Penalty Clause

A contract clause that provides for the payment of an amount as forfeiture in the event a party defaults. Penalty clauses are generally not enforced by the courts when the amount of the penalty is unrelated to the damages incurred. However, the courts will sometimes enforce a penalty on the grounds that the parties were free to agree to it. 5 Corbin, Contracts, §1057 (1964). 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); White & Summers, Uniform Commercial Code 194-95 (5th ed. 2002).