993), at 49
Beale, H. G.; Chitty, Joseph et al., Chitty on Contracts, Vol. 1, London 2004.
Drobnig, Ulrich, General Principles of European Contract Law, in: Volken/ Sarcevic (eds.), International Sale of Goods - Dubrovnik Lectures, New York, London, Rome 1986, at 305 et seq.
Esser, Josef, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts, 4th ed., Tübingen 1990
Fontaine, Marcel, Les Clauses Pénales dans les Contrats Internationaux, DPCI 1982, at 401 et seq.
Fouchard Gaillard Goldman on International Commercial Arbitration (edited by Emmanuel Gaillard and John Savage) The Hague 1999
Knütel, Rolf, Rechtseinheit in Europa und römisches Recht, 3 ZEuP 1994, at 244 et seq.
Löffler, Reinhard, Vertragsstrafe und pauschalierter Schadensersatz im anglo-kanadischen Common Law und dem Recht der Provinz Quebec, Pfaffenweiler 1986
Marrella, Fabrizio, La nuova lex mercatoria, Principi Unidroit ed usi di contratti des comercio internazionale, CEDAM, Tratto di dritto commerciale e di dritto publico dell‘economia, Volume 30, Padova 2003
Michaelis de Vasconcellos, Harald, Garantieklauseln und Risikoverteilung im internationalen Anlagenvertrag, 1st ed., Heidelberg 1988
Ripert, Georges, Les Règles du Droit Civil Applicables aux Rapports Internationaux (Contribution à l'Etude des Principes Généraux du Droit Visés au Statut de la Cour Permanente de Justice Internationale), 44 Rec.Cours 1933-II, at 569 et seq.
Schelhaas, H. N., Het Boetebeding In Het Europese Contractenrecht (met een samenvatting in het Engels) / The Penalty Clause in European Contract Law (with a summary in English), Utrecht 2004.
Sossna, Ralf-Peter, Die Geschichte der Begrenzungen von Vertragsstrafen, Berlin 1993
Tallon, Denis, Damages, Exemption Clauses, and Penalties, 40 Am.J.Comp.L. 1992, at 675 et seq.
Zimmermann, Reinhard, The Law of Obligations. Roman Foundations of the Civilian Tradition, Munich Cape Town 1990
CISG Advisory Council Opinion No. 10: Agreed Sums Payable upon Breach of an Obligation in CISG Contracts
Résolution du Comité des Ministres du Conseil de l‘Europe relative aux clauses pénales en droit civil, Unif.L.Rev. 1978 II, at 223 et seq.
Model Laws
Uniform Commercial Code (USA)
Model Terms
UNCITRAL Uniform Rules on Contract Clauses for an Agreed Sum due Upon Failure of Performance, 1986
National Legislation
Civil Code Québec
Contract Law of the People's Republic of China
Czechoslovak International Trade Code
French Code Civil
Italian Codice Civile
Russian Civil Code
South-African "Conventional Penalties Act" of 1962 (Wet No. 15 of 1962)
Principles / Restatements
Principles of European Contract Law - PECL
The Most Recent Legal Principles Adopted by the Arbitral Tribunals under the Auspices of the Cairo Centre, CRCICA-Newsletter, Jan. 1997, page 2 et seq.
UNIDROIT Principles of International Commercial Contracts
Contract Clauses
1. Liquidated Damages for Non-Performance
Sales & Purchase Contract
Liquidated Damages
The maximum total liquidated damages shall be limited to {X} percent of the value of the undelivered items. Seller shall not be liable for liquidated damages or price reductions for failure to meet contractual delivery dates resulting from Force Majeure or Excusable Delays as defined in the pertinent provision of this contract - (International Contracting: Law and Practice - Larry A. DiMatteo - §2.05 B - S. 27).
Claims, Pre-Estimated Damages
If the Seller fails to deliver in any Calendar Month the whole or any part of the respective Monthly Quantity of {X} (...) by the {X} day of the Calendar Month following the Calendar Month to which such Monthly Quantity applies (...) it shall pay to the Buyer USD {X} for each non-delivered US net barrel. The Parties agree that any such payment constitutes a genuine core-estimate of loss solely in respect of the non-delivery of each US net barrel and is made by the Seller in full and final settlement of any losses, expenses, costs or damages suffered or incurred by the Buyer as a result of such non-delivery as between the Buyer and the Seller.
Failure to Perform
If either Party fails on any Day to Schedule and receive or deliver the Contract Quantity, as provided in Section X, that Party shall be liable for, and shall pay the other party, the following damages (...) If the quantity Buyer/Seller receives and purchases on any Day is less than the applicable Contract Quantity and the Sales Price/Replacement Price is less/greater than the Contract Price, then Buyer/Seller shall be liable for and shall pay to Seller/Buyer a dollar amount equal to the product of (i) the difference between the Contract Price/Replacement Price and the Sales Price/Contract Price, and: (ii) Buyer's/Seller's Deficiency Quantity. In addition, Buyer/Seller shall pay Seller/Buyer an amount equal to ten percent (10%) of the amount calculated pursuant to the first sentence of this subsection X to cover Seller's/Buyer's administrative and operational costs and expenses.
Liquidated Damages
Notwithstanding anything to the contrary contained in this agreement, if the sale of the property to Buyer is not consummated as a result of Buyer's default under this agreement after the satisfaction of all conditions to Buyer's obligations under this agreement and that default is not cured within two (2) business days after notice from Seller, Seller shall be entitled to retain the deposit as Seller's liquidated damages as its sole remedy (...) The parties agree that it would be impracticable and extremely difficult to ascertain the actual damages suffered by Seller as a result of Buyer's failure to complete the purchase of the property pursuant to this agreement, and that under the circumstances existing as of the effective date, the liquidated damages provided for in this section represents a reasonable estimate of the damages which Seller will incure as a result of such failure (...)
Conformity of the Goods
If the Seller fails to meet the above mentioned requirements the Buyer shall be entitled to claim liquidated damages at an amount of E {X}. Further claims like external cost, charges and fines etc. are not exclude.
Rights to rescind
(...) In the event that the Condition Precedent set forth above (...) is not fulfilled by the date which is {X} then the Purchaser shall pay interest on the Purchase Price at the rate of 12% per annum; and the date which is {Y} then the interest rate applied (...) above shall increase to 15% per annum; the date which is {Z} then the Purchaser shall pay the Sellers a lump sum for non-performance equivalent to the Purchase Price (...)
Buyer's Default
If Seller is not in default of Seller's representations, warranties and covenants under this Agreement and is ready, willing and able to convey the Property in accordance with this Agreement, and Buyer fails to consummate this Agreement and take title, then the parties hereto recognize and agree that the damages that Seller will sustain as a result thereof will be substantial, but difficult if not impossible to ascertain and Seller shall, as its sole remedy, be entitled to retain the Deposit as liquidated damages, and not as a penalty and neither party shall have any further rights or obligations with respect to the other under this Agreement, except for the those which are expressly stated to survive termination of this Agreement. Buyer agrees not to interpose any defense or otherwise seek to interfere with Seller's retention and ownership of the Deposit.
Price and Payment Terms
If Buyer incurs default with regard to additional amounts payable in 2011 and/or 2012, or with regard to the amount payable within 30 (thirty) days after Closing, default shall be automatic and penalty interest shall be added equal to LIBOR + 5pp per year, which shall be calculated from the date on which such amount is due and until actual payment (...)
Inexcusable Delay
Should an Aircraft not be Ready for Delivery within {X} days after the last day of the Scheduled Delivery Month (the Delivery Period) and such delay is not as a result of an Excusable Delay or Total Loss, then such delay will be termed an Inexcusable Delay. In the event of an Inexcusable Delay, the Buyer will have the right to claim, and the Seller will pay the Buyer liquidated damages of {X}. In no event will the amount of liquidated damages exceed the total of {X} in respect of any one Aircraft. The Buyer's right to liquidated damages in respect of an Aircraft is conditioned on the Buyer's submitting a written claim for liquidated damages to the Seller not later than {X} days after the last day of the Scheduled Delivery Month.
Services Contract
Validity Period and Breach of Agreement
From {X}, 20XX to {X}, 20XX, Party B must ensure that it pays $ {X} annually to Party A as the bottom-line of advertising agency fee; if the annual advertising sales totals exceed $ {X}, the exceeding portion is to be allocated at the ratio of 3:7 between Party A and Party B. The payment for the allocated exceeding portion from each calendar year is to be made on the fifteenth business day of the following year.
Construction & O&M Contract
Engineering, Procurement and Construction Contract
(...) Additionally, X will be liable for liquidated damages for the failure to meet various performance guarantees which may be satisfied either on a Unit (...): Net Deliverable Capacity/per Unit; Heat Rate/per Unit (...) liquidated damages for any of the above items (...) are individually capped at 30% of the total contract price (...)
Liquidated Damages for Performance
If (...) the Works do not fulfil the performance undertaking or guarantee specified in the Contract, then the Purchaser shall be entitled to such liquidated damages for performance (...) Such liquidated damages shall be to the exclusion of all other remedies for such lack of performance. The total amount of liquidated damages for performance shall, unless otherwise specified in the Contract, not exceed {X} percent of the Contract Price.
Loan Contract
Financing Fee
Subject to Section X, if an Alternative Financing Event shall occur prior to the Senior Secured Convertible Notes Issuance Date, the Borrower shall on the Mandatory Prepayment Date pay to the Lender as liquidated damages and compensation for the costs of being prepared to make funds available hereunder and in respect of the Senior Secured Convertible Notes an amount equal to the excess of ${X} over the amount (if any) previously paid by the Borrower pursuant to Section X of the Securities Purchase Agreement (the "Financing Fee"). The Borrower, the other Loan Parties and the Lender agree that such amount is a reasonable calculation of the Lender's lost profits under this Agreement and in respect of the Senior Secured Convertible Notes in view of the difficulties and impracticality of determining actual damages based on a failure to consummate the transactions contemplated by this Agreement and the Securities Purchase Agreement.
Asset Transfer Agreement
Liabilities for Breach
The Seller and Management Shareholder, in case fail to perform covenants in Article X, shall pay RMB {X} as liquidated damages to the Purchase. If such liquidated damages is insufficient for repairing losses occurs to the Purchaser, the Seller and Management Shareholder shall be jointly liable for the insufficient indemnification.
Lease Contract
It is agreed that Party A provisionally decides to provide the plan view of the Premises and the structure thereof to Party B for renovation on or before {Date}, and shall provide the certificate of recordation of fire-fighting facility acceptance to Party B within one and half a month after the completion of the modification of the principal structure of the renovation. If the Premises can not be delivered on time due to non-completion of the Premises, Party A shall pay to Party B the liquidated damages at 0.5% of the monthly rent for each delayed day.
Rent; Terms of Payment
The rent shall be paid in advance. Therefore, Party B shall pay the rent of the first month (i.e. from August 1, 2009 to August 31, 2009) on or before July 1, 2009, and shall pay the rent of the subsequent months on or before the 25th day of each month (for example, the rent for the month as from September 1, 2009 to September 30, 2009 shall be paid on or before August 25, 2009), and Party A shall issue a corresponding invoice to Party B within three days upon receipt of the payment. If Party B defaults any due and payable rent, it shall pay to Party A the liquidated damages at 0.5% of monthly rent for each delayed day.
Liabilities for Breach of Agreement
If Party B can not use the Premises and materials provided by Party A to complete the necessary registration with the administration for industry and commerce, Party A shall stop collecting the rent and assist Party B in completing the registration within two months. If the registration still can not be completed within the prescribed time period, Party B may terminate this Contract and Party A shall pay to Party B the liquidated damages equal to three months' rent, unless the failure in registration is caused by any reason of Party B.
Liabilities for Breach of Agreement
Unless it is otherwise stipulated herein, neither Party may terminate or cancel this Contract during the lease term. If either Party has to terminate this Contract, it shall give a written notice to the other Party at least three months in advance and the breaching party shall pay to the non-breaching party the liquidated damages equal to three months' rent in that year. If either Party violates this Contract, it shall pay to the other Party the liquidated damages equal to three months' rent, unless it is otherwise stipulated in this Contract.
2. Liquidated Damages for Delay
Sales & Purchase Contract
Liabilities of Breach
Should the Buyer fail to make payment within {X} days of delivery date, the Buyer shall pay to the Seller a default penalty of 0,05% of the late payment per day, until the Buyer has fulfilled its payment obligations.
Im Fall des Verzugs gewährt das Konsortium eine Verzugsentschädigung für nachgewiesene Verzugsschäden von max. 0,5% des Netto-Rechnungsbetrags der Gesamtanlage pro Woche vollendeten Verzugs max. jedoch 5% des Netto-Rechnungsbetrages der Gesamtanlage. Weitergehende Ansprüche aus Verzug sind ausgeschlossen.
Liabilities for Breach of Contract
If the payment of goods is delayed due to reasons of the Seller, X% of the good price shall be paid as breach penalty by the Buyer to the Seller for dealy of one day. If the Buyer delays to pay for goods for {X} days (...) the Seller has the right to (...) require the Buyer to pay X% of the goods price as penalty fee, which does not exert any influence on other rights of the Seller.

If Party B delays in paying any of the installments above, penalty on any delayed installment(s) shall be calculated from the day after the due date of such installment and shall continue to be payable by Party B until such time as the delayed installment is paid. The penalty payable shall be calculated from day to day at the daily rate of 0.05%.

Prior to the relevant government authorities grant to Party B the land use right certificate and the building ownership certificate, if Party B delays the payment of any installment(s) for X days after the due date of such installment (including Saturdays, Sundays and Public Holidays), Party A shall be entitled to (...) charge from Party B 4% of the Purchase Price as a lump sum compensation, or charge all penalties calculated in accordance with Article X (...)
Services Contract
Liability for Breach of Contract
In case of Party's A overdue delivery or Party's B overdue payment, the defaulting party shall pay the other party the penalty of X of the overdue product value or payment for each delayed day.
Construction & O&M Contract
Liquidated Damages and Bonuses (PP-EPC Contract)
(...) If, after the Schedule Completion Date of a Unit, X has satisfied all the requirements for such Unit's Substantial Completion (...) but has failed to meet the performance guaranties, X may either pay the performance liquidated damages or continue to try to meet the performance guaranties through remedial measures (...) the maximum liability of X for all events and damages will not exceed an amount equal to one hundred percent (100%) of the Contract Price, excluding damages resulting from X's gross negligence, willful misconduct or indemnification obligations (...)
Power Purchase Agreement
If any unit has not achieved commercial operation by the required date dor such Unit (...) and such delay is not the result of an event of force majeure or fault of X or the State, the Company will be liable to X for delay liquidated damages equal to US$ {X} (day per Unit), up to a maximum aggregate amount of US$ {X}.
Engineering, Procurement and Construction Contract
(...) If a substantial completion of a Unit is not achieved by the required date, then X will be obligated to pay US$ {X}/day for such Unit in delay damages, up to a amount of {X}% of the total contract price.
Delay in Completion of the Works
If Contractor fails to Complete the Works within the Time as specified in Chronogram, Purchaser shall have the right to recover liquidated damages from the Contractor promptly, at the amount of 0,5% of the Contract Price for each and every week of delay on scheduled completion of delivery after {X} week grace period (...) The total amount of liquidated damages for the delay in completion shall not in any case exceed 10% of the Contract Price. The payment or deduction of the liquidated damages shall not relieve the Contractor from his obligation to complete the Works or from any other of his obligations and liabilities under the Contract.
Liquidated Damages for Delay
If taking over of the Works occurs later than at the agreed time for completion (...) then the Purchaser shall be entitled to liquidated damages (...) Such liquidated damages shall be to the exclusion of all other remedies for delay. Unless otherwise specified in the Contract, the liquidated damages shall be payable at a rate of 0.5 percent of the Contract Price for each complete week of delay and the total amount of liquidated damages for delay shall not exceed 7.5 percent of the Contract Price (...)
Asset Transfer Agreement
Liabilities for Breach
In the case that the Purchaser fails to pay consideration within agreed period herein and does not provide remedy within 15 days after receiving written notice from the other party, shall pay overdue liquidated damages to the Seller. The liquidated damage shall be one-hundredth of a percent of the amount payable in the payment period per day.
3. Due Date
Construction & O&M Contract
Due Date for Liquidated Damages
Liquidated damages for delay (...) shall become due at the Purchaser's demand, but not before the Works have been taken over or the Contract has been terminated (...). Liquidated damages for performance (...) shall become due at the Purchaser's demand, but not before the deviation for performance has been ascertained, or the Contractor has declared that he will not remedy the deviation (...) the Purchaser shall lose his right to liquidated damages if he has not made a claim for such damages within {X} months (...)
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