The invalidity of the penalty cause upon the termination of the contract In the light of the regulations of the Court of Cassation
Dr. Saleh Naser Al Otaibi
Associate Professor – Private Law – Kuwait International Law School
Abstract:
This research discusses the impact of the penalty cause upon terminating the contract. Since the penalty cause is provided to secure the execution of the contract, this research sheds light on whether the cause remains after the termination of the contract as an agreed-upon compensation to the obligor when the obligee fails to perform his side of the contract, or whether the termination of the contract is therefore followed by a termination of the penalty cause thus the cancellation of its impact, in this case the obligor is thus forced to demand a judicial compensation, and therefore the benefit of setting a penalty cause is lost.
The legislator did not provide a fixed judgment for this matter. By looking at the verdicts of the Court of Cassation, it is noted that some verdicts ruled with the termination of the penalty cause upon the termination of the contract while others ruled with the effectiveness of the cause and the agreed-upon compensation regardless of the termination of the contract. At first glance, it might seem that the court’s rules are contradicting, especially that these rules are not based on legal basis justifying this contradiction. Upon conducting an in-depth analysis of these judgments, the research shows that the matter is based on a bilateral agreement since the penalty cause is agreed-upon by the two parties and acts as a penalty for the obligee’s breach of the contract which results in the termination the contract. Therefore, all the obligations are terminated including the penalty cause which is considered an article in the contract executed in return for certain obligations. In this case the penalty cause is considered subsidiary to the original obligation and is terminated with the termination of the obligation. However, if the two parties agree on the execution of the penalty cause upon the termination of the contract, in this case it would be the implementing the obligation and not failing to implement it that leads to the effectiveness of the penalty cause. Thus, the penalty cause in this case is independent and not a subsidiary to the contract as in the first case.