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The similar practice can also be found in motherlands of Chinese contract law, i.e. continental European countries, in particular Germany and France .
III. Penalty Clause in England
After a snapshot, penalty clause is dealt with differently in England. Under common law (as opposed to equity law), a liquidated damages clause will not be enforced if the purpose of the term is solely to punish a breach of contract (in this case a liquidated damages clause turns into a penal clause according to the definition abovementioned). Penalty clause is regarded as a challenge to the authority of the judge since it excludes the judge from determining the actual damages. Since damage is the only remedy for breach of contract under the common law, the common law court possibly would not like the folk to share its power. Therefore, traditionally liquidated damage was exceptionally accepted by the common law, even not to say penalty clause. However, this situation was changed by courts sitting in equity. An equity court will seek to achieve a fair result. Thus considering the advantage of reducing litigation cost of liquidated damages, an equity judge allows the enforcement of liquidated damages. However, the court will not enforce a term that will lead to the unjust enrichment of the enforcing party.
According to the famous judgment of case Dunlop, in order for a liquidated damages clause to be upheld two conditions must be met .
• First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.
• Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.
Accordingly we can see that it is still of difficulty to validate a liquidated damage clause in England. In addition, under common law tradition, when examining a stipulated sum of damage of a contract the court would presume that it is presumed as a penalty clause and then see whether it is extravagant, disproportionate or unreasonable or not. If so, it is void as a penalty clause and if not it is a valid liquidated damage provision. This presumption further increases the burden of proof by the defendant to justify a penalty clause. Therefore it is safe to conclude that a penalty clause is impossible to be enforced in common law countries (as opposed to civil law countries).
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