The Penalty Doctrine in Contract Law

We've never been fans of the contract law rule against penalties. Why can't parties (sophisticated ones at least) agree to suffer a penalty in the event of breach? We’d ordinarily avoid this topic, because the doctrine makes little sense and the issue doesn’t come up much in the sovereign debt world. But recently, a couple of sovereign restructurings (Ghana and Zambia) have used “Loss Reinstatement Provisions.” At least on their face, these provisions seem vulnerable to challenge under the penalty doctrine, since, if the sovereign defaults on the restructured deal, they impose a loss that seems untethered to the injury creditors have suffered. Would these new clauses be enforced if challenged? The contracts in question are both under English law, which we don't know much about. But that does not stop us from speculating and arguing.

Producer: Leanna Doty