As international clients from common law jurisdictions expand their businesses in a civil law jurisdiction such as Luxembourg, the question of the enforceability of the liquidated damages and penalty clause may arise in relation to limited partnership agreements.
Limited partnerships are cash-in/cash-out vehicles and it is critical commercially that each limited partner contributes its share of partnership funds when required to do so. If a limited partner defaults on its commitment then, save in very limited circumstances, it may be placed in default and the general partner may take one of a broad range of possible remedies to ensure that the other partners are not prejudiced. These default provisions are universally accepted in industry as a proportional and sensible safeguard against limited partner default.
The position under Luxembourg law is particularly straightforward as the Civil Code starts from the policy presumption that commercially negotiated contract terms are enforceable. The approach of the Luxembourg courts to liquidated damages (Article 1152) and penalty clauses (Articles 1226 et seq) can be seen in a Luxembourg supreme court case Cour de cassation, 9 juillet 2015 n° 68/15, where the supreme court started by identifying: (i) whether a clause actually pre-determined damages for breach of a principal obligation (whether reasonable or not); or (ii) it simply specified an alternative means of satisfying the principal obligation (eg, payment in cash or kind). Insofar as a clause was a liquidated damages or penalty clause, then the courts would uphold it subject to their discretionary power (inserted into the Civil Code in 1987) to reduce the agreed remedy where they could justify (in accordance with pre-existing case law) that the clause was 'manifestly excessive'. This approach has a clear advantage insofar as all the parties can be confident that a liquidated damages or penalty clause will be enforced and compensatory in nature (ie, with a presumption in favour of the person enforcing the term).
In the context of a limited partnership, therefore, Luxembourg law removes much of the uncertainty that can attach to default provisions under some other jurisdictions. The general partner may be expressed to have the broadest possible remedies under the agreement (without the need to take an unduly technical approach to the construction of the clause), but the general partner cannot use the remedies to benefit certain partners at the expense of another. The remedies must be fairly exercised and the partners treated equitably.
The simplicity and pragmatism of Luxembourg contract law reinforces its suitability for complex commercial contracts where each of the parties is legally represented and there is little justification for unnecessary intervention by the courts.
It is also in line with European legal concepts that are reflected in the broader regulatory framework (such as MiFID II and the AIFMD).