Peachtree II Associates -- Dallas L.P. v. 857486 Ontario Ltd.
Peachtree II Associates -- Dallas L.P., by its general partner, 857485 Ontario Limited et al. v. 857486 Ontario Limited et al. 857486 Ontario Limited v. Peachtree II Associates -- Dallas L.P., by its general partner, 857485 Ontario Limited et al. 869163 Ontario Limited v. Torrey Springs II Associates Limited Partnership et al. Torrey Springs II Associates Limited Partnership et al. v. 869163 Ontario Limited [Indexed as: Peachtree II Associates -- Dallas L.P. v. 857486 Ontario Ltd.]
76 O.R. (3d) 362
[2005] O.J. No. 2749
Court of Appeal for Ontario,
Feldman, MacPherson and Sharpe JJ.A.
July 4, 2005
*Application for leave to appeal to the Supreme Court of Canada was dismissed with costs January 19, 2006 (McLachlin C.J.C., Binnie and Charron).
Contracts -- Stipulated remedy clause -- Relief from forfeiture -- Not all stipulated remedy clauses with penal consequences being unenforceable -- Equitable doctrine of relief from forfeiture enforcing such penalty clauses, where they are in form of forfeiture, where it is not unconscionable to do so -- Stipulated remedy clause in commercial agreement providing that promissory notes provided to appellant by respondents were to be deemed paid if appellant defaulted on its obligations -- Arbitrator not erring by refusing to strike down stipulated remedy clause as unenforceable penalty and by refusing to grant relief from forfeiture.
The parties entered into agreements to purchase and operate two rental properties. The respondents were passive investors who became limited partners in the ventures, which were arranged to provide them with significant income tax deductions. They provided the appellant with promissory notes to secure their obligation to reimburse the appellant for certain fees and advances. The agreement contained a stipulated remedy provision which stated that in the event the appellant defaulted on its obligations, the promissory notes were to be deemed paid. The respondents alleged that the appellant failed to live up to its obligations under the agreements. They served a series of notices to that effect, and the appellant failed to remedy the alleged defaults. The agreements provided for arbitration of disputes. The respondents issued claims for a declaration deeming the promissory notes paid in full or in the alternative damages on the basis of the appellant's alleged default. The arbitrator found that the appellant was in serious default of its obligations. The arbitrator was prepared to assume that the deemed payment of the promissory notes was analogous to a payment of damages by the appellant and concluded that it could be regarded as a penalty. However, he found that the stipulated remedy clause should be enforced and that the appellant was not entitled to relief from forfeiture. The appellant's appeal to the Superior Court was dismissed. The appeal judge rejected the argument that the arbitrator was required in law to restrict the respondents to their remedy in damages after having found that the stipulated remedy clause "could be a penalty". The appeal judge held that the arbitrator had the discretion to decide whether or not the clause should be enforced even if it were a penalty. The appellant appealed. [page363]
Held, the appeal should be dismissed.
The arbitrator and the appeal judge did not err by refusing to strike down the stipulated remedy clause as an unenforceable penalty. There is no iron-clad rule to the effect that all stipulated remedy clauses, whether penalties or forfeitures, assessed at the date of the contract as having penal consequences will not be enforced. The equitable doctrine of relief from forfeiture enforces such penalty clauses, where they are in the form of a forfeiture, where it is not unconscionable to do so. In this case, deeming the notes paid was more aptly described as a forfeiture rather than the payment of a penalty. The appellant forfeited the right to enforce the notes. Courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses. There is good authority for the proposition that the strict rule of the common law refusing to enforce penalty clauses should not be extended. Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach. Properly considered, the appellant's contention that the stipulated remedy clause should not be enforced amounted to a request for relief from forfeiture. There was no basis for interfering with the arbitrator's refusal to grant the appellant relief from forfeiture.
APPEAL from the judgment of Sutherland J., 2004 ONSC 66298, [2004] O.J. No. 4673, 243 D.L.R. (4th) 502 (S.C.J.), dismissing an appeal from two arbitration awards pursuant to the Arbitration Act, 1991, S.O. 1991, c. 17.
Cases referred to Dimensional Investments Ltd. v. Canada, 1967 SCC 85, [1968] S.C.R. 93, 64 D.L.R. (2d) 632, 6 C.N.L.C. 90; Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79, 23 C.L.T. 106 (H.L.); Else (1982) v. Parkland Holdings Ltd., [1993] E.W.J. No. 4674 (C.A.); Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 SCC 7, [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, 20 N.R. 1, 3 B.L.R. 183, 36 C.P.R. (2d) 65; H.F. Clarke Ltd. v. Thermidore Corp. Ltd., 1974 SCC 30, [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385; Robophone Facilities Ltd. v. Blank, [1966] 1 W.L.R. 1428, [1966] ALL E.R. 128, 110 Sol. Jo. 544 (C.A.); Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 SCC 100, [1994] 2 S.C.R. 490, [1994] S.C.J. No. 59, 20 Alta. L.R. (3d) 296, 115 D.L.R. (4th) 478, 168 N.R. 381; Stockloser v. Johnson, [1954] 1 All E.R. 630, [1954] 1 Q.B. 476, 98 Sol. Jo. 178 (C.A.) Statutes referred to Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98 [as am.] Authorities referred to Fridman, G.H.L., The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) Snell's Principles of Equity, 27th ed. (London: Sweet & Maxwell, 1973) Waddams, S.M., The Law of Damages, looseleaf (Aurora, Ont.: Canada Law Book Inc., 1991)
Paul Dollak, for appellants. Milton A. Davis and Kelli Preston, for respondents. [page364]
The judgment of the court was delivered by
1SHARPE J.A.:-- The issue on this appeal is the enforceability of stipulated remedy clauses in two complex commercial agreements. The parties entered agreements to purchase and operate two rental properties. The respondents were passive investors who provided the appellant with promissory notes to secure their obligation to reimburse the appellant for certain fees and advances. The agreements provided that in the event the appellant defaulted on its obligations, the promissory notes were to be deemed paid. An arbitrator found that the appellant was in default and that, while the stipulated remedy "could be a penalty", it should nonetheless be enforced. The arbitrator also refused relief from forfeiture. The arbitrator's decision was upheld on appeal to the Superior Court, 2004 ONSC 66298, [2004] O.J. No. 4673, 243 D.L.R. (4th) 502 (S.C.J.). For the following reasons, I would dismiss the appeal.
Facts
2In 1990, Morris Kaiser, the controlling mind of the appellant corporation, initiated a proposal for the acquisition of two multiple-unit residential properties -- one in Dallas called Peachtree and one in Las Vegas called Torrey Springs. Kaiser brought his proposal to Stanley Goldfarb, then a partner in the accounting firm Goldfarb, Shulman, Patel & Co., asking Goldfarb to recruit investors. The respondents are the investors who became limited partners in the ventures, which were arranged to provide them with significant income tax deductions. For the purposes of these appeals, it is unnecessary to delve into the details of these complex transactions. Suffice it to say that the appellant corporation, aptly labelled "Serviceco", had certain obligations under the financing agreements while the respondents played an entirely passive role.
3At issue on this appeal are promissory notes, referred to as the "C-Notes", which were given by the respondents to the appellant Serviceco. Serviceco was obliged to advance funds to meet some "soft costs" incurred in setting up the arrangements for the acquisitions of Peachtree and Torrey Springs. Repayment of those costs by the limited partners was secured by the C- Notes. The C-Notes also secured any amounts advanced by Serviceco after closing and up to the end of a guarantee period if funds were not available to meet that obligation.
4As stated by the arbitrator, the limited partners secured the immediate advantage of income tax reductions resulting from [page365] losses in the operation of the property without having to advance any funds. They ran the risk of eventually having to pay off the C-Notes if the proceeds from the properties were insufficient to do so. They also ran the risk of having to advance funds to preserve their investment if Serviceco defaulted in its obligations.
5In 1997 and 1998, the respondents alleged that Serviceco had failed to live up to its obligations under the agreements. They served a series of notices to that effect. Serviceco failed to remedy the alleged defaults.
6The agreements each contained the following stipulated remedy provision:
3.01 In the event that a certificate (the "Certificate") of Messrs. Goldfarb, Shulman, Patel & Co. or any successor firm thereto, or of a national firm of chartered accountants licensed to practice in Ontario (the "Notifier") is delivered personally or by registered mail to Serviceco, Shlomo Sharon and Morris Kaiser, if they are alive, at their last known addresses, certifying that:
(a)(i) there has been a default by any one or more of Serviceco, Evergreen Properties No. 23, Inc. or the Manager pursuant to the terms of this Agreement, or the Initial Services Agreement, or the Management Agreement and specifying particulars of the default and the response requested; and
(ii) such default has continued for a period of thirty (30) days following the written notice thereof having been given by the General Partner or any Limited Partner to Serviceco, Shlomo Sharon and Morris Kaiser, if they are alive, at their last known addresses; and
(iii) the General Partner or any Limited Partner has subsequently sent a second notice to the parties aforementioned in the manner aforesaid and the default has continued for a period of thirty (30) days following such second written notice thereof; or
(b) that there has been a default by Serviceco pursuant to Section 2.02(b) hereof;
then in addition to the set off rights in Section 2.10 hereof, the C-Notes shall immediately be deemed to have been paid in full upon payment of $1.00 to the holder of the C- Notes, and the Escrow Agents, upon receiving notice from the General Partner or any aforesaid, shall immediately and without inquiry as to the correctness of the matters set out in the Certificate, deliver the Releases to the Limited Partners.
(Emphasis added)
7The Arbitrator found that this clause had been included in the agreements because Goldfarb had "insisted on the provision to ensure performance on the part of Kaiser and his corporations and that there was no attempt to relate the amount outstanding on the notes to an estimate of the amount of damages". [page366]
Abritration Awards
8The agreements provided for arbitration of disputes. The respondents issued claims for a declaration deeming the C-Notes paid in full or in the alternative for damages on the basis of alleged defaults by the appellant. The appellant denied that it was in breach and raised a number of defences. The appellant denied that the respondents had followed the proper procedure to give notice of the defaults, alleged conspiracy on the part of the respondents, and counterclaimed for damages.
9Although there are some differences in the financial arrangements and the nature and extent of the appellant's defaults under the two agreements, the arbitrator found that the situation in both cases was substantially the same. For the purposes of this appeal, therefore, his two awards are virtually identical. The arbitrator found that the appellant was in breach, dismissed the counterclaims, and awarded the respondents declarations that the C-Notes are deemed to have been paid in full.
10The arbitrator found that Serviceco was in serious default of its obligations. Serviceco failed to provide a promised line of credit and failed to refund approximately $432,000 in tax overpayments to the limited partners. The arbitrator rejected Serviceco's contention that it had made payments for which it had not been reimbursed.
11The stipulated remedy clause did not require Serviceco to pay damages upon breach but it did deem payment of the C- Notes to have been made, and the appellant argued that this amounted to an unenforceable penalty. The arbitrator stated: "... I am prepared to assume that the deemed payment is analogous to a payment of damages by Serviceco and that it is appropriate to consider whether it could be regarded as a penalty". The arbitrator found that "[t]he aggregate principal of the C-Notes was not a fixed amount and could vary over the life of the financing agreement". However, as any default could trigger payment of the C-Notes which on their face had an aggregate principal amount of several million dollars and, as "there was no attempt to relate the amount outstanding on the notes to an estimate of the amount of damages", the arbitrator concluded that "the deemed payment could be regarded as a penalty".
12The arbitrator proceeded to apply what he described as "equitable principles" to determine whether or not the stipulated remedy clause should be enforced. He found that at the time of breach nothing was owed to Serviceco that would be secured by the C-Notes: "There is no evidence that Serviceco made payments for which it has not been reimbursed and for which it is entitled [page367] to be reimbursed by the limited partners" and anything owing to Serviceco for fees or services "has to be offset against the total failure to provide the line of credit and to refund the overpayments on account of taxes". In view of the default and "[s]ubject to considering relief from forfeiture", the arbitrator found the stipulated remedy clause deeming the notes to be paid was enforceable.
13The arbitrator then considered whether the appellant should be granted relief from forfeiture. He applied the following passage from Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 SCC 100, [1994] 2 S.C.R. 490, [1994] S.C.J. No. 59, at p. 504 S.C.R. (per Major J.), describing the power to grant relief from forfeiture.
The power to grant relief against forfeiture is an equitable remedy and is purely discretionary. The factors to be considered by the Court in the exercise of its discretion are the conduct of the applicant, the gravity of the breaches, and the disparity between the value of the property forfeited and the damage caused by the breach.
(Citations omitted)
14In view of the "gravity of the breach" and the fact that "Serviceco had not established on the evidence that a disparity exists" between the value of the C-Notes and the damage caused by the breach, he refused to grant relief from forfeiture. He added that, in any event, the appellant's conduct militated against granting equitable relief. The appellant had, inter alia, failed to make any attempt to remedy its breach despite the notices and had made unfounded allegations of conspiracy during the arbitration.
Appeal to the Superior Court
15The arbitration agreement provided for an appeal to the Superior Court "on errors of law, errors of fact, and errors of mixed fact and law, with such appeals to be dealt with as if the arbitration had been a trial in the Superior Court of Justice". The appellant raised a number of grounds of appeal, all of which were dismissed. Only one of these remains alive before this court, namely the enforceability of the stipulated remedy clause.
16The appeal judge rejected the argument that the arbitrator was required in law to restrict the respondents to their remedy in damages after having found that the stipulated remedy clause "could be a penalty". The appeal judge held that the arbitrator had the discretion to decide whether or not the clause should be enforced even if it were a penalty. As to the exercise of that discretion, the appeal judge wrote at para. 25: [page368]
Given the nature of the transactions, the roles of the parties, the "double notice" provision with its attendant opportunity for remedying breaches, the large potential for serious damage to the interests and property of the investors, the sophistication of the parties or their representatives and the Arbitrator's finding it was uncertain that there was a disparity between the value of the C-Notes and the damage caused by the breaches, it has not been established that the clause in question was extravagant, extortionate, unconscionable or unreasonable . . . .
17The appeal judge also affirmed the arbitrator's decision with respect to relief from forfeiture at para. 33:
The passage from Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. quoted by the Arbitrator at p. 31 of his reasons . . . is equally applicable to the facts in this case and it supports the Arbitrator's actions in taking into account for the purposes of the exercise of his discretion (i) the conduct of the plaintiff and his directing mind, Mr. Kaiser; (ii) the gravity of the breaches; (iii) the principal amounts of C-Notes deemed to have been paid; and (iv) the disparity between the value of those C-Notes and the damage caused by the breach. With respect to the exercise of his discretion, the Arbitrator was correct in considering whether the disparity had been proven at the hearing and in noting that the onus of proving such disparity was on the defendants.
(Citations omitted)
Issue
18The sole issue on this appeal is whether the appeal judge erred by affirming the arbitrator's decision that the stipulated remedy clause should be enforced.
Analysis
19The appellant submits that the arbitrator found that the stipulated remedy clause was a "penalty", and that, having done so, the arbitrator was required to apply a simple, black-letter common law rule that precludes enforcement of penalty clauses. The appellant further submits that the appeal judge erred in finding that the arbitrator had the discretion to enforce what he had found to be a penalty clause.
20In my view, the applicable legal and equitable principles are considerably more nuanced than is suggested by the appellant's argument. I do not agree that the arbitrator found the stipulated remedy clause to fall into the category of penalties that contract law does not enforce. I also consider the applicable legal and equitable principles to be sufficiently flexible to support the enforcement of the clause at issue in this case on the basis of the relief from forfeiture doctrine.
21To understand the law's treatment of stipulated remedy clauses as it pertains to this case, we must turn to history and to [page369] the two great streams of our legal tradition, common law and equity. Although those two streams were joined well over a century ago, as this case demonstrates, we continue to encounter issues of confluence and the reconciliation of doctrines derived from one tradition with those derived from the other.
22The courts of common law and equity adopted similar but distinctive rules with respect to stipulated remedy clauses that had penal consequences. The courts of common law dealt with attempts to enforce the payment of penalties while the courts of equity dealt with pleas for relief from penal forfeitures. In the oft-quoted words of Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79, 23 C.L.T. 106 (H.L.), at pp. 86-87 A.C., "The essence of a penalty is a payment of money stipulated as in terrorem of the offending party ..." On the other hand, a forfeiture is the loss, by reason of some specified conduct, of a right, property, or money, often held as security or part payment of the obligation being enforced under the threat of forfeiture. Like promises to pay a penalty, forfeitures often have penal consequences as the right or property forfeited by the defaulting party may bear no relation to the loss suffered by the innocent party.
23There is a venerable common law rule to the effect that the courts will not require a party to pay a genuine or true penalty on grounds of public policy. The parallel, but distinctive, equitable rule is to the effect that penal forfeitures will be relieved against where their enforcement would be inequitable and unconscionable.
24While both doctrines have the effect of relieving the breaching party of the penal consequences of stipulated remedy clauses, in their traditional formulations they bear significant differences. The common law penalty rule involves an assessment of the stipulated remedy clause only at the time the contract is formed. If the stipulated remedy represents a genuine attempt to estimate the damages the innocent party would suffer in the event of a breach, it will be enforced. On the other hand, again to quote Lord Dunedin from Dunlop, supra, "[i]t will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably be proved to have followed from the breach". Laskin C.J.C. adopted a virtually identical formulation (taken from Snell's Principles of Equity, 27th ed. (London: Sweet & Maxwell, 1973) at p. 535) in H.F. Clarke Ltd. v. Thermidore Corp. Ltd., 1974 SCC 30, [1976] 1 S.C.R. 319, 54 D.L.R. (3d) 385, at p. 338 S.C.R. Although the common law defined penalties in terms of unconscionability, that assessment is to be made at the time the [page370] contract was formed. The common law doctrine did not include any discretion to be exercised in the light of circumstances that may exist at the time of breach.
25Equity, on the other hand, considers the enforceability of forfeitures at the time of breach rather than at the time the contract was entered. Equity also looks beyond the question of whether or not the stipulated remedy has penal consequences to consider whether it is unconscionable for the innocent party to retain the right, property, or money forfeited. As explained by Denning L.J. in Stockloser v. Johnson, [1954] 1 All E.R. 630, [1954] 1 Q.B. 476 (C.A.), at p. 638 All E.R.: "Two things are necessary: first, the forfeiture clause must be of a penal nature, in the sense that the sum forfeited must be out of all proportion to the damage; and, secondly, it must be unconscionable for the seller to retain the money."
26Against this general background, I cannot agree with the appellant's contention that the arbitrator and the appeal judge erred by refusing to strike down the stipulated remedy clause as an unenforceable penalty. The central pillar of the appellant's argument, as I understand it, is that there is an iron-clad rule to the effect that all stipulated remedy clauses, whether penalties or forfeitures, assessed at the date of the contract as having penal consequences will not be enforced. In my view, that proposition does not represent an accurate statement of the law. Not all stipulated remedy clauses having penal consequences are unenforceable. In particular, the equitable doctrine of relief from forfeiture enforces such penalty clauses, where they are in the form of a forfeiture, where it is not unconscionable to do so.
27The proposition advanced by the appellant has been explicitly rejected in the case law. For example, in Dimensional Investments Ltd. v. Canada, 1967 SCC 85, [1968] S.C.R. 93, 64 D.L.R. (2d) 632, the Supreme Court of Canada dealt with a contract to purchase lands that provided for installment payments. If the purchaser defaulted, the contract terminated, and the vendor could retain all installments. This amounted to a penalty as it bore no relation to the damages suffered. The court adopted the approach taken in Stockloser, supra, and enforced the term, holding at p. 100 S.C.R. that "even if [the impugned stipulated remedy clause] had been found to impose a penalty rather than a genuine pre-estimate of damage, it does not follow" that the clause would not be enforced.
28Else (1982) Ltd. v. Parkland Holdings Ltd., [1993] E.W.J. No. 4674 (C.A.) involved an agreement that required the purchaser of shares to make certain payments in default of which [page371] the vendor would recover shares held in escrow and would be permitted to retain half of the substantial payments that had already been made for the shares. This was a penal provision, as the amount forfeited bore no relation to the damages suffered, yet it was enforced. The purchaser made essentially the same argument as that advanced by the appellant in the case [at] bar. The English Court of Appeal, at para. 23, flatly rejected the submission that all stipulated remedy clauses having penal consequences are unenforceable as being inconsistent with the doctrine of relief from forfeiture: "[I]t has never been held or even argued, so far as the law reports indicate, that forfeiture clauses which foreseeably at the time of the contract involved penal consequences are unenforceable and should therefore be dis regarded for that reason alone."
29On these authorities, if the appellant's case, properly considered, amounts to a request for relief from forfeiture, the appeal must fail as the findings of the arbitrator in that regard are not attacked and, in any event, appear to me to be unimpeachable. I pause here to note that it is with some reluctance that I frame the issue in terms of a choice between common law and equity. In doing so, I do not wish to be taken as encouraging the perpetuation of what very well may amount to an outdated distinction between the common law's treatment of penalty clauses and the equitable doctrine of relief from forfeiture. However, as I am satisfied that the appeal fails even on the terms of these traditional categories, it is unnecessary to go further. Moreover, as I will explain, my analysis is driven in large part by considerations that would tend to favour, whenever possible, the equitable approach as the dominant one.
30Should the impugned clause in the present case be assessed from the perspective of the common law rule against penalty clauses or does the appellant's case amount to a request for relief from forfeiture? For the following reasons, I consider that the appellant's case amounts to a request for relief from forfeiture.
31First, it seems to me more apt to describe deeming the notes paid as being a forfeiture rather than the payment of a penalty. A penalty is the payment of a sum as a consequence of breach. By the terms of the clause at issue here, the appellant pays nothing on account of its breach. Rather the appellant forfeits the right to enforce the notes. Admittedly, in the case at bar, we are to some extent looking at two sides of the same coin, but as I shall explain, there is good authority to the effect that courts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice [page372] between considering stipulated remedies as penalties or forfeitures, favour the latter.
32Second, I agree with Professor Waddams' observation in The Law of Damages, looseleaf (Aurora: Canada Law Book Inc., 1991) at para. 8.310 that as there is often little to distinguish between the two types of clauses and that there is much to be said for assimilating both under unconscionability. The effect of assimilation would be "to provide a more rational framework for the decisions of both forfeitures and penalties". Unconscionability is also the direction suggested by the dictum of Dickson J. in Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 SCC 7, [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, at p. 937 S.C.R.: "It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum." As pointed out by the appeal judge, this would also appear to be the direction of s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C .43: "A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise, as are considered just." All of this suggests to me that courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.
33Third, there is good authority for the proposition that the strict rule of the common law refusing to enforce penalty clauses should not be extended. The English Court of Appeal has stated in Else, supra, at para. 30 (per Evans L.J.) that "in modern conditions the courts should not seek to extend the common law rule" and at para. 58 (per Hoffman L.J.) "the penalty doctrine, being an inroad upon freedom of contract which is inflexible compared with the equitable rules of relief against forfeiture, ought not to be extended". A similar view was expressed by Diplock L.J. in Robophone Facilities Ltd. v. Blank, [1966] 1 W.L.R. 1428, [1966] All E.R. 128 (C.A.), at p. 1447 W.L.R., stating that courts should not be "astute to descry 'a penalty clause' in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former".
34This is closely related to the fourth factor, namely, the policy of upholding freedom of contract. Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach. As I have already noted, in Elsley, supra, Dickson J. labelled the penalty [page373] clause doctrine as "a blatant interference with freedom of contract", a sentiment echoed by the English Court of Appeal in Else. The arguments favouring the enforcement of stipulated remedy clauses on this score are recognized by Fridman, The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 1999) at p. 817 and are especially well put by Waddams, supra, at para. 8.330:
It is useful to remember that the jurisdiction to strike down penalty clauses represents an exception to a general principle of freedom of contract. The force of the general principle should not be underestimated. There are strong arguments for enabling parties to set their own value on performance. The power to do so gives flexibility to the contracting process; it enables the promisor to offer an assurance of performance while limiting liability for consequential damages and thereby making the cost of breach predictable. It enables the promisee to avoid the cost of securing compensation by litigation and the risks of undercompensation that may be caused by the legal restrictions on damages, such as remoteness, certainty of proof, mitigation, and failure to recognize intangible losses; it reduces the cost to the parties and to the state of settling a dispute after breach; it enables the promisee to purchase insurance against default from the party in the best position to provide it at the lowest cost. A further point is that the striking down of the clause may represent an injustice to the promisee for the price of performance will have been agreed in the light of all the promisor's obligations, including the promise to pay an agreed sum on breach; if that promise is struck down, the promisee does not receive what has been paid for.
(Footnote omitted)
35Taking all of these factors into account, I conclude that the appellant's contention that the stipulated remedy clause should not be enforced, properly considered, amounts to a request for relief from forfeiture. As there is no basis upon which I would interfere with the arbitrator's treatment of relief from forfeiture, it follows that the appeal must be dismissed.
36My conclusion with respect to relief from forfeiture makes it unnecessary for me to consider the point dealt with by the appeal judge, namely, whether there is a residual discretion to enforce a payment that would be a penalty under the common law rule, and I leave that question to another day.
Conclusion
37For these reasons, I would dismiss the appeal. The respondents are entitled to their costs of the appeals fixed at $40,000, inclusive of disbursements and GST.
Appeal dismissed.
[page374]
