Last Updated on 03/02/2026 by Damin Murdock
Is it a Penalty Clause?
Is someone trying to hold you liable for breaching a clause which you believe may be a penalty? Many commercial contracts have clauses that stipulate compensation in the event that a contractual term or an obligation is breached.
The general rule is that if the clause is a liquidated damages clause it is enforceable and the sum set out in the clause is recoverable. If, however, if it is a penalty clause it will not be enforced beyond the actual loss of the innocent party.
A clause is potentially a penalty clause if:
- the predominant function of the clause is to deter a party from breaking the contract;
- the compensation stipulated is not a genuine pre-estimate at the time the contract was entered into;
- the sum specified is extravagant and unconscionable in comparison with the greatest loss that could have been proved to have followed from the breach;
- if the breach of contract consists only of not paying a sum of money, and the amount stipulated as compensation is greater than the sum that ought to have been paid;
- a single lump sum is made payable by way of compensation whether the occurrence of event or events that trigger the clause are serious or trifling; and
- in a sales contract, the buyer is obliged to either take delivery of a minimum quantity of product or pay a specified minimum amount.
Before paying any compensation demanded under such clauses, or signing a contract that has a penalty clause, please contact Damin Murdock at Leo Lawyers on (02) 8201 0051 or at office@leolawyers.com.au.
DISCLAIMER: This article is not to be taken as legal advice and is general in nature. If you require specific advice, please contact us.
Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."
