Penalties: a Russian and English law comparison

The use of penalties in contracts is not permitted. Any penalty provisions are void and unenforceable. The courts will strike out the whole penalty clause and will not adjust it with a lower, more reasonable sum.

In commercial situations, the issue of penalties often arises with:

Recent case law has suggested that, for a provision to be ruled as a penalty and therefore void and unenforceable, it is also necessary to show that:

The courts will, however, enforce a claim for liquidated damages. The pre-estimate of loss from the breach must be genuine at the time the contract is made. The courts will look at the substance of the contract and not just the wording. Therefore, they may still rule that an obligation is a penalty (and therefore unenforceable), even if it is not described as a penalty in the contract.

For more information, see Practice note, Remedies: damages and agreed remedies: Liquidated damages or penalty?.

Penalties are permitted. However, the courts require them to be reasonable and have the power to reduce them if they are not. In practice, the courts tend to disallow high penalties and the amounts paid are often relatively low.

Penalties are aimed at consumer transactions and business supply arrangements, where there has been a service or performance failure by one party. The widely held view is that they cannot be used in M&A and finance deals to provide an alternative to warranties or indemnities and any attempt to do so would not be upheld by the courts.