Audio recording 28.1

Chapter twenty-eight is concerned with agreed remedies. And I think your starting point should be the courts should simply enforce what parties have agreed. That's what freedom of contract requires. But there are clearly limits to the principle of freedom of contract and those concerning penalty clauses, and relief against forfeiture are two important limits which might be dealt with under a broad umbrella heading of good faith. So, you might have a clause in the contract that says that, let's say I agree to clean your windows for fifty-pounds, and the term of the contract says if I don't clean your windows then I have to pay a thousand pounds. Now that might look like it's a penalty clause that upon breach of contract you have agreed to have to pay you way, way more than I'd have to pay you in an ordinary claim for damages. And maybe the court won't enforce it.At the same time, you can see there's good reasons for this sort of clause, because you might not want to assess exactly what damages are, and have to go through all of the difficult doctrines we looked at in chapter twenty-seven. But there are limits as to what sort of clause you can insert, and the clause it's intended to punish is disproportionate to any legitimate interest that you have were you being forced by a court. And it's the same with forfeiture clauses. So, let's say that we entered into a contract where I'm going to buy your house for a million pounds, and I pay half the price upfront, five-hundred thousand pounds. And then I fail to complete the transaction. Are you entitled to keep all the five-hundred thousand pounds I've transferred to you, or am I entitled to relief against forfeiture? So, they're the big issues that this chapter deals with. And the most controversial issue concerns penalty clauses. And I think it’s sort of helpful to have an idea that when you're thinking about penalties, there's a question both of jurisdiction, so when the court is able to look at the type of clause, as to whether it's a penalty, and then the substantive test of whether or not something is penal. As to jurisdiction, as to when the court will apply the rules against penalty, English law has recently affirmed, or reiterated that the penalty rule only applies to secondary obligations. So, it only applies it to obligations that arise upon breach of contract. Now there's no such requirement of breach in other jurisdictions, such as Australia, but there is in England, and it's not a limitation that applies to forfeiture. But we're told by the Supreme Courts in the Makdessi case that the rules against penalties are now common law rules. Even though their origins might've lain in equity, they now exist at common law only. Which again is unlike the rules on relief against forfeiture. Where the adoption of forfeiture is very much the equitable doctrine. And yet you'll see the Supreme Court in Makdessi talk about substance over form, which sounds sort of faithful to its equitable roots. But anyway, for jurisdiction orthodoxy says you need to establish a breach of contract. And then for a substantive test as to whether or not it is penal. The test itself also harks back to its equitable roots because sometimes you'll see judges talk about whether or not the term is unconscionable. Whether it's disproportionate to any legitimate interest you have. And the relief that you get differs between whether the clause is assessed under the penalties rule, or the forfeiture rule as well. Where the penalty will now list a common law rule, it's of all or nothing.  You can't rewrite the clause to make it fair. Whereas in forfeiture, there's more flexibility in the equitable domain. But the key thing to bear in mind is that these rules are intrusions upon freedom of contracts. But some intrusions of freedom of contract are justifiable. Now we can't agree that if you breach the contract, I get to chop off your hand, there are clearly some limits as to what the law will allow. I think the rule against penalties at least means that one party isn't hoping that the contract won't be performed, right? You're not hoping that I won't clean your windows because you'll be better off if I don't perform the contract. That feels very odd. So, I think that probably is just about a sensible justification for these rules.