PENALTY CLAUSES

 

How does a a penalty clause work in the Spanish conveyancing system

What is a penalty stipulation?

I would like to try to explain easily (if possible) how it works a penalty clause in a property sale and purchase contract.

A penalty stipulation is an stipulation which sets a penalty in the event that one party do not fulfil their duties.

It is worth to remember the general rule in these kind of contracts. When a party breachs the contract the other one can ask either for the fulfilment (if possible) or to cancel the contract. In both cases the party who has fulfiled can ask for the damages and compensation if any. But these damages and compensations have to be proved. A penalty stipulation replaces the evidence issue. This stipulation is a liquidation of the damages and compensations that a breach of the contract might cause. It is like an early liquidation of those damages and compensation. It is a valuation of those damages and compensations made beforehand. This way prevents any discussions on the damagas and compensatinos value.

The penalty stipulation can be set in the case of complete non fulfilment of the duty (ie: if the seller do not deliver the asset or if the purchaser do not pay the price). It can also be set in the event that the non fulfilment is partial (ie in the case that the tenant of commercial premises do not pay one or more monthly payments or in the case a builder does not finish the property in the agreed time but later. The usual penalty clause in these cases is to set a certain amount of money each day of delay).

We should also remember the following:

(i) The debtor cannot avoid the fulfilment of their duty paying the penalty. The contract must be honoured. Only in the case that the debtor breach the contract the penalty will be in force. But the debtor do not have a choice between the fulfilment and the penalty clause. It is not up to the debtor to do so unless this option has been specifically stipulated in the penalty clause.

(ii) Likely, the creditor cannot ask for the fulfilment plus the penalty. This will happen only if it is specifically agreed.

(iii) Finally, in the case the debtor has fulfilled their duty partially the judge must moderate the penalty set for the complete non fulfilment. The judge will take into account all the circumstances of the case.

Thank you

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Warning

Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.