The Doctrine of Penalties and the Test of Commercial Justification

Abstract

The doctrine of penalties has long been a contentious area of the law. One reason for this is that court intervention to strike down an agreed sum is seen to be inconsistent with freedom of contract. The recent High Court case of Ringrow Pty Ltd v BP Australia sought to confine court intervention to situations where an agreed sum is 'out of all proportion' to the likely loss. In the United Kingdom, recent decisions have applied the 'commercial justification' test to determine the validity of an agreed sums clause. The purpose of this paper is to consider this new United Kingdom line ofauthority. Can the commercial justfication test address some of the ongoing criticisms of the doctrine of penalties?