Chapter 28 Self-test questions

. What is the test for penalty clauses as advocated for by Lord Neuberger and Lord Sumption?

Whether the clause imposes a detriment on the breaching party which is out of proportion to any legitimate interest of the innocent party.

Whether the clause provides for a higher payment than the measure of compensatory damages.

Whether the sum is more than double the measure of compensatory damages.

Whether the penalty is equivalent to fines available under the criminal law.

. If a clause is unenforceable because it is a penalty, can the injured party still sue for damages at common law? If yes, what level of damages may be recovered?

The injured party can sue for damages at common law, and will be entitled to a 'reasonable sum' which should only be slightly less than the sum payable under the penalty clause.

The injured party can sue for damages at common law, but will generally recover no more than the loss actually sustained by them as a result of the breach.

The injured party can sue for damages at common law, and the penalty clause will be enforced in part.

The injured party cannot sue for damages at common law.

. What is a good normative reason to abolish the rule against penalties?

It is inconsistent with rules on relief from forfeiture.

It is an intrusion into the general principle of freedom of contract.

Both options given are correct.

Neither option is correct

. What is the main distinction between forfeiture and penalty clauses?

Forfeiture relates to all justifiable payments; penalties relate to all unjustifiable payments.

Sums payable on breach may be caught as penalties; money paid in advance may be forfeited.

Penalties are unjustifiable; forfeited payments are always justifiable.

There is no substantive difference between the doctrines.

. Does the law relating to forfeiture restrict the right of the innocent party to terminate an agreement for breach of contract?

Yes.

No.

. How may we distinguish substantively penalty clauses and forfeiture clauses?

Whether an agreed damages clause is a penalty is assessed at the date the contract is made; forfeiture clauses are assessed at the date of breach.

Penalty clauses require a breach of contract; forfeiture clauses do not.

A clause can be partially enforced when granting relief from forfeiture, but not when the penalty rule applies.

All of the options given are correct.

. Are the courts bound to respect clauses that equitable relief will be granted following a breach of contract?

Yes.

No.

. Which of the options given is not a form of equitable relief?

Specific performance.

Liquidated damages clauses.

Injunctions.

All of the above options are forms of equitable relief.

. Might the courts have regard to the existence of a clause which stipulates that an injunction or specific performance will be awarded?

Yes, and it can be the only thing the court considers.

Yes, but the clause will only be one factor amongst a range of considerations that the court will take into account.

Only where it would be inequitable not to consider such a clause.

No, never.

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