Penalty Clause

The penalty clause is an agreement between the two parties to the contract on the compensation due for the investigation of the violation. It has binding force and is a non-conclusive legal presumption on the occurrence of the damage. Proving that the damage did not occur is the responsibility of the debtor, or proof of an overestimation of the appropriate compensation for him.

The Kuwaiti legislator stipulated in Articles Nos. 302, 303 and 304 of the Civil Code that it is permissible to agree in advance to determine the amount of the contractual compensation when one of the contracting parties breaches his commitment, and also clarified the authority of the trial court in implementing the penal clause.

It is permissible to agree on determining the amount of compensation in advance

Article 302 of the Kuwaiti Civil Code permits the contracting parties to estimate in advance in the contract or in a subsequent agreement the amount of compensation that the debtor is finally bound by when he breaches his obligations in order to compensate for the damage incurred to the creditor, whatever the form, if the subject of the obligation is not a sum of money.

The Authority of the Trial Court to Enforce the Penalty Clause

First: The authority of the trial court to reduce the agreed compensation

Article 303 of the Kuwaiti Civil Code states that the existence of the penalty clause presumes that the assessment of compensation is proportional to the damage suffered by the creditor. The judge must fulfill this condition unless the debtor proves that the creditor did not suffer any harm, in which case the consensual compensation is not originally due.

In the event that the debtor proves that the compensation was greatly exaggerated, or that the obligation was partially implemented. Then the judge may reduce the agreed compensation to the extent commensurate with the amount of the real damage suffered by the creditor, which is within the authority of the trial court, and any agreement to the contrary is void.

Second: The authority of the trial court to increase the agreed compensation

The legislator stipulated in Article 304 of the Kuwaiti Civil Code that if the damage exceeds the value of the agreed compensation, the creditor may not claim more than this value unless he proves that the debtor has committed fraud or a serious mistake, and has settled in the courts of the Kuwaiti Court of Cassation that the judge may not increase the consensual compensation even if it is proven that the value of the damage incurred by the creditor exceeds the value of the penalty clause unless the creditor proves that the debtor’s failure to pay is due to his fraud or gross negligence.

Agreeing to compensate in advance includes an agreement to release liability

The explanatory memorandum of the Kuwaiti Civil Law clarified that the agreement to estimate compensation in advance includes an agreement to exempt from liability for damage that exceeds the agreed compensation. But if he proves that the estimate was so exaggerated that it becomes a threatening condition only, or that he fulfilled his original obligation in part, the judge may reduce the value of the penal condition, which is not in itself a source of the obligation of this compensation, but rather to deserve the conditional penalty from the fulfillment of the conditions that must be met to award compensation. The point of the matter is that the stipulation of this condition is based on a non-conclusive legal presumption on the occurrence of the damage and does not require the creditor to prove it, but rather the debtor has to prove that it did not occur.

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