Liquidated damages/contractual penalty/Vertragsstrafe

Beim Übersetzen ins Englische des Wortes Vertragsstrafe ist Vorsicht geboten: liquidated damages sind erlaubt, a contractual penalty nicht. Daher wird Vertragsstrafe oft mit liquidated damages übersetzt. Natürlich sollte es dem Gericht nicht auf das Wort, sondern auf den Inhalt ankommen, aber das Gericht soll lieber gar nicht auf die Idee kommen.

The German word Vertragsstrafe is often translated as liquidated damages, because in common-law jurisdictions liquidated damages are permitted, whereas a contractual penalty is prohibited. At the request of a client, I once wrote ‘a contractual penalty (Vertragsstrafe, permitted under German law)’, since after all the contracts I translate remain subject to German law. But the argument ‘It doesn’t matter how you translate it, because only German law applies’ is not a good one if the translation is going to be seen by English or U.S. lawyers.

Das Thema bespricht die deutsche Ausgabe vom German American Law Journal blog anhand eines Falls in Arizona.
The German edition of the German American Law Journal Blog discusses this with reference to Winthrop Resources Corporation v. Eaton Hydraulics, Inc., AZ: 03-1790.

Eaton als Mieter von Ausrüstungen beantragte, die Liquidated Damages Klausel aus dem Mietvertrag nach erfolgter Vertragsverletzung für nichtig zu erklären, weil sie wegen ihrer Höhe eine Penalty Clause darstelle. Das Gericht lehnte diese Auffassung ab. Eine Liquidated Damages Klausel dürfe selbst das Fünffache des beim Vertragsbruch messbaren Schadens ausmachen, ohne zu einer Penalty Clause zu werden. Der Sinn der Klausel bestehe darin, beiden Vertragsparteien zu ermöglichen, einen etwaigen Schaden schon bei Vertragsschluss zu schätzen und gerecht auszugleichen.

The court held that where the precise amount of damages is hard to calculate, the fact that the liquidated damages were so much higher than the actual damage does not prove that this was a penalty clause.

The GALJ adds that the court of second instance refuses to accept new evidence because it deals only with an appeal on a point of law (German Revision).

Das Urteil spricht auch andere, im deutsch-amerikanischen Verhältnis gelegentlich missverstandene Fragen an. So lehnt die zweite Instanz die Verwertung neuer Beweismaterials ab, weil diese Instanz lediglich eine Revision, also eine reine Rechtsprüfung, zulässt.

Das Wort liquidated (liquidated damages: bezifferter Schaden(s)ersatz)

The word liquidated may be mystifying to some. In this context it means ‘agreed in advance’. Liquidated damages of £1000 per day means the exact sum has been decided in advance. In England and Wales we used to talk about liquidated and unliquidated claims: if you sued someone for a precise sum of money, it was liquidated, but this did not imply any agreement between the parties. It’s now called a specified claim (see court service glossary).

5 thoughts on “Liquidated damages/contractual penalty/Vertragsstrafe

  1. Thnaks for the specified claim for the liquidated demand of old that is not going away that quickly.

    The liquidated damages (LD) point we’ve had before. A trans. agency changed this term in a translation of mine to contractual penalty (CP) on the basis that LD was ‘too common law’ and CP was a ‘neutral term’.

    As every first-year Eng. contract-law student should know, UK courts will strike down penalty but not LD clauses. So, in my opinion, the edit made the clause unenforceable in Eng. law, whichever law (Austrian in this case) applied. Warning of a potential prof. negligence issue, I withdrew from the case/the job.

  2. It’s probably my ignorance, but this post has me puzzled. Clauses stipulating contractual penalties a.k.a. penalty clauses are standard practice in contracts for works and services. Or does the bit about contractual penalties being verboten only apply to things like dealings with consumers, employment contracts and tenancies?

  3. Robin, do you encounter English-language contracts using the term ‘contractual penalty’ rather than ‘liquidated damages’? I’d be interested to see them. I’ve always learnt that not only the fact of a penalty (i.e. higher ‘damages’ than appropriate) but even the word ‘penalty’ would be thrown out by the courts, and this in both Britain and the USA. Even the words ‘penalty clause’ are risky because of the implications of the word ‘penalty’. But I said this in the entry.

  4. I get it now. It’s known in the trade as a penalty clause (I know that from when my father was still in business) but is technically liquidated damages. Here’s another good explanation:

    “If the contract itself provides that compensation is to be paid in certain circumstances, the amount to be paid must not be excessive or it will be deemed to be a penalty (irrespective of how it is described in the contract) and not enforceable. A penalty clause in a contract is not legally enforceable, but where the compensation is a genuine pre-estimate of loss, this is termed “liquidated damages” (but often referred to mistakenly as ‘penalty clauses’) and the courts will allow recovery.”

    http://www.dti.gov.uk/about/procurement/procud1-2.htm

  5. Yes, that may well be. I think I knew that at one time, that the term ‘penalty clause’ is used to refer to something like this (as, indeed, Vertragsstrafe or Konventionalstrafe is in German). I think you could add to that quote that although something labelled ‘LD’ may be held to be a penalty, quite rightly, it’s not so easy to get the court to recognize something labelled ‘PC’ as LD. This is perhaps unfair, in view of what you say about trade usage, but on the other hand people are supposed to have lawyers to draw up contracts.

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