The Penalties Rule and the Promise Theory of Contract

Abstract

The rule against penalty clauses in contract law sits uneasily with the promise theory of contract. According to the rule, if contracting parties agree a monetary remedy for breach which is substantially in excess of what would be required to compensate the claimant then that remedy is not enforceable. If contracts enforce promises however one would expect to see these clauses enforced. The rule appears therefore to be an example of a contract doctrine that diverges from promise. Promise theorists tend to respond to divergent doctrines in one of three ways, they either: seek to accommodate these doctrines within the promise principle, or they repudiate them, or finally they justify these doctrines on the basis of the specific legal context within which they operate.I argue that in the case of the penalties rule all of these standard responses would fall short. These responses are inadequate because they are premised on the claim that the promise principle is the only general moral principle relevant to evaluating contract law, or that it has overriding justificatory priority when it conflicts with other moral concerns. I argue that a richer conception of the moral principles that bear on contract and how they interact offers a way forward for justifying the rule.