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1. A claim for the agreed sum on (i) the claimant’s full performance or (ii) the occurrence of some other event not amounting to breach is a claim in debt. (i) is a claim for specific performance of the contract. A claim in debt is advantageous because it is not subject to the rules on mitigation and remoteness, the claimant need not prove causation of loss, and the clause is not subject to the penalty rule.
2. In contrast, specific performance for non-monetary performance is only awarded at the discretion of the court. A number of factors tell against the appropriateness of the remedy, in particular: (i) the adequacy of damages, (ii) uncertainty over the performance required, (iii) the need for constant supervision, (iv) the nature of the contract being one for personal services or to carry on an activity, (v) undue hardship to the contract-breaker, and (vi) the wastefulness of performance.
3. Injunctions to prevent a threatened breach (prohibitory injunctions) and, more rarely, to undo breach of a negative undertaking (mandatory injunctions), are also discretionary remedies. Prohibitory injunctions are granted more widely than specific performance, but they will be denied if they would amount to indirect specific performance which would not have been ordered directly.
4. Courts also have the discretion to award damages in lieu of an injunction or specific performance.
5. The parties cannot oust the court’s discretion by agreeing the remedy of specific performance. However, stipulations for an injunction may be persuasive.
6. The parties may try to oust the court’s jurisdiction to award damages by stipulating the sum payable on breach. Agreed damages clauses are enforceable if they amount to liquidated damages (ie genuine pre-estimates of the claimant’s loss likely to flow from the breach) even if the stipulated amount is more or less than the claimant’s actual loss.
The SC in Cavendish v Makdessi has held that an agreed damages clause is enforceable even they exceed any genuine pre-estimate of loss and are aimed at deterring the defendant’s breach, if:
- the claimant has a ‘legitimate interest’ in deterring the breach rather than simply being entitled to damages, and
- the clause is not ‘extravagant or unconscionable’ in proportion to that interest.
Ie the penalty rule will only invalidate an agreed damages clause if:
- it is not a genuine pre-estimate of the claimant’s loss;
- it is aimed at deterring the defendant’s breach, where the claimant has no legitimate interest in doing this; and
- or, where the claimant has such a legitimate interest, the sum stipulated is ‘extravagant or unconscionable’ in proportion to that interest.
7. The penalty rule applies to:
- stipulated payments (or transfer of property or denial of sum otherwise owed) on breach;
- deposit clauses; and
- forfeiture clauses.
The penalty rule may be evaded by functionally similar terms drafted as sums payable on events other than breach.
8. Pre-payments can be retained by the innocent party (ie the contract-breaker forfeits) if they are reasonable deposits (ie paid as security for performance). This sum must be returned if it is a part-payment of the contract price subject to the contract-breaker’s liability to pay damages; it need not be returned if it is payment for services already provided.
9. Courts may relieve from forfeiture of instalment payments for property where the buyer is ready and willing to complete, by giving extra time to pay. Relief is also available where the buyer is not ready and willing to complete if forfeiture would be unconscionable.