I (The Contractor) have a Services Contract with a company (The Company).

Working together more than 2 years, in a very non traditional, hard to replace service, now they are restructuring their society, from their corporate logos to their formal Contract Agreements.

After the proper format change of the standard document we deliver to them (which I will probably charge to them due to the change), now I have their new Contract Agreement Template, which is filled with "Penalty Fees" for a number of different reasons, in different scales between the possible and the expensive, of course the less possible, less expensive being the easier, understandable, and the more possible, more expensive being the hardest, financially unsustainable.

We never failed to deliver our services, and our price is very low, even considering the non traditional nature of our services, hence this is not a reaction for a bad performance from our side, but simply their lawyer applying their template to each of their Contractors.

Of course, a fee increase of my services would be seen as a dealbreak for my company, and the agreement as-is is a dealbreak for me.

Now, each time I read this new "agreement", I am facing these choices:

  • Should I keep the agreement as untouched as possible, adding little "pressure relief" phrases, like "only if the Contractor has direct responsibility for the described events", in order to nullify the Penalty Fee Clauses, but keeping open the hardest Penalty Fees?
  • Should I keep the agreement as untouched as possible, increasing the currently very low prices, with significatively higher (at least 2X) but updated prices, in order to absorb the eventuality of the Penalty Fees, and keeping them all?. This will be a dealbreak for them, as an antecedent of rising our prices, which we have never done and we don't expect to do.
  • Should I change the agreement, eliminating the Penalty Clauses completely?. This would be seen as a soft non compliance with their templates.
  • Should I made a Price List for every situation dealing with Penalties, in order to reflect the Company all them has a cost, which should be eventually paid to us in these situations?. This would be seen as an additional complication, forcing us to work a lot for preparing and defining a not expected, nor requested Price List.

Do you have a link document or article should I see for a kind of advice?

  • 1
    What jurisdiction is this under. Penalties are illegal in most jurisdictions – Dale M Oct 16 '19 at 3:42
  • Hello! Welcome to Law.SE. Please read our tour page. You can see the link at the bottom of the page. – isakbob Oct 23 '19 at 1:56

Only you can determine how much you are willing to sacrifice in order to preserve that business relationship. Without knowing more context of your business with that entity, there is little-to-no guidance one can offer on the basis of contract law.

On the one hand you mention that your field is very non-traditional. On the other hand your dilemmas project your idea that your labor is rather replaceable, and that thus you are thinking hard on how to best accommodate the client's new stance for fear of losing that business. But those dilemmas have more to do with negotiation/bargaining than with contract law.

Do you have a link document or article should I see for a kind of advice?

The Restatement (Second) of Contracts is a frequently resource cited by US courts when deciding contract disputes. Furthermore, contract law in many other countries is essentially similar to that in US jurisdictions, no matter how some "purists" try to emphasize --for instance-- that UK contract law does not involve the covenant of good faith and fair dealing whereas the US counterpart does.

You might also be interested in other Law SE questions pertaining to contract law. I myself have run into (and answered) various interesting, thought-provoking questions that users present regarding contract issues. What makes them thought-provoking is that they are about real-life scenarios that are more varied than what can be expected from lessons or textbooks on the matter.

Knowledge of contract law will be very useful for the situation you are currently dealing with as well as for many others you will experience. That knowledge helps us analyze situations that arise in business, whether we are the provider/professional or the customer.

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  • The Restatement (Second) of Contracts is available here, now that the law firm from the link in this answer removed that resource and posted some useless "overview of contract law" instead. – Iñaki Viggers Jan 3 at 15:06

Penalties are unenforceable in a contract

What is a Penalty?

A penalty is a clause that sets a harsh monetary punishment for the breach of a contract term, or failure to uphold contractual obligations. At first view, this type of clause may appear attractive to those who wish to ensure that the other party performs its obligations.

However, if the amount of money requested is greater than, or disproportionate to, the damage or loss that you actually suffer, there is the risk that this clause would be considered a penalty.

That said, you don't really want to have to go to court to get your money so you should explain this to the other party and get the clauses removed or reduced so that they are liquidated damages - a genuine pre-estimate of the damage your failure will cause the other party.

Once you have done this, you can price the risk appropriately.

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