Penalty

A clause which operates on breach of contract (such as a liquidated damages clause) which cannot be justified by some consideration, such as the desire to compensate or to protect a legitimate interest of the innocent party.

A clause which is out of all proportion to the legitimate interests of the innocent party may be considered to be oppressive and unconscionable and, therefore, an unenforceable penalty.

For further information, see Practice note, Contracts: agreed remedies.