Penalty clauses that are allowed in civil jurisdictions would not be enforceable as liquidated damages in jurisdictions that use a common law approach.However, while it has long been possible to enforce penalty provisions under civil codes, most courts now have the ability to limit the scope of these penalties.Liquidated damages are meant as a fair representation of losses in situations where actual damages are difficult to ascertain.In general, liquidated damages are meant to be fair rather than punitive.The purpose of a liquidated damages provision is to calculate how much one party stands to lose if the contract is breached or performance is not delivered.Courts will enforce these provisions if they decide it would be hard to estimate the harm resulting from a broken contract and the damages described in the contract are reasonable, meaning their amount is not more than the actual losses suffered.
This allows courts to lower the number of penalties if they decide the original penalty is too large.
The second issue is if the damages listed are reasonable and in proportion to the actual harm in question.
If the court cannot detect these two elements in the provision, then it will not be enforced.
For example, penalties clauses are generally included in a contract to encourage one party to fulfill their obligations, whereas liquidated damages provisions are used to make sure an injured party is compensated for the harm they have been inflicted.
When using a penalty to encourage contractual performance, there is no need to prove that actual damage has occurred.