Penalty Clause Law and Legal Definition

Penalty clause is a contractual provision that provides for payment of an amount as forfeiture on breach of the contractual provisions. Usually the amount will be unrelated to the actual harm suffered. These clauses are added so as to prevent future disputes in case of breach of the contractual provisions. Penalty clauses are generally unenforceable. However, courts will enforce a liquidated damage clause when the amount of actual damages is difficult to ascertain and the liquidated damages are a reasonable attempt to approximate the actual damages. U.C.C. §2-718(1).