penalty clause
Definition
A penalty clause is a section in a contract that requires one party to pay a fixed sum of money if they break a specific term of the agreement, like missing a deadline or failing to deliver a product. Courts in many places actually have the power to throw out or reduce penalty clauses they consider unreasonably harsh compared to the actual harm caused.
Example
Your web developer signs a contract promising to launch your site by a certain date, and the contract states they owe you $500 for every week they run late.
Watch Out
If you include a penalty clause in your own contracts, make sure the amount you set is a reasonable estimate of your actual losses, because courts often refuse to enforce amounts that look more like punishment than compensation.
See which terms appear in your contract?
This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.