The Comparative Law and Economics of Penalty Clauses in Contracts

Abstract

Imagine the following monologue by a father afflicted by a severe attack of nerves. My daughter's wedding is scheduled for next month and I'm in deep trouble. She has expressed a strong desire to hold the party in our old country house. A long time ago, I promised her that I would organize the party there. But then I forgot to make arrangements with the builders. A lot of work needs doing to the house. There's no way she can hold the party there without the work being done. All the invitations have already been sent. If I don't get things sorted out my daughter will never speak to me again. Yesterday I rushed around looking for a building contractor. None of them could promise me that they'd finish the work on time. None of them ruled it out, of course, since they didn't want to loose a customer. But they made no promises. I can't take the risk because it would ruin my relationship with my daughter. I'd pay any money for the certainty. This situation of the absent minded father, late in organizing his daughter's wedding, is a typical one in which penalty clauses would be very helpful. He may eventually find a builder willing to rush the work, and willing to promise to have the job finished by the date of the wedding, but in return for a high extra price (say 900 dollars extra). But how can the father be sure that the contractor is not making the promise to attract a customer, charging 900 dollars more than the usual price and then finding an excuse for not meeting the deadline? Of course, if this happens the father can sue the builder for damages. It is equally obvious, however, that he will regard damages