A contractual penalty is an amount agreed in advance that a party is obliged to pay upon breach of a specific obligation – most often in the event of a delay in delivery, in payment, or a breach of confidentiality. Its advantage is that the entitled party does not have to prove that damage arose or its extent; a breach of the obligation is enough. It must be agreed in writing and tied to a precisely defined obligation, otherwise it is unenforceable. A court may reduce a disproportionately high penalty, so extreme rates do not provide the protection the parties imagine. The relationship to damages needs to be agreed separately – without an explicit agreement, damage exceeding the penalty is generally not awarded. In contracts, it is worth agreeing the penalty on a mutual basis, not only to the supplier's disadvantage. Alongside the penalty, interest for late payment can also be agreed, which applies separately to monetary obligations.
See also: Contract with a marketing agency, NDA and confidentiality, Website Acceptance Procedure.
