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In contract law, what is a pre-defined penalty for non-performance called?

For example, if the contract says something like: "so-and-so will do xyz by May 5, 2021, and if so-and-so should fail to do so by that date then so-and-so will be liable for $100,000 due to the party of the first part." What is the $100,000 penalty called?

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It has to be 'liquidated damages', since a penalty clause is unenforceable. It has to have a reasonable relation to the party's legitimate interest. The point is that it has to represent a good faith estimate of the actual damage.

  • Interesting. I did not know about this more precise term (+1). The Black's Law Dictionary cites case law distinguishing between "purpose of a penalty to secure performance [versus] fix[ing] the amount to be paid in lieu of performance". – Iñaki Viggers Mar 14 at 15:52
  • there are also contractual penalties, which are different (and follow different rules) – Trish Mar 15 at 12:51
  • @Trish In German law but not in U.S. law. – ohwilleke Mar 15 at 18:11
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What is the $100,000 penalty called?

It would be called remedy or provision. There surely are other pertinent terms, but "remedy" underlines a connotation of sanction for non-performance.

(I am unsure of what you mean by "[party] of the first part")

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in German contracts, this would be called "Vertragsstrafe", which the dictionary translates as contractual penalties. But then there are also liquidated damages. So basically, there are two types of contract clauses that demand money to be paid for failure: contractual penalties and liquidated damages.

liquidated damages

[These] are ex ante reasonable estimation of the true losses: the party suffering from the other party’s default shall receive a predetermined indemnity.

So, for example, company A has a contract to deliver a machine by 10th of March. They order a part at company B with a contract that stipulates the part needs to be delivered by 1st of March or B has to pay liquidated damages to cover for a (part) of the damages that happen for A being unable to deliver to their customer.

contractual penalties

Contractual penalty awards a lump-sum compensation to the non defaulting party for damages (similarly to the liquidated damages) connected with a specific breach.

So for example, company A has to deliver their machinery to the customer by 10th of March. To make sure that company A puts all they have to deliver in time, the customer has put a contractual penalty into the contract. On the other hand, to ensure timely payment, the company has included a contractual penalty on late payments.

  • U.S. law does (and most common law countries) would classify what you (and German law presumably) calls "contractual penalties" as liquidated damages. – ohwilleke Mar 15 at 18:10
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It would be called “unlawful”

Penalty clauses in contracts are void as being against public policy. That is because only government has the power to punish wrongdoing - private citizens don’t.

The normal remedy for failing to perform obligations under a contract is damages. That is, the wronged party must be put in the same financial position (as far as possible) as if the breach had not occurred.

Further, because the relief against penalties can be an equitable one, rather than at law, a charge can be a penalty even if there is no breach of contract.

Liquidated damages clauses which agree a genuine pre-estimate or the damage an event will cause and are cognisant of their proportionality with respect to the contract and the parties relative bargaining power are not penalties. Nor are charges for the provision of additional or different services from the charging party.

The type of clause you outline is almost certainly a penalty unless the party receiving the money will genuinely believes they will lose $100,000 (or thereabouts) if the event happens.

This is a good summary of the state of the law in Australia. Other common law jurisdictions vary on what is and is not a penalty but the basic principle is the same: damages are allowed, penalties are not.

  • penalty can be unlawful but doesn't need to be. if the contract is about a 25-million ship, a 100k delay penalty is peanuts and can be very lawful – Trish Mar 15 at 12:49
  • @Trish A "penalty" is a term of art in the law that means "not a valid liquidated damages clause." What you are calling a "100k delay penalty" would be called in legal language a liquidated damages clause and not a penalty and a lawyer would be a fool to call it a penalty in contract language. – ohwilleke Mar 15 at 18:08
  • Any citations for that? – Acccumulation Mar 15 at 18:30
  • @Acccumulation See, e.g., Klinger v. Adams County Sch. Dist. No. 50, 130 P.3d 1027, 1034 (Colo. 2006) citing Restatement (Second) of Contracts § 356. – ohwilleke Mar 15 at 19:29
  • @ohwilleke That decision says "The result in this case turns on whether the statutory provision limiting a school district's recovery of damages to the "ordinary and necessary expenses" it incurs in finding a replacement for a teacher who resigns with insufficient notice allows recovery of monies paid to salaried employees when the employees would have been paid the same amount regardless of the teacher's late resignation." It looks to me that there was a limitation specific to that case of "ordinary and necessary expenses" , not a general prohibition against penalties. – Acccumulation Mar 15 at 19:37
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It can just be called a "penalty". "Guarantee", "indemnity", compensation", "forfeit", or "reduction" are also terms that could apply. It can also be an SLA.

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