{"id":207394,"date":"2021-07-02T19:28:43","date_gmt":"2021-07-02T06:28:43","guid":{"rendered":"https:\/\/legalvision.co.nz\/?p=207394"},"modified":"2021-07-28T19:31:40","modified_gmt":"2021-07-28T06:31:40","slug":"avoid-penalty-clauses","status":"publish","type":"post","link":"https:\/\/legalvision.co.nz\/commercial-contracts\/avoid-penalty-clauses\/","title":{"rendered":"How to Avoid Penalty Clauses in NZ Contracts"},"content":{"rendered":"\n

A contract is only as good as the remedy you get <\/span>following a breach<\/span><\/a>. Contracts are <\/span>legally enforceable<\/span><\/a> so that if your contracting party breaks the agreement, the other party compensates you. One way that parties can get compensation is by including liquidated damages clauses in the contract. However, it is important that the court does not deem this a penalty clause. This article will outline what a <\/span>penalty clause<\/span><\/a> is and why you should avoid penalty clauses in your commercial contract.<\/span><\/p>\n\n\n\n

Types of Clauses That Could Be Considered a Penalty<\/span><\/h2>\n\n\n\n

The court may consider three types of clauses to be a penalty clause. <\/p>\n\n\n\n

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Clause<\/b><\/p>\n<\/td>

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Description<\/b><\/p>\n<\/td><\/tr>

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Liquidated Damages<\/span><\/p>\n<\/td>

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A liquidated damages clause is a pre-determined figure that both parties agree to pay if either party breaches their contractual obligations. It allows compensation to be agreed upon before the parties sign the agreement to protect each party. <\/span><\/p>\n<\/td><\/tr>

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Termination Clause<\/span><\/p>\n<\/td>

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A termination clause is a provision that allows either party to terminate the agreement early. The caveat is that the party terminating the agreement may have to pay a fee. If this fee is disproportionate, then it may be classed as a penalty.<\/span><\/p>\n<\/td><\/tr>

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Transfer of Assets<\/span><\/p>\n<\/td>

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A transfer of assets that is not underpinned by consideration may be considered a penalty. Here, consideration is the benefit or detriment that each party receives in a binding contract.<\/span><\/p>\n<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

What Is a Penalty Clause?<\/span><\/h2>\n\n\n\n

A penalty clause is a clause that punishes the party that has to pay it. Penalty clauses might seem like a good idea to include in your contract, but they are legally unenforceable. This means the party is not legally obligated to pay the sum that was initially agreed if they were to breach the contract.<\/span><\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n

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