{"id":35085,"date":"2026-07-15T14:38:16","date_gmt":"2026-07-15T12:38:16","guid":{"rendered":"https:\/\/addwill.eu\/?p=35085"},"modified":"2026-07-15T14:38:16","modified_gmt":"2026-07-15T12:38:16","slug":"penalty-clauses-a-useful-tool-but-not-a-guarantee","status":"publish","type":"post","link":"https:\/\/addwill.eu\/en\/penalty-clauses-a-useful-tool-but-not-a-guarantee\/","title":{"rendered":"Penalty Clauses: A useful tool, but not a guarantee"},"content":{"rendered":"

 <\/p>\n

In business-to-business dealings \u2014 supply agreements, exclusivity arrangements, franchise contracts, sale agreements, minimum-term commitments, service agreements, and the like \u2014 there’s often a clause that goes largely unnoticed until a dispute breaks out: the penalty clause<\/strong>.<\/p>\n

Its purpose is straightforward<\/strong>: to set out in advance the financial consequence of a specific breach, so both parties know in advance what is at stake if one of them fails to hold up their end of the deal. That said, just because a penalty is written into the contract doesn’t mean it will automatically be enforced exactly as drafted<\/strong>.<\/p>\n

    \n
  1. Why do companies care about these clauses?<\/strong><\/li>\n<\/ol>\n

    Penalty clauses are a valuable tool precisely because they bring predictability. They help companies get ahead of risk, reinforce key obligations, and sidestep drawn-out arguments later about how much damage was caused. They’re commonly used to protect things like:<\/p>\n

      \n
    • A minimum commitment period under a contract<\/li>\n
    • Compliance with a notice period<\/li>\n
    • An exclusivity obligation<\/li>\n
    • Handover of a property or premises by a set date<\/li>\n
    • Specific commercial commitments<\/li>\n
    • Early termination of a contractual relationship<\/li>\n<\/ul>\n

      From a business standpoint, the upside is clear: it cuts down uncertainty and strengthens the hand of whoever needs to make sure the other side follows through<\/strong>. But precisely because of the financial stakes involved, these clauses need to be drafted with care.<\/p>\n

        \n
      1. What you agreed to matters \u2014 a lot. Pacta sunt servanda<\/em>.<\/strong><\/li>\n<\/ol>\n

        The general rule is simple: contracts are binding. If two parties validly agree to a penalty \u2014 particularly in a deal between businesses or professionals \u2014 courts tend to hold them to it. Spain’s Supreme Court reaffirmed exactly this in its ruling of April 20, 2022<\/strong> (No. 371\/2022)<\/strong>, in a case involving a penalty clause in a sublease for non-residential use. The penalty had been set for termination due to the subtenant’s breach, and the court declined to reduce it, since the breach that occurred was exactly the one the parties had anticipated when they signed<\/strong>.<\/p>\n

        III. So when can a penalty be reduced?<\/strong><\/p>\n

        Spanish law lets judges moderate a penalty when the main obligation was only partly fulfilled or fulfilled irregularly. This tends to come up when a clause was drafted with total non-performance in mind, but in practice there was meaningful partial compliance. For example, in one case involving a commercial lease, the parties had agreed on a \u20ac50,000 penalty per tenant for early termination. The court ruled out force majeure as a defense \u2014 but still reduced the penalty, because the lease had in fact been honored for a substantial portion of its term.<\/p>\n

          \n
        1. It all comes down to how the clause is worded<\/strong><\/li>\n<\/ol>\n

          In practice, most disputes don’t arise because a penalty clause exists \u2014 they arise because of how it was written<\/em>. There’s a real difference between a vague penalty for “breach of contract” in general and a penalty tied to a specific scenario: missing a notice period, delaying a handover, breaching exclusivity, or ending the contract early. Case law draws this same line:<\/p>\n

            \n
          • Scenario 1:<\/strong> If the clause was written for a general or total breach, and<\/strong> what happened was partial compliance, there’s room to argue for a reduced penalty<\/strong>.<\/li>\n
          • Scenario 2:<\/strong> If the clause was written for exactly the breach that occurred, reducing it will usually be much harder<\/strong>.<\/li>\n<\/ul>\n
              \n
            1. Between businesses, “unfair terms” arguments carry less weight<\/strong><\/li>\n<\/ol>\n

              In contracts between businesses, penalty clauses generally carry more legal weight than they would in a consumer contract \u2014 the unfair-terms protections built into consumer law simply don’t kick in automatically. That doesn’t mean anything goes: a penalty that’s excessive, disproportionate, or badly drafted can still land you in court. But it does mean that in the business world, signing without reading the fine print can get expensive<\/strong>.<\/p>\n

                \n
              1. What to check before you sign<\/strong><\/li>\n<\/ol>\n

                Before agreeing to a penalty clause, it’s worth asking:<\/p>\n

                  \n
                • What exactly triggers the penalty?<\/li>\n
                • Is the amount fixed, or based on some objective formula?<\/li>\n
                • Does it apply the same way to a total breach as to a partial one?<\/li>\n
                • Does it replace damages claim, or stack on top of one?<\/li>\n
                • Is there a cap?<\/li>\n<\/ul>\n

                  VII. Bottom line<\/strong><\/p>\n

                  A penalty clause is a genuinely useful way to protect business interests \u2014 but it’s neither automatic nor foolproof. How well it holds up depends on how it’s drafted, whether the amount is proportionate, and whether the breach that happened matches what the clause was written for. It’s worth having it reviewed carefully before you sign.<\/p>\n

                  These legal and case-law interpretations reflect the views of our team at addwill<\/strong> who you can reach out to for guidance on any of the issues raised here \u2014 or on any question related to civil litigation procedures under Spanish law.<\/p>\n

                  So, if you’d like more information or advice from our expert team, we at addwill<\/strong> are happy to help.<\/p>\n

                   <\/p>\n

                  Author:<\/p>\n

                  Judith Barranco<\/strong><\/p>\n

                  Lawyer, addwill Litigation Department<\/p>\n","protected":false},"excerpt":{"rendered":"

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