Glossary

Penalty clause

A penalty clause is a secondary obligation that makes the contract-breaker pay a sum, or suffer a detriment, out of all proportion to the innocent party’s legitimate interest in performance. In England and Wales it is unenforceable. The test is Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67.

Last updated 28 October 2026

Freelancers meet this when a client’s template says “£10,000 for any breach” on a £2,000 job, or when a supplier tries to keep a 100% fee plus the files after a one-day delay. The lawful cousins are liquidated damages, a late fee that tracks statutory interest, and a kill fee that is the price of termination for convenience.

We draft sums we can stand behind. Lex will put a proportionate cancellation scale or a delay rate in the paper; it will not invent a punishment. Agree the number on one shared link before anyone is in breach, rather than threatening a penalty in a later email that the signed contract never contained.

When is a clause a penalty?

When it is a secondary obligation — it bites because of a breach — and the detriment is out of all proportion to any legitimate interest in getting the primary obligation performed. Cavendish is the authority. An extravagant lump sum for a trivial breach is the classic shape.

What happens if a clause is a penalty?

It is unenforceable. The innocent party is left to prove ordinary loss for breach of contract, subject to the liability cap and the duty to mitigate. The rest of the contract continues, especially if there is a severability clause. You do not get to pick a “reasonable” figure in place of the penalty; the clause falls and damages are assessed.

How do we draft a sum that will stand?

Tie it to a named breach, keep it in proportion to the fee or the likely extra cost, explain the interest it protects, and say whether it is a sole remedy. A sliding kill fee that rises as work is done is easier to defend than a flat 100% from day one. Credit the deposit.

Is a late fee a penalty?

It depends on the rate and the interest it protects. UK statutory interest on late commercial debts under the Late Payment of Commercial Debts (Interest) Act 1998 is a lawful baseline. A modest contractual rate plus a right to pause work is the usual freelance paper.

A worked example

A client template says the supplier pays £25,000 for any breach, including a missed internal meeting, on an £8,000 website build. The studio strikes it. In its place they agree £200 per working day of delay on the launch milestone, capped at 15% of the fee, as liquidated damages, inside the liability cap. The £25,000 line would not have stood.

How it shows up in a contract

Sample wording · our own drafting

The charges in this clause are liquidated damages, not a penalty. They protect the Client's legitimate interest in [timely delivery] and are a genuine estimate of the likely loss. If a court finds any sum unenforceable as a penalty, that sum is severed and the Client's other rights, including to prove actual loss subject to the liability cap, remain.

In Plain English

These extra charges are agreed compensation for a named failure, not a fine. They match the real interest in getting the work on time. If a court will not enforce a figure, that figure drops out and the rest of the contract — including the cap — still applies.

Common mistakes

  • Writing “penalty” in the heading and hoping the number still stands. The label hurts you.
  • Setting one enormous sum for “any breach”, which is the Cavendish example of disproportion.
  • Threatening a penalty that is not in the signed contract at all.
  • Forgetting severability, so a bad sum is used to attack neighbouring clauses.

What the legislation says

Sources

Frequently asked questions

What is a penalty clause?

A secondary obligation that imposes a detriment out of all proportion to the innocent party’s legitimate interest in performance. In England and Wales it is unenforceable (Cavendish [2015] UKSC 67).

What happens if a clause is a penalty?

It falls. The innocent party proves ordinary loss for breach, subject to the liability cap. The court does not rewrite the figure.

How do we draft a sum that will stand?

Tie it to a named breach, keep it in proportion to the fee or likely extra cost, and say whether it is a sole remedy. A sliding scale is easier to defend than a flat maximum from day one.

Is statutory late-payment interest a penalty?

No. Interest under the Late Payment of Commercial Debts (Interest) Act 1998 is a lawful baseline for business-to-business debts. See /glossary/late-fee.

Related

The legal wording governsLast reviewed 28 October 2026Pending lawyer review