Judicial Oversight of Remedy Stipulation

• Author: Jamie Cassels
• Pages: 520-539

520

CHAPTER 14

JUDICIAL OVERSIGHT OF

REMEDY STIPULATION

A. INTRODUCTION

1) Remedy Stipulation and Liquidated Damages

It is not uncommon, in both tort and contract cases, to f‌ind that the

parties have sought in advance to specify an amount of damages for

breach of duty. Exclusion clauses and limitation clauses contained in

written agreements and in posted notices frequently seek to limit both

liability and the amount of damages that may be claimed for tort or

breach of contract. These clauses are inserted for the benef‌it of the

breaching party. Conversely, contracts sometimes contain “liquidated

damages” provisions th at specify a f‌ixed amount of damages for breach

and are generally included for the benef‌it of the plaintif f. Other clauses,

such as “acceleration clauses” and clauses providing for forfeitures of

deposits, also serve to stipulate the remedy. The essential question in

any case is whether or not the courts will enforce the stipulated rem-

edy at the suit of the plaintiff upon breach. Exclusion clauses are con-

trolled by the substantive law of contract rega rding notice of terms and

unconscionability. As such, they will not be dealt with here. Instead,

this chapter is concerned with stipulated damages provisions, gener-

ally called “liquidated damages.”

Judicial Over sight of Remedy Stipulation521

2) The Advantages and Disadvantages of Stipulated

Damages

There are many advantages to permitting parties to stipulate the dam-

ages upon breach of contract. In situations where damages will be dif-

f‌icult to prove, they provide a form of insurance to the parties that in

the event of breach their losses w ill be fully recompensed. They reduce

“judicial risk,” reduce the diff‌iculty and cost of proving damages, and

achieve savings for both the parties and the judicial system. The prin-

ciple of freedom of contract weighs in favour of permitting a w ide scope

for liquidated damages clauses. The parties know best what is at stake

in the transaction and how to arrange their affairs. Each enters into

the agreement with her eyes open, knowing what the consequence of

breach will be.

Despite these arguments in favour of stipulated damages, there

are competing principles at play, including the law’s desire to protect

weaker parties a nd its dislike of pena lties and punitive dam ages. These

considerations suggest that courts should police stipulated damages

clauses carefully. Stipulated damages provisions will often appear to

be punitive or coercive. The law of contract rarely permits punitive

damages or specif‌ic performance, and the question is whether the par-

ties should be permitted to agree between themselves to a result that a

court would not consider appropriate. Moreover, such clauses may be

an indication of overbearing by one party and thus raise the issue of

unconscionability.

B. LIQUIDATED DAMAGES AND PENALTIES

1) Basic Concepts

The most common way of stipulating a remedy is to include in a con-

tract a clause requiring that a f‌ixed sum be payable for breach. Histor-

ically, such provisions, aimed at securing performance of a contract,

took the form of penal bonds and penal clauses.1 Penal bonds were

instruments under which one party promised to pay the other a sum

of money. The bond would be void only if the promisee performed a cer-

tain act. Penal clause s were included in the contractual instru ment itself.

Courts of equity, however, provided relief against bonds and forfeitures,

1 SM Waddam s, The Law of Damages, 2d ed, loose-leaf (Aurora, ON: Can ada Law

Book, 1991–) at para 8.40.