Penalty - A Bad Word

In Shakespeare’s Merchant of Venice, Shylock insisted on a pound of flesh as it was the penalty upon which Antonio had agreed if he defaulted on his debt. In that case, there was some fancy footwork by a lawyer and Shylock lost out.

The general rule is that the court will make you stick to contractual agreements. If courts interfered with stupid bargains, then commerce could be much reduced.

But the court will not allow you to go overboard and agree on a penalty that is extravagant, unconscionable and out of proportion to the loss suffered e.g. a pound of flesh. At the time of entering into the contract, any agreed damages for default must seem a genuine pre-estimate of loss, commercially justified and intended to compensate rather than reward.

For instance, when you buy a house the deposit is ten per cent of the purchase price. If you do not go ahead, you lose the deposit. But if, in the circumstances, it seems over-generous, The court could allow less e.g. you did not need to pay an estate agent again, or advertise, or incur other costs of selling a house.

Here are matters the court may take into account:

1.            The bargaining strength of both parties.

2.            The level of sophistication of the parties.

3.            The information available to the parties at the time contract was entered into.

The court will look for substance over form, so it should not matter how your lawyer dresses it up.

The clause will be struck out to the extent it is a “penalty” (meaning unreasonable). However, you can still sue for damages for the genuine amount of loss.
Shylock ended up being forced to convert to Christianity, was fined half his wealth and reduced to a life share in the other half. Shylock was unrepresented.