The Penalty Clause Bias

Publication Date01 March 2014
AuthorEmily Nordin
162 21 MJ 1 (2014)
E N*
Common law and civil law do not seem to agree on the function of punitive liquidated
damages. Whereas penalty clauses are seen as a way of enriching contract law in France
and the Netherlands, they are forbidden in the United States. Belgian law has its own
hybrid approach to penalty clause s.
i s article looks to the past, the present and the f uture role that penalty clauses (could)
play in American contract law, by comparing the American situation with that of France,
the Netherlands, Belgium , and the harmonization e orts in private law (such as the D ra
Common Frame of Reference). It promotes an understanding of the di erent visions in
common and civil law. While recognizing the risk s inherent to penalty clauses, the article
puts forward that these risks c an be better tackled by allowing a judge to reduce excessive
or abusive penalty clauses – a power judges already have when dealing with excessive
covenants not to compete, or when confronted with excessive punitive damages. It  nds
support for this statement in law and ec onomics, the nature of contract law and the theory
of punitive damages.
Keywords: enforcement; law and economics; liquidated damages; penalty clause;
punitive d amages
From a civil law perspective, one of the most pu zzling elements of American private law is
the possibility of awardi ng punitive damages to protect private interests.  is possibility
is referred to as ‘the American situation’. Famous cases like Liebeck v. McDonalds Rest1
and Philip Morris US A v. William s2 have astonished civil lawyers for whom punishment
* e author would like to than k Prof. Robert E. Scot t (Columbia Law School) and Prof. A. Van Oevelen
(University of Antwer p) for their helpful comments.
1 No. CV-93–02419, 1995 WL 360309 (C.D. N.M . Aug. 18, 1994), vacated 1994 WL 16777704.
2 127 S.Ct. 1057 (S.C. 2007).
e Penalty Clause Bias
21 MJ 1 (2014) 163
belongs to the  eld of criminal law and public law. From an American perspective this
statement might seem inconsistent. A er all do not the civ il law systems allow the par ties
to conclude penalty clauses and do penalty clauses not punish the promissor when he
breaches his contract?3 us private lit igants are punishing each other and according to
common law, this kind of ‘retribution should be le to criminal tribunals’.4
is paper’s main focus will be on explaining why the US generally restricts
punishment in contract cases, while the same cannot be said of civil law jurisdictions
such as France or the Netherlands. It will uncover the penalty clause bias that currently
exists. A comparison will be made between the general American approach and the
French, Dutch and Belgian approaches.
In part 1, I emphasize the f unctionality of pena lty clauses by comparing the ‘American
situation’ with the trad itional civil law one.  e di erence between a (void) penalty clause
and acc epted liqu idated dam ages, is t hat liquid ated damag es have to be pro portionate in
relation to the anticipated or actual harm caused. As this rst part will demonstrate,
the reasons why parties would insert a penalty clause are sometimes in con ict with
the vision of American contract law on liquidated damages.5 On the contrary, the civi l
law approach lets liquidated damages or penalty clauses  ourish and enrich contract
law.  ey respect the par ties’ intention and reasons for inserting the liqu idated damages
clause, while at the sa me time tackling the problem of exploitat ion and abuse.
Part 2 shows why the perception towards pena lty clauses evolved in such a di erent
way in the US from civil law jur isdictions. Di erent historic al experiences ca rved di erent
perceptions in the US on one side, and France, Belg ium and the Netherlands on the other
side.  e common law the ory on penalty clauses was developed in the 15th century w hen
contract law was still primitive. In that period of history, when exploitation and abuse
were clear dangers, the ca ll to prohibit penalty clauses was jus ti ed. In contra st, the Code
Napoléon, which is the or igin for the civil codes i n France, Belgium and the Netherla nds,6
originated during the French Revolution and was a response to aristocratic despotism.
Liberté, Fraternité and Egalité can therefore also be found in the civ il code of 1804, which
3 C.R. Cal leros, ‘Punitive Damages, Liqu idated Damages , and Clauses Péna le in Contract Actions: A
Comparative A nalysis of the A merican Common L aw and the French Civi l Law’, 32 Bro ok lyn Jou rn al .of
International Law 1 (2006), p.103.
4 Rattigan v. Commodore Intern. Ltd, 739 F. Supp. 167, 169 (S.D.N.Y. 1990) (arguing that ‘(a)lthough
freedom of contract is at the core of contrac t law, the freedom to contract does not embrace the
freedom to punish , even by contract’. J.S. Solorz ano, ‘An Uncertain Penalt y: A Look at the Intern ational
Community ’s Inability t o Harmonize the Law of Liquid ated Damage and Penalty Clau ses’, 15 Law &
Business Rev iew of the Americas 4 (20 09), p.783.
5 §2–718 (1) of t he Uniform Commercial C ode allows liquidated d amages, as long as thes e contractually
stipulated da mages are ‘reasonable in the l ight of the anticipated or ac tual harm caused by t he breach,
the di culties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaini ng an
adequate remedy. A term  xing unreasonably lar ge liquidated damages i s void as a penalty’.
6 It should be noted that t he Netherlands cha nged their code i n the 1990s and broug ht it more in line with
the German leg al tradition. Never theless, the orig in of their code is als o the Code Napoléon.

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