diff --git a/contracts/README.md b/contracts/README.md
index d6df2bc3..2c1b7a49 100644
--- a/contracts/README.md
+++ b/contracts/README.md
@@ -81,6 +81,8 @@ create_commitment ──► fund_escrow ──► release            (matured: p
 | `get_yield_pool_balance()` | Read the yield pool balance available for matured release payouts. |
 | `release(commitment_id, caller)` | Return principal plus accrued yield to owner once matured (`Funded → Released`). |
 | `refund(commitment_id)` | Early-exit refund of principal minus `penalty_bps` (`Funded → Refunded`). |
+| `set_grace_period(admin, grace_period_seconds)` | Admin-only configuration of the penalty-free grace window before maturity. |
+| `get_grace_period()` | Read the currently configured penalty-free grace period in seconds. |
 | `dispute(commitment_id, caller, reason)` | Freeze a funded commitment pending admin resolution. The reason is automatically categorized. |
 | `resolve_dispute(commitment_id, release_to_owner)` | Admin-only settlement of a disputed commitment. |
 | `get_dispute(commitment_id)` | Read the dispute record for a commitment (category, reason, timestamp, initiator). |
@@ -136,6 +138,9 @@ const result = await invokeContractMethod(
 console.log(`Exit Amount: ${result.exitAmount}, Penalty: ${result.penaltyAmount}`);
 ```
 
+#### Grace period behavior
+The contract supports a configurable penalty-free window before commitment maturity. If a funded commitment is refunded while the ledger time is within the configured grace period before maturity, the early-exit penalty is waived and the full principal is returned.
+
 ### Yield model
 
 Matured `release` payouts now return the locked principal plus the commitment's accrued yield. Yield is calculated at commitment creation using a simple annualized model based on the selected `RiskProfile` and the commitment duration.
diff --git a/contracts/escrow/src/lib.rs b/contracts/escrow/src/lib.rs
index f1fb34ed..a022f698 100644
--- a/contracts/escrow/src/lib.rs
+++ b/contracts/escrow/src/lib.rs
@@ -41,14 +41,14 @@ pub enum DataKey {
     Dispute(u64),
     /// Default penalty in basis points for each RiskProfile.
     DefaultPenalty(RiskProfile),
-    /// Contract paused flag; true halts write operations.
+    /// Contract pause flag used for emergency write halts.
     Paused,
-    /// Accumulated yield pool balance available to pay matured commitments.
+    /// On-chain yield pool balance used to pay matured commitment yield.
     YieldPool,
-    /// Attestation history for a commitment, keyed by commitment id.
+    /// Historical attestation records keyed by commitment id.
     Attestations(u64),
-    /// Minimum compliance score threshold; scores below this auto-violate a funded commitment.
-    ViolationThreshold,
+    /// Configurable penalty-free grace period before maturity, in seconds.
+    GracePeriodSeconds,
 }
 
 /// Risk profile chosen at creation time. Determines the early-exit penalty
@@ -111,7 +111,7 @@ pub struct DisputeRecord {
     pub disputed_by: Address,
 }
 
-/// A single compliance attestation entry appended to a commitment's history.
+/// Historical compliance attestation stored against a commitment.
 #[contracttype]
 #[derive(Clone)]
 pub struct AttestationRecord {
@@ -253,6 +253,9 @@ impl EscrowContract {
         env.storage()
             .instance()
             .set(&DataKey::DefaultPenalty(RiskProfile::Aggressive), &aggressive_default_penalty_bps);
+        env.storage()
+            .instance()
+            .set(&DataKey::GracePeriodSeconds, &0u64);
 
         Ok(())
     }
@@ -992,6 +995,26 @@ impl EscrowContract {
             .ok_or(Error::NotInitialized)
     }
 
+    /// Admin-only setter for the penalty-free grace period before maturity.
+    /// If the commitment is refunded within the configured window before
+    /// maturity, the early-exit penalty is waived.
+    pub fn set_grace_period(env: Env, admin: Address, grace_period_seconds: u64) -> Result<(), Error> {
+        Self::require_init(&env)?;
+        admin.require_auth();
+        env.storage()
+            .instance()
+            .set(&DataKey::GracePeriodSeconds, &grace_period_seconds);
+        env.events()
+            .publish((Symbol::new(&env, "set_grace_period"), admin), (grace_period_seconds,));
+        Ok(())
+    }
+
+    /// Returns the currently configured penalty-free grace period in seconds.
+    pub fn get_grace_period(env: Env) -> Result<u64, Error> {
+        Self::require_init(&env)?;
+        Ok(Self::grace_period_seconds(&env))
+    }
+
     // ── Internal helpers ────────────────────────────────────────────────────
 
     fn execute_refund(
@@ -1005,11 +1028,15 @@ impl EscrowContract {
             return Err(Error::InvalidState);
         }
 
-        let penalty_mul = c
-            .amount
-            .checked_mul(c.penalty_bps as i128)
-            .ok_or(Error::InvalidAmount)?;
-        let penalty = penalty_mul / MAX_PENALTY_BPS as i128;
+        let penalty = if Self::is_within_grace_period(env, &c) {
+            0
+        } else {
+            let penalty_mul = c
+                .amount
+                .checked_mul(c.penalty_bps as i128)
+                .ok_or(Error::InvalidAmount)?;
+            penalty_mul / MAX_PENALTY_BPS as i128
+        };
         let refund_amount = c
             .amount
             .checked_sub(penalty)
@@ -1066,6 +1093,23 @@ impl EscrowContract {
         Ok((penalty, refund_amount))
     }
 
+    fn grace_period_seconds(env: &Env) -> u64 {
+        env.storage()
+            .instance()
+            .get(&DataKey::GracePeriodSeconds)
+            .unwrap_or(0)
+    }
+
+    fn is_within_grace_period(env: &Env, c: &Commitment) -> bool {
+        let now = env.ledger().timestamp();
+        let grace = Self::grace_period_seconds(env);
+        if grace == 0 || now >= c.maturity {
+            return false;
+        }
+        let threshold = c.maturity.saturating_sub(grace);
+        now >= threshold
+    }
+
     fn next_id(env: &Env) -> u64 {
         let id: u64 = env
             .storage()
diff --git a/contracts/escrow/src/test.rs b/contracts/escrow/src/test.rs
index 49fead50..99a034fc 100644
--- a/contracts/escrow/src/test.rs
+++ b/contracts/escrow/src/test.rs
@@ -385,6 +385,59 @@ fn refund_applies_penalty_to_fee_recipient() {
     assert_eq!(f.client.get_commitment(&id).status, EscrowStatus::Refunded);
 }
 
+#[test]
+fn refund_within_grace_period_is_penalty_free() {
+    let f = setup();
+    let owner = Address::generate(&f.env);
+    fund_owner(&f, &owner, 1_000);
+
+    // Admin configures a 1-day penalty-free grace window.
+    f.client.set_grace_period(&f.admin, &SECONDS_PER_DAY);
+
+    let id = f
+        .client
+        .create_commitment(&owner, &f.asset, &1_000, &RiskProfile::Aggressive, &30, &500);
+    f.client.fund_escrow(&id);
+
+    // Advance to the exact start of the grace window.
+    f.env.ledger().set_timestamp(29 * SECONDS_PER_DAY);
+    let refunded = f.client.refund(&id);
+
+    assert_eq!(refunded, 1_000);
+    assert_eq!(f.token.balance(&owner), 1_000);
+    assert_eq!(f.token.balance(&f.fee_recipient), 0);
+}
+
+#[test]
+fn refund_outside_grace_period_still_applies_penalty() {
+    let f = setup();
+    let owner = Address::generate(&f.env);
+    fund_owner(&f, &owner, 1_000);
+
+    f.client.set_grace_period(&f.admin, &SECONDS_PER_DAY);
+
+    let id = f
+        .client
+        .create_commitment(&owner, &f.asset, &1_000, &RiskProfile::Aggressive, &30, &500);
+    f.client.fund_escrow(&id);
+
+    // Advance to just before the grace window begins.
+    f.env.ledger().set_timestamp(28 * SECONDS_PER_DAY);
+    let refunded = f.client.refund(&id);
+
+    assert_eq!(refunded, 950);
+    assert_eq!(f.token.balance(&f.fee_recipient), 50);
+}
+
+#[test]
+fn admin_can_set_and_get_grace_period() {
+    let f = setup();
+    assert_eq!(f.client.get_grace_period(), 0);
+
+    f.client.set_grace_period(&f.admin, &SECONDS_PER_DAY);
+    assert_eq!(f.client.get_grace_period(), SECONDS_PER_DAY);
+}
+
 #[test]
 fn dispute_freezes_then_admin_resolves() {
     let f = setup();