Wrongs and Remedies in the Twenty-First Century

By Peter Birks | Go to book overview

11
Rethinking Penalty Clauses

T. A. DOWNES

The purpose of this paper is to reexamine the law relating to penalty clauses and related doctrines. The starting thesis is that a body of rules which was once radical in its approach is now out of step with the contemporary trends in the regulation of contractual clauses, that realignment of doctrine is not difficult to achieve, and that there are indications in recent decisions that the courts may be engaged in the task of modernising the law. It is now some twenty years since the Law Commission reexamined the law,1 and there are grounds to question its conclusion of the time that 'the application of the tests to distinguish between valid and invalid penalties . . . has, on the whole, worked satisfactorily.' Such questioning arises not so much from dissatisfaction with judicial decisions ostensibly based upon the present law but from doubts about whether in reaching these decisions the courts have truly adhered to the law as conventionally set out in the books. It is reinforced by the observation that civil law systems, while not disclaiming any power of control over penalty clauses, have operated from the presumption that such clauses should be given effect, as reflecting the will of the parties, and that any control must be seen as an exceptional measure. 2


GENERAL PRINCIPLES3

It was suggested at the beginning that the approach to the regulation of penalty clauses was radical at the time of its adoption. The basis for this remark is the parallel with the regulation of exclusion and limitation clauses. As is well known, until very recent times in general exemption clauses could not be subject to substantive evaluation; control was limited to peripheral doctrines such as the incorporation of terms and the principles of interpretation. Such doctrines were sometimes strained to the limit

____________________
1
Working Paper No.61, 1975.
2
For the definitive comparative treatment, see Treitel G. H., Remedies for breach of contract, OUP, 1988.
3
The common law principles set out here must be read in the light of the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994 No.3159), which will be considered more closely below (see text at note 109).

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