L5M3 practice question 3 of 25

Which of the following statements about penalty clauses is not true?

Full set: 120 questions

Answer options

A: they are used to deter the parties from breaching the contract

B: they are illegal Correct answer

C: they provide damages in excess of the true cost of a breach

D: they can harm the working relationship

Correct Answer:

B. they are illegal

Explanation

2 - penalty clauses are not illegal. However they may be judged excessive in a court of law and thrown out. Most contracts will instead opt for liquidated damages rather than a penalty clause. See p.90

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