What it means
A penalty clause imposes a payment on breach that is extravagant or out of all proportion to the legitimate interests being protected, rather than a genuine estimate of loss. Australian courts will not enforce a clause as a penalty; the wronged party is instead limited to recovering its actual loss. The distinction between an enforceable liquidated damages clause and an unenforceable penalty turns on substance, not the label used. The High Court has also recognised that the penalty rule can apply to certain fees triggered by events other than strict breach.
How it's used
A term demanding $50,000 for returning hired equipment one day late was struck down as an unenforceable penalty clause.