Also known as:void as penalties · penalty void · unenforceable penalty
Written by attorneys · grounded in primary & secondary sources — see below
A contractual provision fixing damages for breach at an unreasonably large amount. The provision is unenforceable on public policy grounds because contract remedies seek to compensate the nonbreaching party rather than punish the breacher.
Sources & Authorities
How it applies
Common Examples
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Unreasonable Late Fee in Parts Contract
Metro Motors contracted with RapidHaul Trucking for parts deliveries and included a clause requiring RapidHaul to pay $100,000 for each day a shipment arrived late regardless of size or impact. A small low-value shipment arrived one day late and caused no measurable disruption or loss. Metro Motors sued to collect the full amount. The court refused enforcement because the fixed sum bore no reasonable relation to any anticipated or actual harm from routine minor delays.
Stipulated Salary in Employment Breach
An employment agreement between a hotel and its manager contained a clause requiring the hotel to pay the manager full salary for the entire unexpired term upon termination without cause. After breach the manager calculated damages at salary for twenty-one months. The reviewing court examined the clause independently and held it void as a penalty because the amount of loss from an employment breach could be readily measured and proved at trial.
Select any source to read its text and confirm it supports the definition.
Uniform Acts
Study Supplements
Wassenaar v. Towne Hotel331 N.W.2d 357 (Wis. 1983)
Common questions
Frequently Asked
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What makes a liquidated damages clause unenforceable as a penalty?+
A clause is unenforceable when the stipulated sum is unreasonably large in light of anticipated or actual harm, the difficulty of proving loss, and the inconvenience of obtaining an adequate remedy. Courts treat such a term as a penalty because contract remedies must compensate rather than punish.
Supporting sources
Does actual loss after breach determine whether a clause is a penalty?+
Actual loss is relevant but not dispositive. Courts examine both anticipated harm at formation and actual harm after breach. A clause may still be a penalty if the amount greatly exceeds either measure even when actual loss is low.
Supporting sources
Can parties enforce a large stipulated sum simply because they agreed to it?+
No. Freedom of contract does not permit enforcement of a term that functions as a penalty. Courts independently assess reasonableness regardless of the parties' consent.
Supporting sources
How does difficulty of proof affect the penalty analysis?+
Difficulty of proof supports enforcement when it justifies a pre-estimate. When loss is easy to calculate at trial, a large fixed sum is more likely to be struck as a penalty.
Supporting sources
770 F.2d 879 (10th Cir. 1985)Contracts
…and "adjustment of minimum bill" provisions of the contract; (2) the "minimum payment" clause of the contract constitutes an unenforceable penalty; (3) the contract as a whole is unconscionable; and (4) the trial court incorrectly calculated the amount of damages owing in the event the contract is found to be enforceable. We consider…