Business Law Today, Comprehensive 10th Edition by Roger LeRoy Miller

Exercise 2

Liquidated Damages. Planned Pethood Plus, Inc. (PPP), a veterinary clinic, borrowed $389,000 from KeyBank. The term of the loan was ten years. A "prepayment penalty" clause provided a formula to add an amount to the balance due if PPP offered to repay its loan early. The additional amount depended on the time of the prepayment. Such clauses are common in loan agreements. After one year, PPP offered to pay its loan. KeyBank applied the formula to add $40,525.92 to the balance due. Is this a penalty or liquidated damages Explain.