Saprai, Prince; (2025) Rationalising the Penalties Rule. In: Saprai, Prince and Chen-Wishart, Mindy, (eds.) Research Handbook in the Philosophy of Contract Law. Edward Elgar Publishing: Cheltenham, UK. (In press).

Text SAPRAI, RATIONALISING THE PENALTIES RULE (FINAL).pdf - Accepted Version Access restricted to UCL open access staff Download (286kB)

Abstract

The penalties rule in contract law regulates agreed remedy clauses which are punitive in their purpose or effect. Powerful moral and economic arguments have been made against the rule. Diplock LJ recommended that we should give up on trying to rationalise it. In this chapter, I argue that a look back at the history of the rule gives us reasons to be sanguine about the prospects of uncovering its justification. I distinguish two rival rationales that have played a role in shaping the current rule: the prevention of exploitation and the upholding of the primacy of compensation for breach of contract. Of the two, I argue that upholding compensation provides a better account of the contours of the rule, explaining both the rule’s scope of application, i.e., the requirement of breach of contract, and the current test used for determining whether an agreed remedy amounts to a penalty, i.e., whether the agreed remedy is extravagant or out of all proportion to the innocent party’s performance interest.

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