Penalty clause
From Common law (penalty rule) and civil law (clause pénale)
Contract and obligations
What it means
A contract term that sets a sum payable if one side breaks the contract. The question every legal system has to answer is how far the parties can agree such a sum in advance, and what a court can do if it is too high.
Why it travels badly
A common-law court will refuse to enforce a clause that is a 'penalty', but will enforce a genuine pre-estimate of loss. Civil codes usually enforce the clause, and let the judge reduce it if it is manifestly excessive. The word 'penalty' also means different things in each system.
How other systems say it
penalty rule
Dunlop v New Garage (1915) drew the line between a 'penalty' and 'liquidated damages'. Cavendish v Makdessi (2015) says a clause is unenforceable only if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in enforcing it.
clause pénale (art 1231-5 Code civil)
The judge can reduce or increase a penalty that is manifestly excessive or derisory.
Vertragsstrafe (§§ 339 ff BGB)
The court may reduce a disproportionate penalty to a proper amount (§ 343 BGB).
United States
liquidated damages versus penalty
A court enforces a reasonable forecast of loss that is hard to estimate and refuses to enforce a penalty. The Uniform Commercial Code says the same for sales of goods.
Tip for translators and students
Check which rule the translated contract is governed by before explaining the clause to a client. The same sentence can be valid in one country and void in another.
See the Legal Dictionary entry →
Related: Good faith, Force majeure and frustration
Updated October 2026. Spotted a mistake? Tell us.
TheLawToKnow Tools’s glossary is an educational overview of the main differences between legal systems. It is not legal advice.
