THE PENALTY DOCTRINE IN CANADA
Keywords:Penalty Doctrine, Rule Against Penalties, Contract Law, Breach of Contract, Remedies, Liquidated Damages Clauses, Unconscionability, Equity, Relief from Forfeitures, Damages, Contract Interpretation, Expectation Interest
The penalty doctrine, which denies enforcement to oppressive remedy clauses, is alive and well in Canada. I demonstrate this with a review of decisions from all common law provinces. I then defend two claims about the doctrine. First, the penalty doctrine fills a role that bargaining unconscionability—the combination of procedural and substantive unfairness—cannot. Because remedy clauses only trigger on the future contingency of breach, applying unconscionability to remedy clauses would require impracticable probabilistic calculations, which I describe. Second, the doctrine should distinguish between what I call “heaps” and “schemes”—that is, between clauses that seek to compensate for loss and clauses designed to uphold a punitive scheme without regard to loss. Heaps and schemes both need a special rule, but raise distinct policy issues.
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