I. When liquidated damages aren't proportionate to the real or anticipated loss, the courts can decide they are a penalty. If the court determines the damages are actually a penalty, the provision will be voided, and the injured party will only be able to pursue actual damages caused by the contract being breached. ii. For example, penalties clauses are generally included in a contract to encourage one party to fulfill their obligations, whereas liquidated damages provisions are used to make sure an injured party is compensated for the harm they have been inflicted