Penalty clause and contractual damages
The purpose of a penalty clause
A penalty clause (art. 160-163 CO) is a contractual provision under which a party undertakes to pay a set amount in the event of non-performance or defective performance of the contract. It in principle relieves the creditor of having to prove the existence and amount of actual loss: the agreed amount is owed by the mere fact of non-performance, unless otherwise agreed.
The court's power of reduction
Art. 163 para. 3 CO allows a court to reduce a contractual penalty it considers excessive, in particular where the amount set is manifestly disproportionate to the creditor's legitimate interest or to the loss actually suffered. This power protects the weaker party to a contract against abusive penalty clauses.
Penalty clause and actual damages
Unless otherwise agreed, the creditor cannot cumulate the contractual penalty with full compensation for actual loss beyond the amount of the penalty (art. 161 CO), unless they prove a loss greater than the agreed amount and the contract expressly allows it.
Frequently asked questions
Do I need to prove loss to obtain payment of a penalty clause?
In principle no: the agreed amount is owed by the mere fact of non-performance, without having to prove the existence or amount of actual loss, unless otherwise agreed (art. 161 para. 1 CO).
Can a court reduce a penalty clause that is too high?
Yes, art. 163 para. 3 CO allows a court to reduce a contractual penalty it considers excessive in light of the circumstances and the creditor's legitimate interest.
Can I claim more than the penalty clause amount if my actual loss is higher?
In principle no, unless the contract expressly provides for it or you prove a higher loss and the law or agreement allows you to claim it in addition to the penalty.