There are several different types of clauses that can help strengthen a contract and protect a business that is negotiating with another party. Restrictive covenants, severability clauses and other custom contract inclusions can help protect both parties signing a contract.
In some cases, either party might insist on including terms intended to deter contract violations. Penalty clauses can impose costly financial consequences if a verifiable breach of contract occurs. Are penalty clauses typically enforceable during contract litigation in Nevada?
The courts may not enforce penalty clauses
It is relatively easy for one party to abuse penalty clauses. Demanding inappropriate amounts of compensation for minor contract breaches does more than deter violations of the agreement. Overly punitive terms integrated into a contract can raise questions about the intentions of the party demanding those terms and could complicate efforts to enforce the contract later.
Generally, penalty clauses are not enforceable during civil litigation in Nevada. However, clauses allowing for liquidated damages based on the impact that a breach of contract has are theoretically enforceable.
Particularly in situations involving breaches that have significant repercussions, such as a violation of a non-disclosure agreement that protected trade secrets, the liquidated damages available after a contract breach could be relatively significant. The best time to ensure that a contract is robust and enforceable is long before a dispute about the agreement arises.
Creating custom contracts and taking appropriate action after violations are both important steps for those who want to minimize disruptions to business operations. Strong contracts can help protect a company against the misconduct or oversights of other parties.