3 purposes of a contractual penal clause

A penal clause is another obligation attached to the principal one, requiring the payment or performance of something, or simply, requiring a greater responsibility, in case of noncompliance in order to assure performance or to deter nonperformance. Other annotators defined "penal clause" as a “coercive means to obtain from the debtor compliance of the obligation.” It has also been defined as “an accessory undertaking to assume greater liability in case of breach. It is attached to obligations in order to insure their performance. READ MORE: OBLIGATIONS WITH A PENAL CLAUSE.

Such a penal clause stipulated in a contract has three (3) purposes: the coercive purpose; the liquidation purpose; and the restrictive purpose.

1. COERCIVE PURPOSE, also called "funcion coercitiva de garantia." The penal clause is inserted in the contract to insure the performance of the obligation. With knowledge and fear of a penalty in case of breach, the obligor is reminded to fulfill his obligations fully and in good faith.

2. LIQUIDATION PURPOSE, also called "funcion liquidatoria." The penal clause operates to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation (compensatory). It is understandable that, when the obligor breaches what is incumbent upon him/her, the obligee must have suffered actual or moral damages, among others.

3. RESTRICTIVE PURPOSE, also called "funcion restrictamente penal." The penal clause is written into the contract to punish the obligor in case of breach of the principal obligation (punitive). When contracting parties enter into a contract, both expect the fulfillment of obligations; this failure of expectation and the concomitant injury suffered are the reason for the punishment.

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