The former may be reduced by a judge if part of the main contract obligation has been performed and if it is “manifestly excessive.” Liquidated damages may also be adjusted if “obviously excessive or ridiculously low.”10 Italy: Both concepts, “clausola penale” (penalty clause) and “liquidazione convenzionale del danno” (liquidated damages), exist in doctrine, but not in the Civil Code.11 Penalties are generally enforceable but can be mitigated if “manifestly excessive” or if part of the main contract obligation has been performed.12 13 Spain: Article 1154 of the Codigo Civil regulates penalty clauses (Clausula Penal), which can be reduced by a judge if part of the main contract obligation has been performed.There is no provision regarding mitigation of the penalty because of excessiveness, which makes Spain one of the few countries that has not amended its Civil Code to allow a reduction of a penalty amount.The Napoleonic Code, upon which most civil codes are based, allowed for penalties to encourage performance of contractual obligations.(This is the precise rationale that is rejected in the United States.) In recent years, however, there has been a widespread trend in civil law countries toward narrowing the scope of such penalties, and allowing courts to reduce the amount if they find it excessive.The intent of liquidated damages is simply to measure damages that are hard to prove once incurred.If the liquidated damages are disproportionate, they can, however, be declared a penalty.
Although penalty clauses have been generally enforceable in civil law countries, they can now be mitigated by the court in most jurisdictions.7 The Council of Europe issued a “Resolution on Penalty Clauses” in 1971, with the aim of recommending a uniform application of penalty clauses for the member states to use.
The UN Convention on Contracts for the International Sale of Goods (“CISG”), which has generally been an important tool in developing a more uniform international sales law, regulates neither liquidated damages nor penalty clauses.
In fact, the framers of the CISG agreed to leave these clauses out of the convention, in favor of regulation by domestic law, because of widely divergent approaches in different legal systems.3 The enforceability of liquidated damage and penalty clauses thereby depends on domestic law.
In the United States, a liquidated damage clause is intended to estimate damages in the event of non-performance or breach of contract.
A liquidated damages clause will be enforced where the court finds that the harm caused by the breach is difficult to estimate, but where the amount of liquidated damages is reasonable compensation and not disproportionate to the actual or anticipated damage.