THE JUDICIAL POWER TO MODERATE THE PENALTY CLAUSE AND THE JURISPRUDENTIAL ANALYSIS

Abstract

This paper looks at a high-profile concept present throughout contractual dealings, the penalty clause. The functions penalty clauses can perform are mapped out based on Spanish Supreme Court jurisprudence. A distinction is drawn between the functions of penalty clause as guarantee (ensuring the discharge of the primary obligation), penalty clause as settler of damages (providing creditor's indemnification for damages due to breach of contract or defective discharge of an obligation) and penalty clause as service accord (promising a service whose performance enables the performing party to pay the accorded penalty in order to desist from discharge of the main obligation). Examination is devoted to the issues of judicial moderation of penalty clauses under section 1154 of the Civil Code, the requirements for moderation, the imperative nature of moderation and the criteria permitting moderation.