When a contract is breached, an innocent party often wants one thing: a fixed sum, fast. Rather than proving loss the long way through a damages claim, a solicitor can sometimes reach for an agreed sum — a liquidated damages clause, a debt, or a forfeited deposit. These routes can sidestep the duty to mitigate and the rules on remoteness and causation, making them powerful tools in advising clients and drafting contracts. The catch is that the law polices them: an agreed sum that crosses into punishment can be struck down as a penalty.
This lesson takes you through each route in turn, and the limits the courts impose.
- Overview and Liquidated Damages Clauses — the three routes to a fixed sum, and how an agreed-damages clause lets you recover without proving loss.
- The Penalty Rule — why some agreed clauses are unenforceable, and the primary/secondary obligation distinction at its heart.
- The Modern Test for Penalties — the two-stage inquiry: legitimate interest, then proportionality, judged at formation.
- Applying the Penalty Test — how the rule plays out between commercial parties, and what survives if a clause falls.
- Debt Claims — enforcing the primary obligation to pay, and the effect of entire and substantial performance.
- Set-Off, Limitation and Statutory Interest — the defences and add-ons that shape recovery.
- Deposits and Part-Payments — what can be forfeited, what must be returned, and why the difference matters.