Contractual terms stipulating that a sum of money becomes payable if the contract is breached are an inevitable feature of many high-value contracts, including building and engineering contracts and charterparties. More significantly perhaps, many commercial contracts, including the personal banking terms offered by all the major banks,1 are drafted in a way that is designed to ‘avoid’ the jurisdiction to set aside so-called penalty clauses. Hence, it can be seen that the jurisdiction to set aside contractual terms as an unenforceable penalty affects, both directly and indirectly, the enforceability and form of provisions in many B2B, as well as B2C contracts.
The so-called penalty rule has considerable commercial importance but is also the focus of great academic interest. The court’s power to set aside a contract term as a penalty stands as an exceptional derogation from the general power of contractual specification enjoyed by parties to contract upon such terms as they see fit, usually summarised as the ‘freedom of contract’. Consequently, the penalty jurisdiction has been the focus of both academic, and judicial, discussion aimed at explaining its underlying rationale. Given the commercial importance of stipulated damages provisions and the academic interest they have aroused, it is surprising that there has never before been a dedicated work published in the UK or the US examining the common law penalty rule.
This first published work is, as Lord Dyson notes in his generous foreword, very timely following the reformulation in 2015 of the penalty rule by the UK’s highest appellate tribunal for the first time in almost a century in the Cavendish case.2
The book consists of six substantive chapters. A historical perspective is key to a full understanding of the modern ‘penalty’ doctrine and this is the subject of Chapter 1. In the Andrews case,3 the High Court of Australia relied upon a subtly different historical analysis to that propounded by the Supreme Court in the Cavendish case, thereby justifying a more extensive jurisdiction to review penalty clauses. Such historical accounts, like those of the general law of contract, often ‘begin’ around the start of the seventeenth century. In contrast, this chapter traces the history of the penalty rule to its earliest origins and uses this long history to explain key features of its modern manifestation.
(p. viii) The reformulation of the modern ‘penalty’ rule in the Cavendish case, which resulted in the longest Supreme Court judgment in 2015, is itself subjected to extensive analysis and critique in Chapter 2. Chapter 3 examines the legal effect of the classification of a contractual term as providing for either a ‘penalty’ or valid liquidated damages. The underlying rationale for the legal control of stipulated damages clauses is investigated in the most extensive survey of its kind in Chapter 4, which critically engages with proposed economic, psychological, and comparative rationales, as well as many other proposed justifications or perspectives.
Doctrines and provisions that closely resemble, but are nonetheless distinct from, stipulated damages clauses are examined in Chapter 5, as are associated techniques employed by contract drafters to avoid the review of contractual terms. Specific sectors of activity and contract types where stipulated damages provisions are often encountered are the subject of Chapter 6, including contracts of employment, construction and engineering contracts, ‘shipping’ contracts, comprising charterparties and shipbuilding contracts, in addition to specific contractual clauses such as provisions for the payment of interest and so-called take or pay clauses.
This book has been written for multiple audiences: legal academics, practitioners, and advanced students of law. It also recognises that the needs of these individual audiences will vary, depending upon the task in hand. Practitioners drafting contractual provisions will find Chapters 2, 5, and 6 of greatest assistance. Chapters 1 and 4 will benefit academics, practitioners involved in appellate litigation, and those involved with law reform when considering existential questions and submissions as to why we have a jurisdiction to review stipulated damages provisions. Academics and practitioners seeking an explanation of the legal consequences of classification as either a penalty or as a valid liquidated damages clause will find Chapter 3 very helpful. It is very much hoped that judges engaged in the application and formulation of the law will find all of the chapters of interest and assistance.
The book will hopefully find an audience beyond the common law legal world in that, whilst it does not set out to be a comprehensive comparative law work, it nonetheless contains many references to the approach of the civil law. In this area, as in others, civil and common lawyers have much to learn from each other. A practical demonstration of this was that it was my friend Professor Gerardo Caffera from the Universidad de la Republica, Uruguay, who when staying with me, pointed out that the study in which I have written this book overlooked the probable site of The Humber Ferryman’s case (1348) referred to in Chapter 1.4
(p. ix) The origins of this book, like its subject, go back a long way. My personal interest in contractual remedies was stimulated by Mr Donald Harris, my supervisor when I was a postgraduate student at Oxford University, with whom David Campbell and I later co-authored a book on remedies for breach of contract and tort. Thereafter, my first academic post was at the University of Nottingham, where Professor J C Smith, the leading criminal lawyer, headed up the law department. However, ‘JC’—as he was always affectionately known—was also an inspiring contract lawyer and I benefited greatly from many conversations, usually at ‘teatime’, about our shared interest. A situation that we discussed one day concerning an extra fee to be levied by the university upon students who failed to make prompt payment of their accommodation fees has been used as an example in Chapter 6.5
More recent debts of gratitude are owed to a large number of people who have helped me in different ways, mainly by way of comment upon draft chapters, but also with suggestions, discussion, encouragement, and materials. In no special order I would like to thank: David Bunn, John Horgan, and Mark Wheeler at Driver Group, which provides specialist litigation support, the Honourable Justices Christine French and Stephen Kos (also President) of the New Zealand Court of Appeal, Ms Jane Eatock from Wilkin Chapman Solicitors, Professor and Dean Yi Wang from Remnim University, Dr Qiao Liu from the University of Queensland, Professor Hugh Beale from the University of Warwick, Professor David Campbell from the University of Lancaster, and colleagues at the University of Leeds: Professor Michael Cardwell, Professor Alastair Mullis, Dr David Pearce. and Dr ‘George’ Zhou. Research assistance was provided by Marcus Halson and a former student, Bren McCarthy, who helped with respect to a survey of the authorities which were relied upon by the Supreme Court in the Cavendish case.6 I would also like to thank the production staff at Oxford University Press for their assistance in preparing the manuscript for publication.
I would like to give special thanks to former Master of the Rolls and Justice of the Supreme Court the Rt Honourable Lord Dyson, who has contributed a generous foreword to this book. However, my greatest debt is surely owed to the Justices of the UK’s Supreme Court who, in the Cavendish case, at a time when the manuscript for this book was half complete, rejected the submission of counsel that the penalty doctrine should be abolished.
In the first edition of a contract textbook which I published in 2001, I thanked my then 3-year-old son for the valuable service he provided by distracting me from work when the task I had undertaken seemed too large. Marcus is now at university (sensibly studying physics, not law) but his former role was admirably (p. x) fulfilled during the completion of this book by his 10-year-old sister Maia. The book could not have been completed without the support of my partner Jane Eatock, an employment lawyer, who has read every chapter.
The manuscript has been corrected to take account of materials available to me up to December 2017.
The book is dedicated to the loving memory of my wonderful parents, David and Jean Halson: sine qua non.
6 Discussed in ch 4B.