CLP: Lost on Penalties — A Penalty Shoot-Out between England and Germany

CLP: Lost on Penalties — A Penalty Shoot-Out between England and Germany (and a few other jurisdictions)

Speaker: Professor Florian Wagner-Von Papp (Faculty of Laws, UCL)

Chair: TBD

Abstract

The treatment of penalty clauses and liquidated damages clauses has long been a staple topic of Law & Economics and Comparative Law textbooks. Various legal systems limit the enforcement of penalty clauses to a greater or lesser extent. Common law jurisdictions do not enforce penalty clauses at all, and various civil law jurisdictions put limits on the extent of their enforcement. This is, from the legal perspective, a limitation on the party’s freedom of contract and, from an economics perspective, a restriction of Coasean bargaining.

Both common and civil law jurisdictions single out penalty clauses for this special treatment. Alternative contract clauses serving objectives very similar to those of penalty clauses (“alternative arrangements”), such as liquidated damages clauses or agreements on differentiated primary obligations conditional on events that are not a breach, largely or completely escape such special treatment. In light of the functional exchangeability of penalties and these alternative arrangements, the legal differentiation appears at best curious. Unease with the differentiation has resulted in a moving of the goalposts in recent years in some jurisdictions (most prominently in Australian and English contract law).

There is, however, little attempt to tackle the more fundamental question what the precise objectives of the rules against (or on) penalties are. Once the objectives are properly defined, the question arises whether these objectives, if they are indeed strong enough to justify the inroads into freedom of contract and Coasean bargaining in the case of penalty clauses, also require modifications in the approach to functionally equivalent alternative arrangements in order to avoid inconsistencies. Otherwise, the penalty rule will become a mere trap for the unwary. Blurry boundaries between penalty clauses and alternative arrangements are particularly problematic if the qualification as a penalty clause or, alternatively, as an alternative arrangement results in starkly different outcomes.

A consistent approach to penalties and alternative arrangements is of great, and arguably increasing, practical significance. In addition to their wide-spread use in consumer contracts (bank charges, parking fees...), penalty clauses or alternative arrangements are used to allocate risks in large-scale commercial contracts, public-private partnerships, and performance-based logistics; and in private competition law enforcement, the use of stipulated damages clauses is gaining in importance as well.

The presentation describes the developments from a comparative law & economics perspective, and describes a framework for a more consistent approach.

About the Speaker

Florian is currently Professor of Private and Business Law (including Contract Design) at the Helmut Schmidt University in Hamburg, Germany. Prior to leaving the UK in 2019 so as to avoid Brexit, he held various positions at the UCL Faculty of Laws (2005-2007 DAAD lecturer, 2007-2012 Lecturer in Law, 2012-2017 Reader in Law, 2017-2019 Professor of Antitrust and Comparative Law & Economics).

Florian holds law degrees from the University of Tübingen/Germany (First State Examination 1998, Dr. iur. 2004) and Columbia Law School (LL.M. 2002); he also passed the German bar exam (Second State Examination 2000). In the past decade, he was a Visiting Researcher at Harvard Law School/USA (2011/12), Visiting Professor at Osaka University/Japan (2017/18), and Visiting Professor at Würzburg University/Germany (2017/18). His greatest achievements so far are his two sons Dominic and Felix, and not being abandoned by his wife Konstanze.

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