Am I Entitled to a Contractual Penalty on a Time-Barred Claim?

What is a contractual penalty?

A contractual penalty serves to reinforce a contractual obligation. Think of it as a side agreement that, if one party breaches a particular contractual obligation, it will have to pay the other party a contractual penalty. A contractual penalty is a handy tool for enforcing the proper performance of important contractual obligations. When one party fails to perform, there is no need to work out how much damage the other party suffered, because it is already clear what penalty the entitled party will collect for it.

1) A separate claim

A contractual penalty is a separate claim, unlike default interest, for example. If the right to payment of the contractual penalty arose before the main claim became time-barred, the creditor can successfully demand that it be paid, even after the main claim has become time-barred.

That is because the extinction or time-barring of the main claim has no effect on a contractual penalty that has already arisen; it is a separate claim with its own limitation period. The limitation period is generally three years and runs from the day the claim could first be asserted (for example, by filing a lawsuit with the court).

2) After the main claim is time-barred

If the right to the contractual penalty arose only after the main claim had become time-barred, the situation is different. Both the main claim and the contractual penalty do exist, but they are not enforceable through the courts.

If you need advice about a contractual penalty, don't hesitate to get in touch with our law firm. We are here for you.