The primary consideration is ensuring the clause is a legally enforceable "liquidated damages" provision rather than an unenforceable "penalty." The modern legal test focuses on whether the clause imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party. Failing to draft the clause carefully can result in it being struck out by a court, leaving the claimant to prove their actual losses (unliquidated damages), which is a more complex and uncertain process. Clear drafting prevents ambiguity and costly disputes over the interpretation and application of the damages term.

1. CIPS. (2018). Procurement and Supply in Practice L4M8 Study Guide. Stamford: Chartered Institute of Procurement & Supply. Learning Outcome 2

Section 2.3: 'Types of contractual terms and remedies'.

2. Poole

J. (2021). Textbook on Contract Law. 15th ed. Oxford: Oxford University Press. Chapter 9

pp. 353-368

covering the distinction between liquidated damages and penalties

and the principles established in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67.

3. McKendrick

E. (2020). Contract Law: Text

Cases

and Materials. 9th ed. Oxford: Oxford University Press. Chapter 23

Section 4 'Agreed damages clauses'

pp. 934-942.

4. Beale

H. (2019). 'Penalty Clauses in English Law: Cavendish Square Holding BV v Makdessi'. Uniform Law Review

24(4)

pp. 716–735. https://doi.org/10.1093/ulr/unz036. This article provides an in-depth academic analysis of the modern test for penalty clauses.