Penalty clause
A clause that imposes a fixed amount for non-performance, without requiring the claiming party to prove actual damages.
What is a penalty clause?
A penalty clause (or liquidated damages clause) pre-fixes what a party pays for a specific breach. Advantage: no need to prove actual damages. Drawback: courts may reduce it if disproportionate.
Example
"For each calendar day of delay past the delivery date, Supplier owes an immediately due penalty of €1,500, capped at 15% of contract value."
No debate over "what's the real damage" — the meter runs.
When it matters
- Construction contracts — delivery delays
- Suppliers — delivery or performance delays
- NDA / confidentiality — penalty per leak
- Non-compete / non-solicit — penalty per breach
- IT implementations — go-live delays
Penalty vs damages
- Penalty: fixed amount, regardless of actual damages. Not cumulative unless stated.
- Damages: proven actual loss. Unlimited, unless liability cap applies.
Warning: a penalty clause often excludes damages claims, unless "without prejudice to the right to claim damages" is included.
Common pitfalls
- Disproportionate amount — court may reduce to a reasonable level.
- Cumulation unclear — can you claim both penalty and damages?
- No formal notice — some penalties lapse without formal demand letter.
- No cap — daily penalty can explode.
How GuardPilot flags this
GuardPilot extracts every penalty clause, verifies trigger events against reality (delivery data, SLA metrics), and generates recovery-ready reports for finance. See Contract Review.
Related terms: Indemnity clause · SLA · Contract compliance