Mindy Chen-Wishart. Contract Law (2018 6 edn). p 568.

enter image description here

Kindly see the red underline.


Rather than saying "If you breach these terms by doing X you agree to pay damages/penalty of..." you can phrase it as "The fee for doing X is ...".

Para 2 of the quoted text gives a good example. The bank wanted to put a limit on overdrafts. The obvious way to do this would be to just write a contract term such as:

You agree that you will not exceed an overdraft of £1,000.

The trouble is that breach of contract is limited to the direct damages actually incurred. The bank could try something like this:

You agree that the damage to us of exceeding the overdraft limit is £50 per month.

However the Penalty Clause rule says that this is not allowed: the bank still needs to prove that it actually suffered £50-worth of damage.

To get around this the bank could phrase it like this:

We will provide you with an unlimited overdraft facility. This is free for the first £1,000. Any overdraft in excess of this limit and will be charged at the rate of £50 for every £1,000 or part thereof, for each month or part thereof.

This describes the £50 as a fee for a service rather than a penalty for breach of contract, so that is considered to be OK.

However you can't get away with just charging a huge penalty and calling it a fee. That is where it gets complicated.

In the UK this often comes up in private parking. The sign shown here is typical:

£80 if you fail to pay or [list of other restrictions] (a Charge Notice to pay will be issued) and you also agree that a wheelclamp may be applied which will be released on payment of £250 (in addition to the charge notice of £80).

The notice doesn't say that there is an £80 penalty, it says that there is an £80 fee.

| improve this answer | |
  • 1
    Liquidated damages do not have to be close to the actual damages to not be a penalty- they have to be a genuine pre-estimate of the likely damage that would be suffered. A particular breach may involve more or less (including zero) actual damages than the liquidated amount but if it isn’t a penalty the LD will be what is actually applied – Dale M May 12 '19 at 4:53

Not the answer you're looking for? Browse other questions tagged or ask your own question.