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From: Davis, Kevin [davisk@exchange.law.nyu.edu]

Sent: 07 July 2009 17:36

To: obligations@uwo.ca

Subject: Penalty clauses and unconscionability

I am wondering whether anyone on the list has come across decisions in which common law courts have seriously questioned whether the traditional rule against enforcing penalty clauses, as opposed to doctrines of more general application such as unconscionability, should be used to analyze the enforceability of stipulated remedies.

I am just finishing up a comment on the decision in Birch v. Union of Taxation Employees, Local 70030 (2008), [2009] 93 O.R. (3d) 1 (C.A.), leave to appeal to the Supreme Court of Canada denied May 7, 2009, in which the Ontario Court of Appeal did just that.  The issue was whether a union is entitled to enforce a fine against strike-breaking members pursuant to provisions in the union constitution.  What I found interesting about the decision is that the Court of Appeal could have refused to enforce the fine on the grounds that it was penalty.  Instead, following an approach suggested in obiter by Justice Sharpe in an earlier decision called Peachtree, the court focused its enquiry on whether the clause was unconscionable (and the majority concluded that it was). Has anyone come across similar decisions (particularly from outside Canada)?

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Kevin Davis

Beller Family Professor of Business Law

New York University School of Law

40 Washington Square South Room 335

New York, NY 10011

tel: 212 992-8843

fax: 212 995-4760

There's a very interesting English case showing much the same tendency, Murray v Leisureplay plc [2005] I.R.L.R. 946, [2005] EWCA Civ 963. A senior executive had a highly lucrative golden parachute arrangement that applied if he was fired (including wrongly). It was much more than the loss of earnings he would suffer -- or at least than the amount he would recover. The employers fired him; he sued for the severance, whereupon the employers sought to argue as against their own employee that the clause was a penalty (!!!). The first instance court sided with the employers on the usual "genuine pre-estimate" rhetoric: the Court of Appeal reversed. Although the case was strictly speaking argued on penalties, unlike the Ontario case you mention, the CA was in no doubt that even a non-genuine-pre-estimate amount could be recovered if there was nothing unconscionable or outrageous about the contract.

Andrew