Commercial agreements often provide for “fixed sums” payable upon a specified breach. Such agreements are generally enforced in civil law jurisdictions. In contrast, the common law distinguishes between “liquidated damages” and “penalty” clauses, enforcing the former, while invalidating the latter as a penalty. The UN Convention on Contracts for the International Sale of Goods (CISG) does not directly address the payment of “fixed sums” as damages, and the validity of “penalty” clauses has, traditionally, been relegated to otherwise applicable domestic national law under CISG Article 4. This traditional orthodoxy has recently been challenged—suggesting that the fate of a penalty clause should be determined by reference to the general principles of the CISG and that such a clause should generally be enforced. The validity of fixed sums, as penalties, is currently under consideration by the CISG Advisory Council, so further exploration of the issue would seem particularly timely. This article examines the basis for the traditional view, along with two distinct challenges to that view—ultimately concluding that these challenges fail to support their respective solutions to the issue and suggesting the continuing vitality of the traditional view.
Penalty Clauses and the CISG