Undertaking by each of the contracting parties to pay the other a pre-determined sum of money or provide other compensation to it in the event that such party breaches the terms of the agreement.
Payment of the contractual penalty is separate from the proof of any damage suffered as a result of conduct in breach of contract. The reason for agreeing on a contractual penalty is to prompt the contracting parties to conduct themselves in conformity with the agreement. This is intended as a proactive measure to prevent breaches of contract.
The contractual penalty is dealt with in Arts. 160 et seq. of the Code of Obligations (Obligationenrecht, OR).