Common law enforces; civil law modifies
The fundamental divide is that English law enforces a valid LD clause as written (or strikes it down as a penalty - a binary outcome), whereas civil-law systems generally permit penalty clauses but allow a court to modify them. That difference creates real cross-border risk: a clause carefully built to pass Cavendish may be cut down by a court applying its own proportionality rules.
So for any deal that might be enforced abroad, the question is not only whether the clause is valid under the governing law, but also what the enforcement forum will do with it.
France, Germany, and the UAE
The detail varies sharply. Under French law (Article 1231-5 of the Code civil), a court may reduce - or increase - a penalty that is manifestly excessive or derisory, and may do so of its own motion; an attempt to exclude that review is ineffective. German law (section 343 BGB) allows reduction of a disproportionately high penalty, but section 348 of the Commercial Code (HGB) blocks reduction between merchants - making Germany notably enforcement-friendly for individually negotiated B2B clauses (standard terms remain subject to fairness control).
The highest-risk forum is the UAE: under Article 390(2) of the Civil Code, the onshore courts have a mandatory power to adjust the agreed sum to match the actual loss, on a party's application, and any agreement to the contrary is void. So an English-law LD clause litigated in an onshore UAE court can be rewritten regardless of how well it satisfies Cavendish.
Will a foreign court apply English penalty rules?
In principle, the law governing the contract governs the consequences of breach (Rome I, Article 12), so a foreign court applying English law should apply the English penalty rules. The risk is that it instead applies its own rules as overriding mandatory provisions or on public-policy grounds. Most commentators think penalty rules do not usually rise to that level - but the risk is real in practice, especially in the UAE where Article 390(2) is mandatory.
So you cannot assume the chosen law will carry the day in a foreign court. The structural protections below matter more than the governing-law clause alone.
Arbitration and DIFC/ADGM as protection
International arbitration is the strongest structural protection. An arbitral tribunal generally applies the chosen governing law without importing the forum state's penalty rules, so a London-seated LCIA or ICC arbitration applying English law will assess the clause under Cavendish, and the award is enforceable under the New York Convention in well over 100 contracting states.
For deals with UAE counterparties specifically, choosing DIFC or ADGM law and courts can reduce the onshore Article 390(2) risk - though the two are not identical: DIFC has its own statutory power (Article 122 of the DIFC Contract Law) to reduce liquidated damages that are grossly excessive in relation to the harm, while ADGM is closer to English penalty principles. Match the dispute-resolution choice to the enforcement map.
Drafting for the most demanding test
Where a clause may face several systems, draft to satisfy the most demanding. Recite that actual damages would be difficult to calculate, that the figure is the parties' genuine best estimate of probable loss, and that both parties are sophisticated entities who negotiated at arm's length - language that simultaneously supports the English legitimate-interest test, the US reasonable-forecast standard, the French not-manifestly-excessive test, and the German disproportionality threshold.
Consider a clause-specific severability provision stating that if a court finds the amount exceeds the enforceable level, it is reduced to the maximum enforceable amount rather than struck down. English courts apply a binary enforce-or-strike approach, but this language assists in civil-law jurisdictions where modification is the norm.
Use at the desk
Practical checklist
- Identify the likely enforcement forum, not just the governing law - civil-law courts can rewrite penalties.
- Expect judicial modification under French CC Art 1231-5, and mandatory adjustment under UAE Art 390(2) (cannot be excluded).
- Note Germany blocks reduction between merchants (s.348 HGB) - enforcement-friendly for negotiated B2B clauses.
- Use international arbitration so the chosen law is applied without forum penalty rules (New York Convention enforcement).
- For UAE-connected deals, consider DIFC or ADGM law and courts to reduce onshore Art 390(2) risk (DIFC applies its own Art 122 gross-excessiveness review; ADGM is closer to English principles).
- Recite difficulty of calculation, genuine estimate, and arm's-length negotiation; add a clause-specific reduction or severability provision.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
Product demo
Use the guide for context. Use Veqtor for the Word documents.
Watch Claude compare negotiation drafts and create a separate Word document with proposed tracked changes.
See Veqtor work with Word redlines