Penalty clause is a contractual provision that provides for payment of an amount as forfeiture on breach of the contractual provisions. Usually the amount will be unrelated to the actual harm suffered. These clauses are added so as to prevent future disputes in case of breach of the contractual provisions. Penalty clauses are generally unenforceable. However, 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 penalty clause

Are There Any Limitations on the Award of Compensatory Damages?
An important limitation on the award of damages is the duty to mitigate. The non-breaching party is obligated to mitigate, or minimize, the amount of damages to the extent reasonable. Damages cannot be recovered for losses that could have been reasonably avoided or substantially ameliorated after the breach occurred. The non-breaching party‘s failure to use reasonable diligence in mitigating the damages means that any award of damages will be reduced by the amount that could have been reasonably avoided.


  • Limitations of liability attempt to limit, define or eliminate damages occasioned by a parties conduct or breach of contract
  • A limitation of liability clause (sometimes referred to simply as a liability clause) is the section in a contracted agreement that specifies the damages that one party will be obligated to provide to the other under terms and conditions stipulated in the contract.

In a legal context, a liability is generally a responsibility to compensate for some failure to perform according to an established or agreed-upon stipulation. Because there is an element of risk inherent in most business agreements, limitation of liability clauses are common in all areas of contract law.

In IT, limits of liability clauses are typically written into contracts between any two parties, including distribution agreements, software license agreements and service-level agreements. In a software license agreement, for example, the limitation of liability is one of the most important clauses because it limits the amount and types of damages one party can recover from the other
party. For example, if the software doesn’t work and the company suffers damages as a result, the limitation of liability will restrict the company’s ability to recoup its loss. Because a limitation of liability clause typically favors whichever party drafted the agreement —
usually the vendor — it’s particularly important to negotiate that part of the contract after careful

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