The Sunday Mail
Arthur Marara
This is Part Two of “Demystifying contractual penalty clauses”
IN the case of Scotfin Ltd v Ngomahuru (Pvt) Ltd 1997 (2) ZLR 563 (HC), the court made it clear that the Contractual Penalties Act allows for the enforcement of penalty clauses. However, the court had the discretion to reduce the penalty to the extent of the claimant’s prejudice or to grant other fair and just relief. Thus, while parties may agree to a penalty clause in case of a breach, the court has the authority to refuse its enforcement in appropriate circumstances.
When it comes to agreements for the sale of land by instalments, if a party intends to enforce a penalty clause, terminate the agreement or initiate legal action to claim damages, it must follow provisions of Section 8 of the Act.
According to this section, a written notice must be given to the purchaser, specifying the nature of the breach and allowing a minimum of 30 days for the breach to be rectified. Failure to provide notice in accordance with Section 8 renders the notice and any consequent actions null and void.
In the case of Gurure v Rusike 1992 (2) ZLR 334 (H), the court ruled that, if Part III of the Contractual Penalties Act 1992 had been effective in July 1987, the defendant’s cancellation of the agreement would have been unlawful because the notice given by the defendant’s lawyers did not meet the requirements of Section 8 of the Act.
Clause 9 of the sales agreement stated that, in the event of the purchaser failing to pay any instalment within 21 days of the due date, the seller had the right to summarily cancel the agreement. However, Section 8 states that a seller cannot terminate a contract for breach by the purchaser under an instalment sale of land unless a reasonable period of at least 30 days is given to the purchaser to rectify the breach.
In the Fichani & Anor v Makoni SC-02-03 case, it was found that the notice of cancellation of the agreement given to the purchaser did not meet the Act’s requirements. The seller initially sent a notice of breach, and only after 29 days sent a notice of cancellation.
The court ruled that the 29-day delay in issuing the cancellation notice made it inadequate. This failure to meet the Act’s specific requirement turned out to be fatal for the case.
Is there a difference between contractual penalties and liquidated damages?
Contractual penalties refer to predetermined sums of money that parties agree upon in a contract as a form of punishment or deterrence for a breach of contract.
These penalties are meant to be punitive in nature and may exceed the actual damages suffered by the non-breaching party. The purpose of contractual penalties is to incentivise the breaching party to fulfil its contractual obligations and act as a deterrent against any potential breach.
On the other hand, liquidated damages are predetermined amounts of compensation that parties agree upon in a contract to address anticipated or estimated damages resulting from a potential breach. These damages are often set at a reasonable estimation of the actual loss the non-breaching party would incur in the event of a breach.
Liquidated damages provide a measure of certainty and predictability by eliminating the need to prove the actual damages suffered in case of a breach. They are typically intended to compensate the non-breaching party for its actual loss rather than punish the breaching party.
While both contractual penalties and liquidated damages are contractual provisions meant to address breaches of contract, the key distinction lies in their purpose and the amount of money involved.
Contractual penalties are punitive in nature and may exceed the actual damages suffered, while liquidated damages are meant to provide fair compensation based on an estimation of the damages.
Waiver of rights under Act invalid
Section 11 of the Act provides that “No waiver of any right or benefit conferred by this Act shall be of any force or effect”. This means parties cannot agree to waive the rights provided in terms of the Act. Any waiver is thus unenforceable in terms of the law.
The Supreme Court, in the case of Chikomba Rural District Council v Hebert Pasipanodya SC26/12, held that “Clearly any agreement entered into between the parties had to comply with the specific provisions of both the Act and Regulations. Any agreement to the contrary would be against the law”.
It is worth noting that penalty provisions should be carefully drafted to ensure they are reasonable, proportionate and not excessive. It is advisable for parties to consult legal professionals when including penalty provisions in a contract to ensure compliance with applicable laws and regulations.
LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.
Arthur Marara is a practising attorney, author, human capital trainer, business speaker, thought leader, law lecturer, consultant, legal proctor (University of Zimbabwe), notary public and conveyancer. He is passionate about promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]
