The 'penalty' clause in English law: a critical analysis and comparison with Jordanian law

This thesis discusses the penalty rule in English law. Pre-arranged provisions
concerning the estimation of due damages in event of the promisor' breach are of
considerable practical importance. When such provisions are enforceable they are
called liquidated damages clauses. However, English law courts will not enforce these
provisions where they are categorised as penalty clauses. A penalty clause is a
contractual provision which provides that in the event of a breach of contract the
de,faulting party shall pay to his contractual partner a sum which is unconscionable
and extravagant in relation to the loss that is likely to result from breach. Despite the
fact that the non-enforcement of penalties seemed to be well recognised at least by the
seventeenth century the penalty rule remains elusive and controversial. This thesis
tentatively suggests a New Approach which in some circumstances would involve a
different solution than the application of existing law. The thesis also builds upon a
comparison with Jordanian law.
This thesis has been divided into SIX chapters.' The first chapter examines the
historical development of penalty clauses and also introduces the New Approach. The
second chapter critically examines the existing test, i.e. the sum being extravagant and
unconscionable, for the invalidity of penalty clause. Chapter three considers the
principle that the penalty rule is only applicable on breach and the loss to be estimated for application of this rule. The general principle under English law, which gives a
court no power but to declare the invalidity of a penalty is dealt with in chapter four.
The circumstance where the injured party's actual loss exceeds the stipulated sum is
the object of examination in chapter five. Chapter six discusses whether the penalty
rule should be applied to a provision that requires a forfeiture of money already paid
taking into consideration that the only difference between a forfeiture clause and a
stipulated damages clause is that under a forfeiture clause the sum is paid before
breach. In the last part of this thesis a summary of the thesis including suggestions for
the improvement of the current law are put forward.