Contract Glossary
Penalty Clause
Definition
A contract provision that imposes a punishment, usually a large payment, for breach, where the amount isn't related to the actual damages suffered. In the U.S. and England, penalty clauses are generally unenforceable. Courts prefer liquidated damages (pre-agreed reasonable estimates of actual loss).
In Practice
If your contract says 'late delivery results in a $100,000 fine' but the actual cost of late delivery is $5,000, a court will likely strike down that provision as an unenforceable penalty. To make it stick, frame it as liquidated damages, a reasonable estimate of the loss, determined at the time the contract was signed.
Common in these contract types
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