Jurisprudential and Legal Examination of the Theory of Penal Clause (Contractual Penalty) with an Approach to Iranian and English Law

Abstract

This study examines the nature, position, and limits of liquidated damages in terms of fairness within Islamic jurisprudence and the statutory laws of Iran using a descriptive-analytical research method. There are differing opinions regarding the nature and position of liquidated damages. One view considers liquidated damages as a type of optional condition (Khiyar al-Shart), allowing the obligor to pay the stipulated penalty instead of fulfilling the primary obligation. However, this view is not entirely precise. Another perspective regards liquidated damages as a form of penalty, despite the fact that such damages may not necessarily correspond to the actual loss incurred. Moreover, the inclusion of liquidated damages often deprives the beneficiary of the right to claim actual damages. Another perspective classifies liquidated damages as compensation for non-performance of obligations, but this contradicts the last part of Article 230 of the Iranian Civil Code, as the actual damage incurred may be greater or lesser than the stipulated amount, and the judge cannot order the obligor to pay more or less than the agreed-upon sum. Nevertheless, it appears that while liquidated damages align closely with the last perspective, they serve as a unique form of compensation and a guarantee for performance, possessing distinct characteristics. Based on their specific nature and Article 10 of the Iranian Civil Code, liquidated damages fall within the realm of the parties' contractual agreement. Additionally, unlike Iranian law, English common law draws a clear distinction between liquidated damages and penalty clauses, invalidating the latter. Under English law, the aggrieved party can only claim actual damages incurred. The primary rationale for the invalidation of penalty clauses is that contracting parties cannot impose punitive measures on one another. It is noteworthy that this study examines the position of Iranian law regarding penalty clauses and concludes that judicial penalties are currently either prohibited or, at the very least, highly restricted under Iranian law, with a limited scope of application.