A penalty clause is a contractual provision requiring the debtor to pay a sum of money, or render another performance, on breach. It serves two functions at once: pressing for performance and making compensation predictable in advance.
Legal basis
Section 6.1.9.4 of the Dutch Civil Code governs the clause. Article 6:91 gives the definition. Article 6:92 provides that the penalty replaces statutory damages unless otherwise agreed, and that performance and penalty cannot simply be claimed side by side. Article 6:93 requires the debtor to be in default before the penalty falls due, unless the penalty relates precisely to performance at a fixed time. Article 6:94 allows the court to reduce a penalty where fairness manifestly so requires; the Supreme Court emphasised in Intrahof/Bart Smit in 2007 that this power must be exercised with restraint.
How it works in practice
Penalty clauses are common in non-compete and confidentiality provisions, in contracts for the sale of real estate and in construction contracts. A workable clause makes four things explicit: what the penalty covers, whether it is per breach or per day, whether there is a cap, and whether actual loss can also be claimed. Cumulation with damages requires an express provision.
Where it goes wrong
The clause states only an amount without addressing notice of default, and the penalty turns out not to be due. A second error is a daily penalty without a ceiling, which climbs in a short time to a figure the court reduces. In consumer relationships a disproportionately high penalty may also be annulled as an unfair term.
Related terms
The clause connects to default, damages and the general terms and conditions in which it usually appears.
Are you being pursued for a penalty? Our civil law specialists assess whether it is due and whether it can be reduced.
