Private Law Theory

ABSTRACT
The balance of the common law tilts more in favour of freedom of contract, and the enforcement of consensually selected remedies, today than it did a century ago … Today, contractual overreach calls for assessment primarily through the lens of impaired consent, unconscionability or consumer law infringement. That means there is less for the prohibition against penalties to do.

The issues faced today by the courts and legal advisers in respect of penalty clauses exist only because we have forgotten some fundamental legal principles. An apparent tension is said to exist between the principle of freedom of contract and remedies available on breach. However, I argue that this tension is effectively illusory because the principle of freedom of contract prevents interference with primary obligations, whereas remedies are secondary rights – a liability flowing from the breach of a primary right. Although related, the two are mutually exclusive. Further, it is possible to uphold the principle of freedom of contract by adopting the presumption that legally advised commercial parties of equal bargaining power are best placed to select their own remedies. It is also possible to uphold the origins of the penalty rule by allowing for judicial scrutiny only in situations where the relationship between the parties at the time of formation of the contract suggests ill-intent, motive, or behaviour – with consumer legislation, vitiating factors, and the law of negligence filling any remaining remedial gaps. Further, where judicial scrutiny of an impugned clause is necessary, the traditional rule is more than adequate. This is because a shift in focus from the parties’ relationship to performance interests and disproportionality (under the reformulated rule) requires the courts to lean heavily on subjective interpretation, discretion, and the benefit of hindsight – a clear indication that the rule is not appropriate.

Hinton, Vikki, The Reformulated Rule Against Penalties: Advantageous or Outrageous? (February 7, 2025), The University of Auckland Faculty of Law Research Paper Series Forthcoming.