Wrongs and Remedies in the Twenty-First Century

By Peter Birks | Go to book overview

12
Controlling the Power to Agree Damages

MINDY CHEN-WISHART

The power of contract parties to agree damages is controlled by the penalty rule. This rule appears an oddity in the law of contract1 for, contrary to the generally accepted value of freedom of contract, the rule imposes a particular substantive limit on the amount of damages contract parties can stipulate as payable on breach, being the amount of ordinary damages which a court would have awarded in default of express stipulation. This mode of substantive control seems at odds, not only with accepted techniques of judicial intervention justified in terms of policing procedural unfairness2 which attacks the consent basis for contract enforcement, but also, with common law and statutory controls of other remedial terms3 which assess substantive unfairness in much broader terms than deviation from compensatory damages. Moreover, the penalty rule is associated with an enormous labyrinth of much criticised4 distinctions and obscure jurisprudence, all while its real scope of operation is perceived to be in decline5. How, then, can the rule be understood and developed for the future?

It will be argued that the current operation of the penalty rule, justified primarily on the basis of fidelity to the compensatory principle and more incidentally on prevention of punishment and indirect specific performance in contract law, is unsustainable. The compensatory rationale is itself based on three untenable premises: first, that a workable distinction can be made

____________________
1
R. A.Ponser called it 'a major unexplained puzzle in the economic theory of the common law', "Some Uses and Abuses of Economics in Law" ( 1979) 46 U Chi LR281, 290; Sir George Jessel MR saw relief against penalties as an irrational aberration, to be acquiesced in rather than explained, Wallis v Smith ( 1882) 21 Ch D 243, 261.
2
The doctrines of duress, unconscionable bargains, undue influence and constructive notice in Barclays Bank v O'Brien [ 1993] QB 109.
3
Such as relief from forfeitures of deposits and installments, and exclusion and limitation clauses.
4
See for example, A. L. Corbin, Corbin on Contracts, 1964, para. 1057; G. A. Muir, "Stipulations for the Payment of Agreed Sums" ( 1985) 10 Syd LR503; P. R. Kaplan, "A Critique of the Penalty Limitations on Liquidated Damages" ( 1977) 50 So Cal LR1055; A. Ham,'The "Rule Against Penalties in Contract: An Economic Perspective" ( 1990) 17 Melb ULR649; and see infra 4(b).
5
E. McKendrick, Contract Law, 2nd ed. 1994, 329. "The penalty jurisdiction is the anomaly, not the rule"

-271-

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