contract-law england-and-wales
Why are unlikely hypothetical breaches overlooked, because most clauses operate punitively?
<p>Poole, Shaw-Mellors. <a href="https://www.amazon.co.uk/Contract-Law-Concentrate-Jill-Pool/dp/0198840446/ref=dp_ob_title_bk" rel="nofollow noreferrer"><em>Contract Law Concentrate</em> (4 ed 2019)</a>. p 166.</p>

<blockquote>
  <h1>Distinguishing liquidated damages and penalty clauses</h1>
  
  <p>This is a question of construction of the contract and public policy. Traditionally reference
  has been made to the guidelines (a summary follows) laid down by Lord Dunedin in <em>Dunlop
  Pneumatic Tyre Co. Ltd v New Garage &amp; Motor Co. Ltd</em> (1915).</p>
  
  <h3>Lord Dunedin’s traditional guidelines</h3>
  
  <p>• Terminology used was not conclusive, e.g. Cellulose Acetate.<br>
  • Was the clause a genuine pre-estimate of the likely loss at the time contract was
  made rather than in the light of the breach? The estimate did not have to be correct,
  i.e. it did not need to be the same as the actual loss as long as it was a genuine and sensible
  estimate of the likely loss resulting from that breach.<br>
  • In commercial contracts made ‘at arm’s length’ the clause was likely to have been intended
  by the parties as an enforceable liquidated damages clause: <em>Philips Hong Kong Ltd v
  AG of Hong Kong</em> (1993). <strong>Account would not be taken of unlikely hypothetical breaches,
  since it would be very difficult to draft a clause that would never operate in a penal way.</strong>
  The courts should uphold the parties’ agreement.</p>
</blockquote>

<p>The boldened sentence too many negators. I rewrote it —</p>

<blockquote>
  <p>Unlikely hypothetical breaches are overlooked, because it's difficult to draft clauses that never penalize/operate punitively.</p>
  
  <p>⇒ Unlikely hypothetical breaches are overlooked, because most clauses drafted would penalize. </p>
</blockquote>

<p>I still don't understand. How does difficulty in drafting clauses that don't penalize, relate to overlooking unlikely hypothetical breaches? </p>

<blockquote>
  <p>How does difficulty in drafting clauses that don't penalize, relate to overlooking unlikely hypothetical breaches?</p>
</blockquote>

<p>The parties to a contract try to reach a balance on how (1) exhaustive and (2) non-controversial the clauses ought to be in a contract.</p>

<p>An exhaustive contract would provide a remedy for unlikely hypothetical breaches. But that gives the potential or actual breaching party more room for disputing the adequacy of those remedies (thereby creating a controversy): that party can allege that the remedies at issue are punitive and therefore excessive for the purpose of remedies in contract law (the purpose being the fair compensation for losses arising from a breach).</p>

<p>When it comes to unlikely hypothetical breaches, that unlikelihood makes it harder for the parties to agree on what would be a reasonable estimate of losses --and hence the compensation for actual losses-- in the event that the hypothetical breach occurs.</p>
