Kuwait Court of Cassation principle number 322

Summary: - Penalty clause. An obligation accessory to the principal obligation. Its nature: an agreement on the sanction for breach of the principal obligation. Its import: the lapse of the principal obligation entails the lapse of the penalty clause. Its effect: the compensation prescribed under it is disregarded. The judge may assess compensation, if due to the creditor, in accordance with the general rules placing the burden of proving damage, its occurrence, and its amount upon him. The challenged judgment's rescission of the investment contract and ordering the appellant company to pay the value of the penalty clause contained in the aforementioned contract despite its lapse in examining the elements of liability. An error in applying the law requiring its cassation. Rule: It is established—in the jurisprudence of this Court—that a penalty clause is an obligation accessory to the principal obligation, as it is an agreement on the sanction for breach of that obligation. If the principal obligation lapses, the penalty clause lapses with it, and the compensation prescribed under it is disregarded. If compensation is due to the creditor, the judge assesses it in accordance with the general rules placing the burden of proving damage, its occurrence, and its amount upon the creditor. That being so, the challenged judgment upheld the first-instance judgment rescinding the investment contract at issue, and the extinguishment of the contract entails the lapse of the penalty clause. Since the challenged judgment ordered the appellant company to pay the value of the penalty clause contained in the investment contract at issue despite its lapse in examining the elements of liability, it is vitiated by an error in applying the law, requiring its partial cassation in this respect.