In this research, we develop a comprehensive theoretical model of the consumer response to penalties and the penalty resolution process. Two mechanisms of consumers’ response to penalty resolution are proposed: the perceptions of penalty fairness and feelings of gratitude. We delineate and test differences between gratitude and perceived fairness and identify factors differentially affecting them. Factors influencing feeling of entitlement, such as nature of the error, and consumer history and status with the provider, contribute to fairness perceptions. On the other hand, firm-customer interactions influence both gratitude and fairness assessments. Specifically, the penalty outcome provides benefits, hence induces gratitude, and is also perceived as the right thing to do, hence induces perceptions of fairness. However, factors that contribute to benefits received, but do not align with equity, such as type and uniqueness of compensation, influence gratitude only. The findings also confirm that, compared with fairness, gratitude more strongly influences active profirm behaviors, such as advocacy. This research offers important managerial implications. The findings suggest that service providers should consider customer history and relationship status in the penalty resolution process. Meeting customer expectations will enhance fairness perceptions and minimize the negative effect on loyalty. Further, flexible procedures for handling penalties, preferred type of compensation, and selectivity in treatment should stimulate feelings of gratitude and motivate consumers to actively promote the company via positive word of mouth.