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Contract Penalty Provisions and Clauses

Liquidated damage clauses in contracts are enforceable, while penalty clauses are not. Paragon Group, Inc. v. Ampleman, 878 S.W.2d 878, 880 (Mo. Ct. App. 1994). The reason for this is that the policy behind remedies in the event of a breach of contract is to effect compensation, not a penalty. Luna v. Smith, 861 S.W.2d 775, 779 (Mo. Ct. App. 1993). Liquidated damages are a measure of compensation which the parties agree represent the damages in case of breach. Still, though, evidence of actual harm or damages is necessary for liquidated damages to be applied. Goldberg v. Charlie’s Chevrolet, Inc., 672 S.W.2d 177, 179 (Mo. Ct. App. 1984).

How does one distinguish between an enforceable liquidated damages clause versus an unenforceable penalty clause? The answer is not always clear, but to be a liquidated damages clause the (1) amount fixed as damages must be a “reasonable forecast” for the harm cause by breach and (2) the harm must be of a kind difficult to accurately estimate. Luna, 861 S.W.2d at 779.

Contact with questions about contracts, penalty clauses and/or liquidated damages clauses.