Penal damages are
best seen as quantitatively excessive liquidated
damages and are invalid under the common law.
While liquidated damages are a priori
calculations of expectation loss under the
contract, penal damages go further and seek to
penalise a party in some way for breach of a
clause above and beyond the loss suffered by the
innocent party as a result of this breach. Many
clauses which are found to be penal are expressed
as liquidated damages clauses but are seen by
courts as excessive and thus invalid.
The judicial approach to penal damages is
conceptually important as it is one of the few
examples of judicial paternalism in contract law.
Even if two parties genuinely and without
coercion wish to consent to a contract which
includes a penal clause, they are unable to. So,
for example, a person wishing to give up smoking
cannot contract with a third party to be fined
$100 each time they smoke as this figure does not
represent the expectation loss of the contract.
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