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23 Feb 2024 Unclear penalty clause

A purchase agreement on real estate usually includes a penalty clause stating, in brief, that the defaulting party forfeits a penalty of at least 10% of the purchase price. The District Court of Midden-Nederland recently had to rule in an issue in which the seller of a real estate property took the position that the buyer had to pay not only the contractual penalty but also additional damages because the actual damages exceeded the amount of the penalty. However, the penalty clause was unclearly worded. What was at play here?

The procedure

The buyers and the seller had entered into a purchase agreement on 22 February 2021 regarding a property. The purchase agreement was rescinded out of court by the buyers on 18 May 2021. By judgment of 20 April 2022, the Midden-Nederland District Court ruled on the buyers' claim that the purchase agreement between the parties had been validly dissolved. The court ordered the seller to pay the claimed contractual penalty of €88,000.00, plus statutory interest. This judgment was not appealed. The judgment was complied with by the seller.

In these proceedings, the buyers claimed compensation for the actual damage they had suffered, which they had estimated at €350,470.43, plus statutory interest, expert costs (€3,427.33), extrajudicial collection costs (€6,775.00) and legal costs.

Position of buyers

According to the buyers, the parties had agreed that in the event of a default, the defaulting party would forfeit a penalty of at least 10% of the purchase price, without prejudice to the other party's right to claim its actual damages in the form of additional compensation. According to the buyers, their actual damages were much higher than the penalty amount already paid by the seller. Those damages consisted of lost profit, the intended increase in value of the property through redevelopment and the future exploitation of the property.

Seller’s position

According to the seller, the buyers were not entitled to additional damages because the contractual penalty was liquidated damages. In addition, according to the seller, the parties had agreed that the immovable property would be delivered as 'as is-where is', meaning that the seller had not provided any guarantees for the intended exploitation by the buyers. For this reason too, the buyers would not be able to claim damages for lost profit and/or failure to realise the intended exploitation of the property. The seller also felt that the buyers had either processed their right to claim additional damages or were acting contrary to reasonableness and fairness. Finally, the seller also argued that there was no causal link between the damaging event and the alleged damages, and disputed the extent of the damages claimed.

Judgement of the court

The court rejected the buyers' claims and reasoned as follows.

According to the court, it was established between the parties that the seller had breached the contract and forfeited a penalty for that reason. The question at issue in these proceedings was whether the buyers were entitled to additional damages in addition to the contractual penalty, which the seller had already paid.

That question was answered in the negative by the court because the seller's first defence succeeded.

The parties had agreed a penalty clause in the purchase contract. Article 6:92 paragraph 2 of the Civil Code stipulates, that the penalty replaces the statutory additional and substitute damages. This is regulatory law. Parties can make different agreements. According to the buyers, the parties had done so and they referred to the text of the penalty clause.

The penalty clause read as follows:

"Buyer and seller agree that if either party only partially fulfils or fails to fulfil its obligation arising from the purchase agreement, it will forfeit to the other party a penalty of at least 10% of the purchase price, without prejudice to that party's right to claim performance, dissolution, or damages.".”

The parties thus differed on the scope of the penalty clause. That is a matter of interpretation. When interpreting an agreement, it comes down to what the parties mutually declared and mutually may reasonably have inferred from each other's statements and conduct (the so-called Haviltex yardstick). All circumstances of the case must be taken into account, valued according to what is reasonable and fair. Behaviour of the parties after the conclusion of the contract may also be important for the interpretation of the contract.

One of the circumstances that plays a role in explaining the parties' intentions is the text of the contract. In this case, the court assumed an objective linguistic interpretation because the parties had not discussed or negotiated the text and/or content of the penalty clause in the pre-contractual phase. Through their estate agent, the buyers had presented the purchase agreement that also contained this clause to the seller and he had agreed to this penalty clause without comment.

The court held that the scope of the clause was unclear. It did not explicitly follow from the text, as argued by the buyers, that in addition to the penalty, there was a right to additional damages or compensation for actual loss. According to the court, the sentence "without prejudice to the right of this party to claim performance, dissolution, or damages" could be interpreted in different ways. It could be interpreted as a provision whereby performance, dissolution or damages could be claimed in addition to penalty. It can also be interpreted as meaning that the other party can claim performance or dissolution in addition to the penalty, or no penalty but can claim damages.

As the text of the penalty clause was unclear and the (text of the) penalty had not been negotiated, the court ruled that, in accordance with the contra proferentem principle, the clause should be interpreted to the disadvantage of the buyers as drafters of the clause. That interpretation is also in line with the legislator's intention to interpret a penalty clause whose purport is not clear in favour of the debtor.

This means that the clause was interpreted in such a way that it was not intended to deviate from the legal principle that the contractual penalty replaces statutory damages.

Conclusion

Due to the unclear wording of the clause in the contract, the buyers drew the short straw here. Their claim for damages was rejected in full and they were ordered to pay the costs of the proceedings.

It is therefore important to formulate provisions in an agreement, such as the penalty clause here, carefully and clearly to avoid differences in interpretation. Do you need help with that or would you like to have a received contract screened? Then contact one of our lawyers without any obligation. We will be happy to assist you

SPEE advocaten & mediation Maastricht

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