A terrorem clause is a type of provision included in certain contracts to provide a form of deterrence to any breach of contract. It attempts to penalize a party for not following through with their contractual obligation and is a way for businesses to protect against financial losses.
Example of How Terrorem Clauses Are Used
Let’s say, for example, that a small business owner agrees to provide services to a larger corporation. In this case, the larger corporation might include a terrorem clause in the contract, which would stipulate that, in case of any breach in the agreement, the smaller business owner would be responsible for paying a penalty fee. This penalty fee would be put in place to discourage or dissuade the smaller business owner from breaching the contract.
Are Terrorem Clauses Enforceable?
In general, terrorem clauses are enforceable in courts of law, though their enforceability depends on the nature of the contract in question. In order to be legally enforceable, a terrorem clause must be reasonable and must be included only if it is suitably proportional in size to the damages that could be caused from breaching the contract.
Conclusion: Use Terrorem Clauses With Discretion
In conclusion, terrorem clauses are a way for businesses to encourage parties to follow through with their contractual obligations and protect against financial losses. It is important, however, to use these clauses judiciously; as the enforceability of these clauses can vary depending on the nature of the contract.