Legal analyzing of the manner of taking penalty clause in banking contracts

Banks take large sums of money as penalty clause which in some cases exceeds the original amount of money. There is a formula in banking contracts known as penalty clause which determines high rates of interest in addition to obtaining an undertaking for the interest and delay in payment. In this inquiry the exact borders of penalty clause, late payment damages and devaluation of money are described and coordination these concepts and judicial terms is analyzed. Prohibition of taking damages more than inflation rate is proved and taking penalty clause from interest and late payment damages is criticized. The other issues that are discussed in this research are: the neglecting of judicial precedent about debtor’s financial ability and content of article 227 and 229 civil code. The article concludes that in Iran legal system, banks at most are allowed to take damages as much as the devaluation of money and more than that is illegal.