penalty clauses


Also found in: Dictionary, Financial, Encyclopedia.

penalty clauses

clauses that impose a liability more extensive than general damages. They are contrary to public policy and accordingly unenforceable. However, the courts will allow parties to agree the amount of damages in advance by way of what is called a liquidate damages provision. These often look the same, and the result may be little different. It has been said that the factors in determining what is allowed and what is not are as follows:
  1. (i) the difficulty of calculating the actual loss on breach;
  2. (ii) the reasonableness of the stipulated sum;
  3. (iii) a clause will be presumed penal if it makes the same sum payable for breaches of differing severity;
  4. (iv) a clause will be penal if the principal obligation is to pay money and the stipulated sum is larger.