PROBLEMATIC STIPULATED DAMAGE CLAUSES: PENALTIES OR CASES OF MUTUAL MISTAKE?
The standard law and economics criticism of contract law’s penalty doctrine is that a court should always enforce a freely-bargained-for stipulated damages clause because contracting parties would never agree to include a penalty for breaching absent fraud, oppression or a related bargaining anomaly. However, this argument fails to recognize that contracts are often incomplete, and hence even an explicit and freely-bargained-for damages clause may be inapplicable and require court intervention. Contract law refers to the problems that arise from the realization of unforeseen contingencies as cases of “mutual mistake.” The solution to liquidated damage disputes prompted by the occurrence of an unforeseen contingency is neither to adhere to the penalty doctrine nor to strictly enforce all liquidated damage clauses. Rather, an efficient and simple solution is to deal with this class of stipulated damages disputes under contract law doctrines that are specifically designed to address problems stemming from contractual incompleteness, such as the doctrine of mistake.