Ontario Court of Appeal Considers the Law Regarding Penalty Clauses

Co-authored by Christiaan A. Jordaan. (2008) 13:1 Commercial Litigation 684. Courts have historically shown reluctance to enforce contractual clauses that impose particularly onerous consequences on a party that breaches the contract. Two different streams of jurisprudence developed to address this issue: common law courts developed the "penalty" doctrine, while courts of equity developed the doctrine of relief from forfeiture. While closely related, the two doctrines would not necessarily lead to the same result in similar circumstances. Two recent decisions of the Ontario Court of Appeal suggest the possibility of a harmonization of these doctrines in a manner that would create greater predictability in the law and would better respect freedom of contract.