Penal damages
are best seen as quantitatively excessive liquidated
damages and are invalid under the common law. While
liquidated damages are a priori calculations of
expectation loss under the contract, penal damages go
further and seek to penalise a party in some way for
breach of a clause above and beyond the loss suffered by
the innocent party as a result of this breach. Many
clauses which are found to be penal are expressed as
liquidated damages clauses but are seen by courts as
excessive and thus invalid.
The judicial approach to penal damages is conceptually
important as it is one of the few examples of judicial
paternalism in contract law. Even if two parties
genuinely and without coercion wish to consent to a
contract which includes a penal clause, they are unable
to. So, for example, a person wishing to give up smoking
cannot contract with a third party to be fined $100 each
time they smoke as this figure does not represent the
expectation loss of the contract. |
