CONTRACT LAW — Penalty Clauses — Definition and Enforceability
Ratio Decidendi
Per Adekeye, JSC, in Oyeneyin & Anor v. Akinkugbe & Anor (2010) NLC-123-283-2001(SC) at p. 16, para. F – p. 17, para. C:
"A penalty clause is defined in Black's Law Dictionary Eighth Edition as 'A contractual provision that assesses against a defaulting party an excessive monetary charge unrelated to actual harm. Penalty clauses are generally unenforceable, particularly when clauses of the nature are designed to terrorize or frighten the party into performance. For example a contract may provide that the promissory is to pay N5 on a certain event but if he fails to do so, he must then pay N500. A clause of that kind is called a penalty clause by lawyers. For several years, it has been the law that such promises cannot be enforced on the ground that it is unfair and unconscionable to enforce clauses which are designed to terrorize.'"
Explanation / Scope
This principle defines a penalty clause as a contractual provision imposing an excessive monetary charge unrelated to actual harm, designed to terrorize or frighten a party into performance. Such clauses are generally unenforceable as unfair and unconscionable. The principle applies in contract disputes involving penalty clauses. It ensures that penalties are not enforced. The principle reflects the distinction between penalties and liquidated damages. It prevents oppression through contractual terms. The court must declare penalty clauses unenforceable. The principle provides guidance on penalty clauses.