For example, Joanna got a $10,000 loan from her bank. In the loan agreement, Joanna agreed to pay an additional $500 for each month her payments were late. When her second payment was delayed by three months, she had to pay $1,500 to the bank in addition to the payments she normally had to make. Under the Conventional Penalties Act of 1962, criminal clauses are legally applicable, but the court has the power to reduce compensation. The court is required to compare the sentence with the actual harm or harm suffered and to decide whether the sentence is disproportionate to the damages suffered. Therefore, you must ensure that the sanction in the clause is not insolent. In addition, you can only claim a penalty or damages for the same act, but not both. Whether a specific clause is a sanction generally depends on the broader real and commercial context. The new test applies to clauses contained in any relevant contract governed by English law, whether at the Gulf Cooperation Council (GCC) or elsewhere. The Dutch Civil Code defines a contractual penalty as any contractual provision stipulating that the debtor, if he does not properly fulfil his obligation, must pay a sum of money or provide another benefit, whether that amount of money or any other benefit is conceived as a remedy or an inducement to carry out the undertaking. The rule of the penal clause applies only to secondary and non-primary obligations.
Overall, a « primary » obligation is a stand-alone contractual obligation, while a « secondary » obligation is triggered only by an infringement and must be a contractual alternative to injury. The court departed from the « true pre-estimate » rule in Dunlop. On the contrary, they recognized that if an innocent party could prove that it had used a clause in a contract to protect a legitimate interest and that the sentence was not exorbitant or indecent, it should not be a true pre-readability of the damages.