Penalty

In one sentence

A sum of money a contract requires as punishment for breach, often unrelated to actual damages.

Plain English

A penalty clause in a contract sets a fixed amount that must be paid if someone breaks the agreement. Unlike damages, which aim to compensate for actual losses, a penalty is meant to punish or deter breach. Courts often view penalties skeptically and may refuse to enforce them if they seem unreasonably harsh compared to the real harm caused.

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Example

A concert promoter's contract states that if a band cancels within 30 days of the show, they must pay $50,000. If the promoter can prove actual losses were only $5,000, a court might refuse to enforce the full $50,000 penalty as excessive.

Used in a sentence

“The contract included a $10,000 penalty for any late delivery, regardless of whether the delay caused actual financial harm.”

Related terms

Punitive Damages

Extra money awarded to punish wrongful conduct and deter future misconduct.

Consideration

Something of value exchanged by each party to make a contract binding.

Unconscionability

A contract term so unfair and one-sided that a court will refuse to enforce it.

Mitigation of Damages

A duty to take reasonable steps to minimize losses caused by another party's breach.

Specific Performance

A court order forcing someone to actually do what they promised in the contract.

Liquidated Damages

A fixed amount both parties agree in advance the breaching party must pay.

Offer

A proposal to enter into a binding agreement on specific terms.

Acceptance

Agreeing to the exact terms of an offer, creating a binding contract.

This page is a plain-English reference and is not legal advice. Laws vary by jurisdiction and change over time. For specific situations consult a licensed attorney.