The Unjust Penalty Clause

Penalty clause is one of the sanctions of contract performance according to which parties intend to pay liquidated amounts as remedy for breach of the contract (Art. 230 Iranian civil law).The purpose of such agreement is to secure the contract and to facilitate the remedy without complexity of proceedings. Its nature in Iranian legal system is remedy not penalty and punishment. It isnt revisable by court. Although it's not necessary for the penalty clause to be exactly equal to actual damages but in some cases its specified amount is excessive and it's not in reasonable proportion to actual damages so far there isnt reasonable proportion between them. In other word, because of undesirable economic status and other conditions of the contract, the promisor can never pay it, thus such agreement is unreal, unjust and inadequate matter. In this case, there are two prominent views. Some authors state that penalty clause is absolutely correct and operative, and the others believe that the court can adjust it. But this sort of clause is void in our view. In this article we will explain nature and characters of penalty clause and also the legal status of unjust penalty clause.