While liquidated damage clauses set a pre-agreed value on the expected loss to one party if the other party were to breach the contract, penal damages go further and seek to penalise the breaching party beyond the reasonable losses from the breach.
Even if two parties genuinely and without coercion wish to consent to a contract which includes a penal clause, they are unable to.
In the United States, a 1947 legal case relating to the contracted supply of dried eggs to the Federal Surplus Commodities Corporation to be supplied as aid to Russia in 1942 (Priebe & Sons, Inc. v. United States) held that a provision in the contract for liquidated damages to be paid for late inspection and certification of the product constituted an unenforceable penalty clause.
[3] A wholesale review of the English law rule against penalty clauses (as opposed to penal damages) was conducted by the UK Supreme Court in the 2015 judgment in Cavendish Square Holding BV v Talal El Makdessi.
[4] Penal damages are to be distinguished from punitive damages, which are awarded in certain types of tort actions for actions which caused harm to the plaintiff.