Controlling the Power to Agree Damages
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____________________