Quick answer

An obligation with a penal clause is one that carries an accessory undertaking (the penal clause or penalty) by which the parties agree in advance on the consequence, usually a sum of money, that the debtor must bear in case of breach, non-performance, or delay. The penal clause serves two main functions: a coercive or guarantee function, to ensure the performance of the obligation by holding over the debtor the threat of the penalty; and a substitute-for-damages function, to fix in advance and liquidate the damages for breach, sparing the creditor from having to prove the actual damages suffered. Because of the second function, the general rule is that the penalty takes the place of the indemnity for damages and the payment of interest in case of non-compliance, if there is no stipulation to the contrary; so the creditor who invokes the penalty need not prove actual damages. There are exceptions where the creditor may recover more than the penalty (the actual damages in addition): when it is expressly stipulated that the creditor may recover damages in addition to the penalty; when the debtor refuses to pay the penalty; or when the debtor is guilty of fraud (dolo) in the fulfillment of the obligation. As a rule, the debtor cannot exempt themselves from performing the obligation by paying the penalty, unless this right has been expressly reserved for them. An important protection is judicial reduction: the courts shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, and even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. The nullity of the penal clause does not carry with it that of the principal obligation, but the nullity of the principal obligation carries with it that of the penal clause. So a penal clause pre-fixes the penalty for breach and generally substitutes for proven damages, subject to exceptions and to the court's power to reduce an unconscionable or partly-performed penalty.

What a Penal Clause Is

An obligation with a penal clause carries an accessory penalty (usually a sum) that the debtor bears on breach, non-performance, or delay.

Two Functions

It coerces performance (a guarantee), and it substitutes for damages — the penalty generally takes the place of damages and interest, so the creditor need not prove actual damages.

Exceptions and Reduction

Practical Takeaways

Frequently Asked Questions

What is an obligation with a penal clause? An obligation carrying an accessory undertaking by which the parties agree in advance on the penalty, usually a sum of money, that the debtor must bear in case of breach, non-performance, or delay.

Does the creditor have to prove damages to collect the penalty? Generally no. The penalty takes the place of the indemnity for damages and the payment of interest in case of non-compliance, if there is no stipulation to the contrary, so the creditor need not prove actual damages.

Can the creditor recover more than the penalty? Yes, in three cases: when it is expressly stipulated that damages may be recovered in addition to the penalty, when the debtor refuses to pay the penalty, and when the debtor is guilty of fraud in fulfilling the obligation.

Can a court reduce the penalty? Yes. The courts shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, and even without performance, the penalty may be reduced if it is iniquitous or unconscionable.

This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.

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