Another Piece of the Puzzle: Are Penalty Clauses Unenforceable or Void?

Shouyu Chong

September 2021

A commended entry in the Hudson Prize 2020

This paper looks at the rather complex puzzle of liquidated damages and penalties in contracts, and in particular the rule against penalty clauses. It questions whether liquidated damages clauses, when caught by the rule against penalties, should be both unenforceable in court and also treated as invalid or void. The paper examines how the enforcement of liquidated damages clauses is closely related to the enforcement of dispute resolution provisions, and argues that treating the penalty clause as unenforceable is the most appropriate relief. Finally, the paper explains how the rendering of penalty clauses as void could open the floodgates to litigation. 
I. Introduction – II. Unenforceable or void, and why does it matter? – III. The authorities – IV. Why should penalty clauses be treated as unenforceable? – A.  A matter of procedural dispute – B. Framing liquidated damages clauses as dispute resolution provisions – C. The importance of party autonomy in procedural disputes – D. Adverse downstream effects – V. Conclusions 

The author: Shouyu Chong is a Visiting Lecturer and PhD Research Student at the Centre of Construction Law & Dispute Resolution, Kings College London, and SCL Frances Paterson Scholar.

Text: 11 pages