Are penalty clause enforceable under the law ?
Ajay Kumar (Administration) 16 September 2011
Yes penalty clauses are very much enforceable under law.
RK MEHTA (DEPUTY GENERAL MANAGER - LEGAL) 16 September 2011
sanjay kumar (BE/ LLM in Corporate Laws) 12 December 2011
Penaty is a kind of Fine. And a fine is imposed wherever somebody breaks the law or an agreement clause. That way, if a penalty clause in incorporated in the agreement, it is enforceable provided the penalty is also indicated. It cannot be arbitrary. Further, penalities are to be event-specific like delay in supplies, delay in compeltion of work etc. It cannot be general in nature.
Liquidated Damages are a better option in commercial contracts because it is presumed that breach of any clause of contract , there will be a loss to the customer, irresepctive of the fact whether that 'loss" is quantifiable in terms of money or not. The LDs are much easier to impose than penalties.