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Civil-common Law Divergence on Penalties: Is it a Thing of the Past?

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‘Clarity begets confusion when faced with a continuing reality, which begets chaos, which begets a movement towards greater clarity.’

Creation of the author.

‘[A pragmatist] turns away from abstraction and insufficiency, from verbal solutions, from bad a priori reasons, from fixed principles, closed systems, and pretended absolutes and origins’ (James 1906: 379).

Abstract

This article examines the rationale for the common law’s penalty rule and finds it lacking. It examines the rule as applied in different common law systems since the 2015 United Kingdom Supreme Court decision in Cavendish Square Holding v Makdessi and ParkingEye Ltd v Beavis. The article concludes that the chaotic jurisprudence surrounding the rule warrants its elimination. The rationale that was the original inspiration for the rule has long become antiquated over the six hundred years of its existence. The destabilizing effects of the rule on freedom of contract and certainty of damages calls for its abandonment. The specialized rules of penalty law should be stricken, and the regulation of penalties should be returned to the general body of common law contracts with the recognition of the idiosyncratic values and preferences of private parties. The voiding of penalties should be the domain of consumer contract and protection law and the common law’s construct of unconscionable terms. This approach would eliminate the overinclusive nature of the penalty rule—for there are penalties that are not penalties due to the undercompensatory nature of contract damages and there are penalties that serve other functions other than to punish the breaching party. This is also a recognition that the civil law has the better rule, which may be a bitter pill to accept, but the mangled law of precedents of the penalty rule must give way.

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Notes

  1. [1966] 1 WLR 1428.

  2. Ibid. at 1447 (per Lord Diplock).

  3. 1 Equity Cases, Abr, 91: Hall v Higham 3 Ch Rep 3 (1663); Wilson v Barton, Nelson 148 (1671); Friend v Burgh, Finch 437 (1679).

  4. Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, 229–230, quoting JA Priestly in Austin v United Dominions Corporation Ltd, [1984] 2 NSWLR 612 (19 October 1984) See also Simpson, ‘The Penal Bond with Conditional Defeasance’, (1966) 82 Law Quarterly Review 392 at 419; D.E.C. Yale (ed), Lord Nottingham’s ‘Manual of Chancery Practice’ and ‘Prolegomena of Chancery and Equity’ (Cambridge University Press, 1965).

  5. [2015] 3 WLR 1373 at 1380 [3]; [2016] 2 All ER 519 at 526 (Lords Neuberger and Lord Sumption).

  6. Commissioner of Public Works v. Hills [1906] AC 368, 375 − 76 (per Lord Dunedin) (emphasis supplied).

  7. [1915] AC 79.

  8. Ibid. at 86 (‘a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage’).

  9. Ibid. at 87.

  10. Ibid.

  11. Ibid.

  12. Ibid. at 87–88.

  13. See Kenneth W. Clarkson et al., ‘Liquidated Damages v. Penalties: Sense or Nonsense?’ 1978 Wisconsin Law Review 351.

  14. Charles J. Goetz & Robert E. Scott, ‘Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach’ (1977) 77 Columbia Law Review 554.

  15. [2015] UKSC 67, 109 [255].

  16. English Law Commission commissioned a contract code and work persisted from 1966 to 1972. The Commission failed to publish such a code, but a version was published independently. See Harvey McGregor ‘Contract Code drawn up on behalf of the English Law Commission’ (Milan – Giuffre Editore 1993).

    Contract Code (1993).

  17. Justinian Institutes, 3 (Moyle, 5th ed.), 3, 15, 7.

  18. Council of Europe, Resolution 78(3) Relating to Penal Clauses in the Civil Law, Preamble (Jan. 20, 1978).

  19. UK Public General Acts, 2015, Ch. 15.

  20. [2015] UKSC 67.

  21. Ibid at [149].

  22. Ibid at [152],

  23. Ibid.

  24. [2017] EWHC 350 (Ch).

  25. Ibid. at [63] (‘consequence is all out of proportion to the legitimate interest’).

  26. (2012) 247 CLR 205.

  27. Ibid. at 27–28 [78].

  28. [2016] HCA 28.

  29. Ibid at 25 [69].

  30. Ibid at 23 [58] (‘late payment impacted the ANZ’s interests in three relevant respects: through operational costs, loss provisioning and increases in regulatory capital costs’).

  31. Ibid. at 13 [28].

  32. Ibid. at 107 [338].

  33. [1915] 52 SCR 349.

  34. [1976] 1 SCR 319. See also, JG Collins Insurance Agencies Ltd v Elsley Estate [1978] 2 SCR 916;

    Fern Investments Ltd v Golden Nugget Restaurant (1987) Ltd 1994 ABCA 153; Prudential Insurance Co of America v Cedar Hills Properties Ltd 1994 CanLII 1960 (BCCA); Peachtree II Associates - Dallas LP v 857,486 Ontario Ltd 2005 CanLII 23,216.

  35. Ibid. at 338.

  36. 2009 CanLII 7760 (ON SC), https://www.canlii.org/en/on/onsc/doc/2009/2009canlii7760/2009canlii7760.html?autocompleteStr=Calloway%20Reit%20(Westgate)%20Inc%20v%20Michaels%20of%20Canada&autocompletePos=1 .

  37. Ibid. at [85] & [87].

  38. Ibid. at [88]-[89].

  39. Ibid. at [97].

  40. 2019 NLSC 52.

  41. 2020 SCC 25. See also, Capital Steel v Chandos Constructions Ltd, 2019 ABCA 32.

  42. Ibid. at [308]-[313].

  43. [1978] 2 SCR 916.

  44. Ibid. at 937.

  45. [2020] NZSC 53 [5 June 2020].

  46. Ibid. at [112] & [116].

  47. Ibid. at [111].

  48. [2021] NZHC 2205.

  49. Ibid. at [39].

  50. For an examination of the chaotic jurisprudence related to S. 74 see, Swaminathan, S. (2018). De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872. The Chinese Journal of Comparative Law, 6(1), 103–127.

  51. 2003(5) SCC 705. See also, Fateh Chand v Balkishan Das, AIR 1963 SCC 1405 (Supreme Court adopted the view that law a genuine pre-estimate of damages allows the aggrieved party to receive the stipulated sum whether actual damages were suffered or not).

  52. Ibid. at 742 − 43.

  53. Ibid.

  54. [2017] IESC 62.

  55. Ibid. at [39].

  56. Ibid. at [38].

  57. [1915] AC 79 (a penalty if it is not a genuine pre-estimate of the loss).

  58. Ibid at [43].

  59. [2016] IEHC 68.

  60. [2016] IEHC 67.

  61. [2016] IEHC 68 at [48].

  62. [2016] IEHC 67 at [118]-[119].

  63. [2016] HKEC 989.

  64. See KK Cheung, ‘Enforceable liquidated damages clause or unenforceable penalty clause? Court of Appeal find the former in recent case,’ https://www.deacons.com/2016/05/16/enforceable-liquidated-damages-clause-or-unenforceable-penalty-clause-court-in-recent-case.

  65. Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui & Anr [2019] MLJU 693.

  66. [1995] 1 MLJ 817.

  67. [2019] 6 MLJ 15 FC.

  68. University of Malaysia Law Review, Lex: In Breve, ‘A Stunning Restatement of the Law on Liquidated Damages Clauses by the Federal Court’, (10/2/2019), https://www.umlawreview.com/lex-in-breve/a-stunning-restatement-of-the-law-on-liquidated-damages-clauses-by-the-federal-court.

  69. Ibid. (‘burden of proof falls on the defaulting party’).

  70. Ibid. (‘unreasonable compensation if it is extravagant and unconscionable’).

  71. [2019] 6 MLJ 15 FC. at [49].

  72. Lex; In Breve, above (‘deposit paid which is not merely part-payment but also as a guarantee of performance is generally not recoverable’).

  73. Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui & Anr [2019] MLJU 693.

  74. [2020] SGCA 119.

  75. ‘Denka Advantech affirmed the old rule articulated by Lord Dunedin in Dunlop and declined to follow the new developments in Andrews and Cavendish.’ Lexicon, The penal-compensatory dichotomy of liquidated damages clauses: Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2021] 1 SLR 631’ (September 28, 2021),

    https://smulexicon.com/2021/09/28/the-penal-compensatory-dichotomy-of-liquidated-damages-clauses-denka-advantech-pte-ltd-v-seraya-energy-pte-ltd-2021-1-slr-631.

  76. California Civil Code, 1872, s 1671(d).

  77. 11 Cal. App. 5th 713 (2017).

  78. Ibid. at 721 (‘Accordingly, the amount of damages actually suffered has no bearing on the validity of the liquidated damages provision.’).

  79. 738 F.Supp. 2d 1062 (C.D. Cal. 2010).

  80. Ibid. at 1087.

  81. Ibid. at 1088.

  82. See, Perry v. Moran 111 Wash.2d 885, 766 P.2d 1096, 1096 (Wash. 1989).

  83. 830 S.E.2d 605 (Ga. Ct. App. 2019).

  84. Ibid. at 614.

  85. 24 N.Y.3d 528 (NY Ct App. 2014).

  86. Ibid. at 536.

  87. 36 N.Y.3d 69 (NY Ct. Ap. 2020).

  88. Ibid. at 75.

  89. Ibid. at 84.

  90. Ibid, partially quoting, 172 Van Duzer Realty Corp., 24 NY3d at 536.

  91. No. 19cv656 (SDNY) (May 6, 2021).

  92. Ibid. See also, In re Lehman Bros Holdings Inc 970 F.3d 91, 105-06 (2d Cir. 2020) (disproportionality test).

  93. 72 P.3d 308 (Al. Sup. Ct. 2003).

  94. Ibid. at 311.

  95. Ibid. at 310.

  96. 242 Ariz. 108 (Sup. Ct. 2017).

  97. Ibid. at 112, citing Restatement Second § 356, comment b.

  98. Ibid. at 117.

  99. Ibid. at 117–120.

  100. 137 N.J. 238, 249 (N.J. Sup. Ct.1994).

  101. Ibid. at 253.

  102. 159 N.J. 484 (Sup. Ct.1999).

  103. Ibid. at 495.

  104. Ibid. at 496.

  105. Ibid. at 496–497.

  106. Ibid. at 497.

  107. Commercial Real Estate v Comcast of Utah, 285 P.3d 1193 (Utah Sup. Ct. 2012).

  108. Ibid. at 1203 (‘courts should begin with the longstanding presumption that liquidated damages clauses are enforceable’).

  109. Ibid. at 1200.

  110. Ibid. at 1198.

  111. Ibid. at 1199 (‘Significantly, almost all of the cases applying shock the conscience analysis note that such amounts are unconscionable, although they appear to be using that term to refer only to substantive unconscionability’.

  112. Ibid. at 1202.

  113. Ibid. at 1202.

  114. Ibid. at 1203.

  115. See also, HealthBnac International, LLC v Synergy Worldwide 435 P.3d 193 (Sup. Ct. 2018) (parties to a contract with express warranties are concerned about the insufficiency of expectation damages they can bargain for liquidated damages).

  116. Cotheal v Talmage 9 N.Y. 551, 553–54 (1854).

  117. Giesecke v Cullerton 280 Ill. 510, 117 N.E. 777, 778 (1917) (‘No branch of the law is involved in more obscurity by contradictory decisions than whether a sum specified in an agreement to secure performance will be treated as liquidated damages or a penalty.’); McIntosh v Johnson 8 Utah 359, 31 P. 450, 452 (Utah Terr. 1892) (‘There is a great conflict and confusion in the authorities in [liquidated damages] cases.’); Commercial Real Estate v Comcast of Utah 285 P.3d 1193, 1197 (Utah Sup. Ct. 2012) (‘A century of legal scholarship reflects the same confusion over how courts should approach liquidated damages clauses.’).

  118. Phillips v Phillips 820 S.W.2d 785 (Tex. Sup. Ct. 1992).

  119. Cavendish-ParkingEye at [199] (‘a charge of the order of £85 (reducible on prompt payment) is an understandable ingredient of a scheme serving legitimate interests’).

  120. Ibid. at [167] (‘It would be unsafe to assume that any of these measures makes or will make the penalty doctrine redundant.’). See also, [212].

  121. See, e.g., New Zealand’s Fair Trading Act 1986 (prohibits traders unfair contract terms in their standard form consumer contracts). S 46 M(c) lists penalties as suspect terms. See also, Unfair Terms in Consumer Contracts Regulations 1999.

  122. Cavendish-ParkingEye at [314] (‘I am not persuaded that ParkingEye has shown grounds for assuming that a party who was in a position to bargain individually, and who was advised by a competent lawyer, would have agreed to the penalty clause as it stood.’).

  123. I owe this proposition to the commentary provided by Professor Geraint Howells.

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  1. Warrington College of Business and Levin College of Law, University of Florida, Gainesville, Florida, USA

    Larry A. DiMatteo

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DiMatteo, L.A. Civil-common Law Divergence on Penalties: Is it a Thing of the Past?. Liverpool Law Rev 43, 421–449 (2022). https://doi.org/10.1007/s10991-022-09297-4

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