Agreed Damages, the Penalty Rule, and Unfair Terms: An Anglo-Australian and Chinese Comparison

Abstract

Focusing on two recent decisions handed down by the highest authority in the United Kingdom and Australia, this article attempts to critically review the common law rule dealing with contractual penalties through a comparison with its 'functional equivalent' under Chinese law. In the above two decisions, the UK and Australian courts effectively tightened the test for a penalty clause by making it harder for a contracting party to escape from the provision of the contract. However, the decision to retain the penalty jurisdiction remains a controversial one, and the historical and comparative analysis offered by the UK Supreme Court to justify the retention is particularly tenuous. In this regard, a comparison with Chinese law, which bears diametrical differences from the common law in both systematic design and under-structure, helps to bring out the incoherency between rule and rationale under the common law. By tracing the different historical origins and paths of evolution of both the common law and Chinese rules, the article offers a full-fledged comparison that penetrates the surface of legal texts and challenges the long-held assumption that the penalty jurisdiction exercises a fairness control by reference to the time when the contract is made. It concludes that the true rationale of allowing judicial intervention in agreed damage clauses lies in the existence of a discretionary power to achieve remedial justice and that the common law penalty rule should be abolished given its inability to adapt to this rationale.