The commercial advantages of agreed remedies are so extensive that the courts should almost invariably give effect to them. Discuss.

The court may not give effect to a liquidated damages clause which is held to be a penalty clause. The test for whether an agreed sum of compensation is enforceable or not is set out in Dunlop Tyre: the sum must be a genuine pre-estimate of loss at the time the contract is formed. If the amount is above such a level, then the court would rule it to be a penalty clause and unenforceable. The difficulty of foreseeability of loss is acknowledged by the court as a liquidated damages clause is enforceable as long as the pre-estimation is genuine; there is no need for it to be accurate. Without such an approach, a strict rule against over-compensation would render liquidated damages clause very likely to be invalidated Collins refers to the court's approach as “risk-averaging” since the court allows for a certain degree of leeway which enables the parties to set an amount representing an average of probable losses resulting from different breached of the same contract. 

Liquidated damages clause is regulated because it may be open to abuse in two ways: firstly, a clause may impose an unjustifiably high amount of compensation to induce a party to perform its obligations. The pressure to perform may be criticised for invading one's individual freedom. However, it is questionable that in a commercial context whether the argument that there is undue pressure is applicable where contracts are carefully negotiated and parties are generally aware of their rights and obligations. In fact, it could be argued that by invalidating an agreed remedy, the court would disrupt the balance of benefits decided by the parties, who would have taken the potential inducement of performance into account when negotiating the contract. Hence the prevention of inducement of obligations is not a strong justification for judicial control of penalty clause in a commercial context.

Secondly, the penalty clause may be unfair and over-compensate the injured parties in relation to the actual loss. If the aim of a remedy is corrective justice, invalidating penalty clauses may be justified because parties should not be allowed to set a higher amount of compensation than the actual loss. Collins has proposed that the court's approach is one of fairness which “compares the agreed remedy with the ordinary measure of damages”, qualified by allowance of foreseeability issues concerning the consequence of breach at the time the contract was formed. This justification of avoiding over-compensation based on fairness and corrective justice would be applicable in a commercial context.

Similarly to excessive liquidated damages clauses, unreasonable deposit is also regulated by courts. A deposit has to be at a reasonable amount, with reference to the custom of the trade. Applying Collin's analysis of fairness to courts' exercise of jurisdiction to invalidate unreasonable deposits, there seems to be two problems. Firstly, fairness is not the standard which the courts employ. Because deposit only has to be set at a reasonable rate with reference to customs of trade, the amount of justifiable deposit may be unrelated to the actual loss suffered by the injured party. Therefore, it seems the at the court is concerned with commercial reasonableness rather than fairness.

Secondly, fairness is a vague concept which does not explain how the court decided to use the reasonable test. For example, the court could have tested deposits according to the actual loss suffered and still claimed the standard to be based on consideration of fairness. No justification is provided by the courts as to the difference in standards for testing deposits and penalty clauses. A possible explanation may be that courts have developed responsively to different types of agreed remedies in an ad hoc manner and consequently, there are no overarching coherent principles or uniformity of standards for testing the fairness of deposits and penalty clauses.

In relation to forfeiture of property, it is also regulated and courts may grant a relief from forfeiture so that property is not repossessed. Relief would normally be granted if the rights confer a proprietary interest; proprietary interest is added to contract as security for performance; and time is not of the essence. The main problem with granting a relief is it only applies to certain proprietary or possessory interest. In Sport International, relief was not granted for a contractual licence for use of trademark; Whereas in BICC, relief was grant for joint proprietary interests in patent rights. The distinction between the two cases is unjustified because it lacks consideration of practical commercial implications, where the two interests were both intended to allow another party to use a form of intellectual property. In an age where intellectual property rights are seen as valuable assets, relief granted may be significant to a business's viability, especially if creditor only wishes the property to be a security.  Collins argues that courts should consider whether debtor has a real commercial interest in keeping possession and whether forfeiture clause was merely a security against payment for granting relief. Such considerations would ensure that the interests of the debtor and creditor would be properly balanced. Relief from forfeiture may be said to be based on a conception of fairness which enable both parties to achieve their benefits, without unduly favouring one party and therefore the nature of the interests should be immaterial.

To conclude, it has been demonstrated that there are many advantages of allowing agreed remedies to be enforced. The main justification for enforcing agreed remedies is freedom of contract. However, commercial advantages of agreed remedies must be balanced by consideration of fairness and the need to prevent abuse. Currently, the court is able to invalidate penalty clauses and unreasonable deposits, and grant relief form forfeiture. But regulation of agreed remedies has not developed any overarching coherent principles and there remains some incoherent areas of law. In sum, the advantages of agreed remedies may outweigh its disadvantages, but that does not mean the court should invariably give effect to them.

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