Built-In Contract Remedies: Avoiding the Unenforceable Penalty
Under California law, a provision of a contract found to impose a penalty is unenforceable as a forfeiture and contrary to public policy, explains Giselle Roohparvar of Miller Starr Regalia.
“The characteristic feature of a penalty is the lack of proportional relation between the forfeiture compelled and the damages or harm that might actually flow from the failure to perform under a contract,” she writes in the article posted by JD Supra Business Advisor. “Whether a contractual provision is an unenforceable penalty is a question of law subject to judicial determination. When parties are not careful, they risk having a bargained-for condition in their contract struck down as an unenforceable penalty.”