Penalty Clause

Definition

A penalty clause is a clause in a construction contract by which a contractor is assessed a monetary penalty, usually on a daily basis, for delay in the completion of a project.

Purpose

Penalty clauses incentivize contractors to complete projects on time by imposing financial penalties for delays, ensuring that project deadlines are met and reducing the risk of extended timelines.

Examples of Use

• Construction Contracts: Imposing penalties for delays in completing building projects.
• Service Agreements: Applying penalties for late delivery of services or products.
• Lease Agreements: Including penalties for late occupancy or failure to vacate on time.

Related Terms

• Liquidated Damages: Pre-determined compensation for losses due to breach of contract.
• Performance Bond: A bond that ensures the contractor completes the project as per the contract terms.
• Delay Damages: Compensation for losses incurred due to delays in project completion.

Notes

• Enforceability: Penalty clauses must be reasonable and proportionate to be enforceable in court.
• Negotiation: Both parties should agree on the terms of the penalty clause during contract negotiations.