Liquidated Damages Or Penalty? Beware The Difference

It is well established that a contractual clause providing for the payment by a defaulting party of a sum which is a genuine pre-estimate of loss is enforceable as liquidated damages while a clause which is predominantly to deter a party from breaking the contract is a penalty and thus unenforceable. The question of whether a sum stipulated is a penalty or liquidated damages is a question of construction and one has to consider all the relevant circumstances existing at the time that the contract was made (Dunlop Pneumatic Tyre Co Ltd v New Grange and Motor Co [1915]). A recent case before the English Commercial Court considered such a clause in a contract for the construction of a yacht.