First Principles of Business Law
Remedies for breach of contract

3. An award of damages

3.3. Distinguishing estimated loss and agreed penalties

 

 

 

Read the facts and the question and then choose the best answer.

A, a manufacturer, agrees to supply B, a contractor, with 100 safety helmets each month for 24 months at a unit price of $35 each. To ensure proper performance of the contract by A, the contract provides that, if any consignment of helmets does not meet the standards required by government regulations for construction sites, this will be a breach of contract and A will be liable to pay $5,000 as a penalty to B. In the second month of the contract, the helmets sent to B are faulty and do not meet government regulations. A replaces this consignment immediately, but B claims payment of the agreed penalty. Is A liable to pay the agreed $5,000 penalty to B?

(a) Yes. If the parties agree to a sum of money that will be payable as a penalty in the event of a breach of their contract, the court will enforce payment of the agreed amount.

(b) No, the courts will not enforce payment of an agreed penalty for breach of contract. Nor will the court enforce payment of a sum of money that the parties have agreed on as an estimate of the damages that will be caused by a breach.

(c) The courts will not enforce payment of an agreed penalty for breach of contract. But a court will enforce payment of a sum of money that the parties have agreed on as an estimate of the damages that will be caused by a breach.

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

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