Penalty clauses — how to spot them and how to avoid them

When entering into corporate and commercial contracts, it is common to structure the deal so that if there is a breach it can be compensated without having to bring court proceedings. This can be achieved by mechanisms such as forfeiture clauses, put and call arrangements and compulsory buy-back provisions. However, as highlighted by a recent High Court decision, any party hoping to rely on such provisions will need to ensure that they do not constitute unenforceable penalties. We look at the practical points to consider arising from the case.

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