We can gain a broad perspective on penalty clauses in private law from a comparative law perspective by contrasting three legal systems: Continental Europe, England, and Brazil. In France, Italy, Spain, and Portugal, two models of penalty clauses coexist harmoniously: the compensatory and the punitive. As the names suggest, under the former, the parties predetermine the damages resulting from a potential breach of contract. The compensatory penalty clause provides for a predetermined amount in the event of delay or default, thereby sparing the non-defaulting party the need to spend time, money, and energy proving in court the damages resulting from the breach of the contract. In contrast, the penalty clause itself is an agreement in which the contracting parties stipulate a civil penalty as a punitive sanction for breach of the contract. Its function is not compensatory but deterrent, in the sense of inhibiting and discouraging the breaking of one’s word. To achieve this purpose, the amount of the penalty must, of course, exceed the value of the goods or services being negotiated. For example, if A and B negotiate the purchase of equipment for conducting cancer screenings, the penalty clause will be R$ 200,000.00 if that amount corresponds to the actual damages and loss of profits of the aggrieved party, but it may reach R$ 400,000.00 if the objective of A and B was to establish a penalty that would discourage either party from withdrawing from the contract, regardless of the actual assessment of any loss. Generally speaking, under European law, the imposition of a contractual penalty is considered legitimate to the extent that it preserves proportionality, in accordance with the circumstances of the case. However, its amount will be subject to judicial reduction if it exceeds the reasonable “quantum” necessary to produce the deterrent effect and amounts to an abuse of rights.
