Contract law/ penalty clauses

[Astaroth]

I have tried googling but it isnt coming up with anything from any reliable sources so I thought I would ask the experts.

With all the media and online coverage over contract law and penalty clauses it has kind of got me wondering (eg banking charges and the wembly stadium) about this area of law in a little more detail.

When does a "fee" for a specific trigger become a penalty and not just a "handling fee" (so in the example of banks the fee for doing a balance transfer isnt being contested but the fee for an unauthorised overdraft is)

Many contracts I have had contains a clause of compensation for specific events (eg £50 a day when I had an extention built). How is it determined when a clause such as this goes from being acceptable to an unenforcable penalty clause?

When we are in a free market and people/ companies voluntarily agree a contract why is there a restriction on penalty clauses? I understand why the courts cant award punative damages for breach of contract but it seems different to me when it is stated in the contract and signed by both parties to when it isnt and a judge has to decide the amount to award.

 

[Antonia @limeone.com]

I could write a few hundred pages on this and then some, and it would bore you to death but as at 2006 the test is 2 fold:

1. Is this a penalty clause?

2. Is this liquidated damages?

Those are the 2 tests. The penalty will be punitive and be an amount bearing little or no resemblence to the damage done ie just a frightener to the other party. A liquidated damages clause will be proportional to the loss and generally be linked to some measure of true loss ie hire of personal, wage bills etc.

 

[Astaroth]

How would you differentiate between a penalty and a fee though?

Going back the the banking example. You get charged £25 for writting a cheque your bank honours when you have insufficient funds to cover it. Is this a service fee for the "emergency overdraft" or is this a penalty clause for exceeding your agreed borrowing?

 

[The Resolver]

Taking Wembley Stadium,as the example you quote of a major public works project with disputed penalty clauses, the reason for the disputes is that Multiplex will argue that delays were caused by the fault of other contractors or on the client. Companies like Multiplex who gain huge numbers of contracts through bidding too low for the risks are the darlings of construction lawyers.

Maybe Multiplex would make more in the long run by claiming a fee for every disputed penalty on the field.


The other factor here is that if the customer is buying the service other than for the purpose fo his trade,business or profesison then he has the benefit of the Unfair terms in Consumer Contracts Regulations 1999. If it was a standard term that he could not negotiate then if it is also 'unfair 'such as penalty clauses can be then it may be unenforceable.This would apply to bank penalties to non business customers and small builders clauses in relation to house repairs.

What is 'unfair'.The regulations define a clause as unfair if:-

"contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer."

To answer the question it doesn't really matter whether it is termed a 'fee'or a 'penalty'. If its a consumer contract then the issue is whether it is unfair. Its harder to make a term for a fixed fee , agreed to by the customer, invalid but penalty clauses are easier to challenge both from the point of view of their impact in financial terms and of course one can always challenge even in non-consumer contracts, whether as a fact the events have occured to justify the penalty.

The Banks are VERY negotiable over these issues. Its a sensitive issue since a bad ruling will impact over all their business and bring them up on the regulators radar. If anyone is upset at bank charges then challenge.If the amount is a significant figure, offer mediation. They will deal.