The Issue of Penalty Clauses in Iranian and U.S. Law

Abstract

In Iranian law, there is no specific prohibition on the determination of penalty clauses in contracts. However, sometimes one party to the contract may, under the pretext of provoking or manipulating the other party, include disproportionate penalty clauses. These penalty clauses, often referred to as "excessive" in judicial practice and among some legal scholars, are typically based on the abuse of the weaker party's position or the unfair exploitation of favorable contractual conditions. In certain legal systems, such penalty clauses have been opposed, and legislation has been enacted to reject conditions based on such excessive penalty clauses. A prominent example of such legal systems is the United States. Despite this, in some other legal systems, there is no explicit prohibition in the laws and regulations related to contract law, although such clauses are sometimes regarded in judicial practice, and particularly in legal analysis, as contrary to the principles of fairness and contractual justice. A clear example of such legal systems is Iran. The question that arises is: what is the approach of Iranian and U.S. law towards excessive penalty clauses in contracts and transactions? Given the importance of the issue, on the one hand, and the experiences and achievements of U.S. law regarding the prohibition of excessive penalty clauses in contracts and transactions, and the necessity of incorporating these experiences into Iranian law, on the other hand, this study aims to comparatively examine the approach and stance of Iranian and U.S. law regarding excessive penalty clauses and the inclusion of conditions based on such clauses in contract law.