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Penalty clauses proposals put out to consultation

9 July 2010

A new Scottish Government consultation proposes to take forward a report by the Scottish Law Commission on penalty clauses in contracts published in 1999.

Penalty clauses in contracts commonly provide for payment of a stated sum in the event of a breach of contract, or provide a formula by which such a sum is to be calculated. At present, some penalty clauses are enforceable on breach on contract, whilst others are not, depending on how they are drafted. Similarly, the court can strike down some "oppressive and unreasonable" clauses, but not others, again depending on the form of the penalty clause.

The Commission's proposals aim to bring clarity and certainty to this area of contract law, rather than make any radical departure from existing policy.

The draft bill to take forward the Commission's proposals would make penalty clauses unenforceable if the penalty provided for is manifestly excessive, and gives the court powers to modify any penalty clause it considers manifestly excessive in order to make the clause enforceable. The Government's view is that although the concerns addressed are minor and technical, there would be benefits from increased legal clarity and transparency over the interpretation and enforcement of contracts.

Click here to access the consultation. The consultation runs until 8 September.

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