Breach Of Contract And The Contractual Penalties Act

Breach of contract simply refers to the failure by a party to perform one or more of the terms of the contract. There are various forms of breach which include default by the debtor, default by the creditor, positive malperformance, prevention of performance and repudiation. This article however only focuses on breach of contract in relation to the Contractual Penalties Act.

The Contractual Penalties Act applies to all penalty stipulations (or clauses) in contracts and contracts for sales of land by instalments. A penalty stipulation is defined in the Act as follows;

“penalty stipulation” means a contract or provision in a contract under which a person is liable—

(a) to pay any money; or

(b) to do or perform anything; or

(c) to forfeit any money, right, benefit or thing;

as a result or in respect of—

(i) an act or omission in conflict with a contractual obligation; or

(ii) the withdrawal of any person from a contract;

whether the liability is expressed to be by way of penalty, liquidated damages or otherwise.

The most common penalty clause is where parties agree that the party in breach pays a specified amount for the breach or the seller in a contract of sale is allowed to cancel the contract for breach and retains the amount paid by the buyer as damages. The Act provides that such clauses are enforceable but the court is given a wide discretion if it considers that such a clause is ‘out of proportion to any prejudice suffered by the creditor”. Thus the court may reduce the penalty to the extent it considers equitable, order the creditor to refund the debtor the whole or part of any money paid or grant relief which it considers fair and just. The court in Scotfin Ltd v Ngomahuru  (Pvt) Ltd 1997 (2) ZLR 563 (HC) the court stated that “… the Contractual Penalties Act renders a penalty stipulation enforceable subject to the court’s discretion to reduce the penalty to the extent of any prejudice suffered by the claimant or to grant such other relief  as may be fair and just”. What is clear is that parties may agree to a penalty in the event of breach but the court may in appropriate circumstances refuse to enforce it.

Where it is an agreement for the sale of land by instalments, a party who wishes to enforce a penalty clause, terminate the agreement or institute proceedings to claim damages must do so in terms of section 8 of the Act. This section provides that notice should first be given to the purchaser in writing, advising him/her of the nature of breach and calling upon him/her to remedy the breach within a minimum of thirty days. Failure to give notice in terms of section 8 of the Act means that the notice and any consequent action is of no force and effect.

In Gurure v Rusike 1992 (2) ZLR 334 (H) the court held as follows;

“I would point out that had Part III of the Contractual Penalties Act 1992 been in operation in July 1987 the cancellation of the agreement by the defendant would not have been lawful because the notice given to the plaintiff by the defendant’s lawyers would not have met the requirements of s 8 of that Act. Clause 9 of the agreement of sale provides that if the purchaser fails to pay any instalment within 21 days of due date the seller is entitled to cancel the agreement summarily. However, s 8 provides that no seller under an instalment sale of land may terminate a contract on account of any breach of contract by the purchaser unless he has given the purchaser a reasonable period of not less than 30 days to remedy the breach.”

The drafting of contracts and enforcement of the same is always complex. It is always important to consult a lawyer for one to properly navigate this legal minefield.

The contents of this article are for general information purposes only and do not constitute our legal or professional advice. We accept no responsibility for any loss or damage of whatsoever nature which may arise from reliance on any of the information published herein.

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