McGill Law Journal ~ Revue de droit de McGill
PENALTY CLAUSES THROUGH THE LENS OF
UNCONSCIONABILITY DOCTRINE:
BIRCH V. UNION OF TAXATION EMPLOYEES,
LOCAL 70030
CASE COMMENT
Kevin E. Davis*
The author reviews the recent case of
Birch v. Union of Taxation Employees, Local
70030, in which the Ontario Court of Appeal
evaluatedin terms of the doctrine of uncon-
scionabilitythe enforceability of a clause fin-
ing union members who cross picket lines dur-
ing legal strikes. He applauds the decision as an
important step toward jettisoning the tradi-
tional common law penalty doctrine, according
to which stipulated remedy clauses designed to
have an in terrorem effect upon a contracting
party are per se unenforceable. The author
criticizes the decision, however, for its failure to
examine features of the case that would have
been ignored under the penalty doctrine but
that should have been prominent under the un-
conscionability doctrine. These features include:
other provisions of the contract, the relative dif-
ficulty of arriving at a genuine pre-estimate of
the loss as opposed to a reasonable penalty,
and the process by which the contract was
formed. The author concludes that, in failing to
examine these features, the court missed an op-
portunity to clarify the changing law on the en-
forceability of stipulated remedy clauses.
Lauteur analyse larrt Birch v. Union of
Taxation Employees, Local 70030 dans lequel la
Cour dappel de lOntario a valu sous langle
de la thorie de liniquit la validit dune clause
imposant une amende aux membres dun
syndicat qui traversent la ligne de piquetage
lors dune grve lgale. Lauteur approuve la
dcision de la cour, quil considre comme un
pas significatif vers la possibilit de se dfaire
de la doctrine traditionnelle des clauses pnales
de la common law selon laquelle les clauses
destines avoir un effet in terrorem sur une
des parties au contrat taient rputes
impossibles excuter. Lauteur critique
nanmoins
ignor
certains aspects de la situation ; des lments
auxquels la doctrine traditionnelle des clauses
pnales ne sintresse pas, mais qui, du point de
vue de lauteur, auraient d tre examins sous
langle de la thorie de liniquit. Parmi ces
lments, lauteur soutient que la cour aurait
d se pencher sur les autres clauses du contrat,
sur la difficult dvaluer les cots anticips de
la rparation du prjudice et sur le processus de
formation du contrat. Lauteur conclut que,
parce que la cour na pas examin ces lments,
elle a manqu une occasion de faire voluer la
common law dans le domaine de la mise en
uvre des clauses pnales.
jugement pour avoir
le
* Beller Family Professor of Business Law, New York University School of Law. I am
grateful to several anonymous reviewers for helpful comments on an earlier draft and
to Andrew Tettenborn and Edward Veitch for helpful suggestions. All errors remain my
own.
Citation: (2010) 55 McGill L.J. 151 ~ Rfrence : (2010) 55 R.D. McGill 151
Kevin E. Davis 2010
152 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
Introduction
I.
II.
III.
The Decision in Birch
Missed Opportunities
Should the Courts Reasoning Be Taken at Face
Value?
Conclusion
153
154
158
163
164
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 153
Introduction
Do advances in legal doctrine matter? Will it make a difference if
courts begin to analyze a particular legal problem under the rubric of one
doctrine rather than another? In theory, new doctrinal lenses should
bring different features of the problem into focus, and this should in turn
lead judges to form different impressions of how the problem ought to be
resolved. The Ontario Court of Appeals recent decision in Birch v. Union
of Taxation Employees, Local 70030 casts doubt on this hypothesis.1 The
majoritys decision in the case suggests that changing the doctrine used to
analyze the enforceability of stipulated remedies will not necessarily af-
fect the outcomes of future cases. Changing outcomes may require a more
fundamental shift in judges understandings of stipulated remedies and
their role in contractual relationships.
Birch was preceded by a path-breaking line of cases in which Cana-
dian appellate courts signalled their willingness to depart from the strict
common law rule against enforcing a stipulated remedy that amounts to a
penalty rather than a genuine pre-estimate of damages.2 Those cases
marked a positive development in Canadian contract law, as adherence to
the traditional rule against penalty clauses is difficult to justify. This is
not to say that all penalty clauses ought to be enforced. But some of them
should be enforced, while the reasons not to enforce the rest are more or
less the same as the reasons not to enforce other contractual provisions.
Consequently, doctrines such as unconscionability, mistake, and contra
proferentem ought to be capable of addressing concerns relevant to the en-
forceability of stipulated remedies. There is no need for a rule that singles
out penalty clauses for special treatment. Prominent commentators have
1 2008 ONCA 809, 93 O.R. (3d) 1, 305 D.L.R. (4th) 64 [Birch], leave to appeal to S.C.C. re-
fused, 32989 (7 May 2009).
2 See especially Liu v. Coal Harbour Properties Partnership, 2006 BCCA 385, 273 D.L.R.
(4th) 508 at para. 24, 56 B.C.L.R. (4th) 230 [Coal Harbour] (the decision to grant relief
against a penalty depends on whether to enforce the penalty would be unconscionable);
Peachtree II AssociatesDallas L.P. v. 857486 Ontario Ltd. (2005), 76 O.R. (3d) 362,
(sub nom. 869163 Ontario Ltd. v. Torrey Springs II Associates Ltd. Partnership) 256
D.L.R. (4th) 490 (C.A.) [Peachtree II cited to O.R.] (I agree with Professor Waddams
observation in The Law of Damages that as there is often little to distinguish between
[penalties and forfeitures] 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 at para. 32 [reference
omitted]), leave to appeal to S.C.C. refused, 31126 (19 January 2006); Elsley Estate v.
J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1 (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 op-
pression for the party having to pay the stipulated sum. It has no place where there is
no oppression S.C.R. at 937). It is important to note that all but the first of these cases
dealt with this issue in obiter dicta.
154 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
long endorsed this position,3 and Canadian courts and legislatures are
cautiously beginning to take heed.4 This question remains: will analyzing
stipulated remedies through the lens of unconscionability rather than the
penalty doctrine make any difference in the outcome of decided cases?
I. The Decision in Birch
Most reported disputes concerning stipulated remedies arise in com-
mercial settings. The dispute in Birch is an exception. According to the
agreed facts, the applicants were employees of the Canada Revenue
Agency and members of the Union of Taxation Employees (UTE), a com-
ponent of the Public Service Alliance of Canada (PSAC). UTE brought dis-
ciplinary proceedings against the applicants for violating the PSAC con-
stitution by crossing a picket line to work during a legal strike by PSAC.
The PSAC constitution provides that the punishment for this sort of of-
fense
shall include the imposition of a fine that equals the amount of daily
remuneration earned by the member, multiplied by the number of
days that the member crossed the picket line, performed work for
the employer or voluntarily performed struck work.5
Pursuant to this and other provisions of the constitution, the union
suspended the applicants for three years (one year for each day that they
crossed the picket line) and fined them each an amount equivalent to
their gross salary for the three days they crossed the picket line. The ap-
3 See S.M. Waddams, The Law of Contracts, 5th ed. (Toronto: Canada Law Book, 2005) at
320-32. For a historical overview and explanation of the development of the penalty
doctrine, and suggested alternative legal principles, see Charles J. Goetz & Robert E.
Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some
Notes on an Enforcement Model and a Theory of Efficient Breach (1977) 77 Colum. L.
Rev. 554.
4 New Brunswick has enacted legislation that was intended to reform the common law
rule against enforcement of penalty clauses. See Law Reform Act, S.N.B. 1993, c. L-1.2
(A party to a contract may enforce a penalty clause or a liquidated damages clause to
the extent that it is reasonable in all of the circumstances that the clause should be en-
forced at s. 5(1)); Mortgage Makers v. McKeen, 2009 NBCA 61, 312 D.L.R. (4th) 82
(s. 5(1) of the Act effects a fundamental change in the common law regarding the en-
forceability of penalty and liquidated damages clauses at para. 3), revg 2008 NBQB
327, 339 N.B.R. (2d) 215. See also Timothy Rattenbury, Reforming (or Should That be
Re-forming?) the Common Law: Some Notes on the Law Reform Act (l994) 11:1 Solici-
tors Journal (N.B.) 8. I am grateful to Edward Veitch for bringing this body of law to
my attention.
5 Birch, supra note 1 at paras. 38-39, 64-65, 75 (citing the PSAC Constitution, s. 25(3)).
See also Berry v. Pulley, 2002 SCC 40, [2002] 2 S.C.R. 493, 221 D.L.R. (4th) 651 [Berry]
(holding that the relationship between a union and its members is contractual in na-
ture).
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 155
plicants refused to pay the fine and the union sought to enforce its rights
in the Small Claims Division of the Ontario Superior Court of Justice. The
applicants applied for a declaration that the fines were unenforceable.
The application judge declared that the clause was not only a penalty
clause but also unconscionable, and thus unenforceable on both counts.6
He went on to conclude that in the absence of legislation, no such fine
could be enforced.7 At the Ontario Court of Appeal, Justice Armstrong
dismissed the unions appeal from the decision of the application judge,
with Justice Rouleau concurring. Justice Juriansz dissented.
Birch may be regarded as a noteworthy case in the development of
Ontario labour law on account of its impact on the balance of power be-
tween both unions and their members, and unions and employers. It may
also be of more general importance. The Ontario Court of Appeal prem-
ised its decision on the notion that the relationship between the appli-
cants and their union was governed by principles of contract law and that
no special statutory provisions were applicable to the case at hand.8 Con-
sequentlyif it is taken at face valuethe decision in Birch has signifi-
cant ramifications for the development of contract law in Ontario, and
perhaps elsewhere too.
Birch is a noteworthy case in the law of contracts because it repre-
sents an important step toward jettisoning the penalty doctrine. At first
glance, the significance of the decision may not be immediately obvious.
The court declined to rule on either the application of the penalty doctrine
to the particular facts of the case or whether the general rule against pen-
alty clauses should be abolished. Both the majority and the minority ex-
plicitly endorsed the abolition of the strict rule against enforcing penalty
clauses, but only in the context of union constitutions.9 What is, however,
6 See Birch v. Union of Taxation Employees, Local 70030 (2007), 288 D.L.R. (4th) 424 at
para. 60 (Ont. Sup. Ct. J.).
7 See ibid.
8 See Birch, supra note 1 at para. 14. See also Berry, supra note 5 at para. 48 (establish-
ing ordinary principles of contract law).
9 See Birch, supra note 1. Armstrong J.A. held, While I agree with the view that a union
constitution represents a different kind of contract between a union and its members
and that a penalty clause is not necessarily unenforceable in accordance with the com-
mon-law rule, I see no reason to suggest that the law of unconscionability does not ap-
ply to these kinds of agreements (ibid. at para. 38). However, he prefaced those re-
marks by writing, Whatever may be said of the facts of this case, it is not a typical
commercial case and I would not wish to be taken as suggesting that what follows is in-
tended to be general authority for sounding the death knell for the rule against penalty
clauses (ibid. at para. 37). Juriansz J.A. held, While, like Armstrong J.A., I would de-
cline to make a sweeping pronouncement that the rule against penalty clauses is no
longer applicable to the law of contract generally, I would conclude the common-law
rule against penalty clauses does not apply to a union constitution (ibid. at para. 100).
156 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
more significant about Birch is that when confronted with a challenge to
the enforceability of a stipulated remedy, all of the members of the court
expressly endorsed the idea that the problem could be analyzed using the
doctrine of unconscionability. In doing so they bolstered the respectability
of an approach that had previously been adopted only in obiter dicta and
secondary literature.10 By making a serious effort to map out how the en-
forceability of stipulated remedies might be analyzed under the rubric of
unconscionability, the members of the Ontario Court of Appeal probably
did a great deal to make other judges comfortable with the new ap-
proachthe first step toward convincing them to abandon the penalty
doctrine.
Another encouraging feature of the decision is the fact that both the
majority and the minority agreed on the basic contours of the unconscion-
ability doctrine. Justice Armstrong approved of the decisions holding that
a determination of unconscionability involves a two-part analysisa
finding of inequality of bargaining power and a finding that the terms of
an agreement have a high degree of unfairness.11 Justice Juriansz agreed
with Justice Armstrongs review and formulation of the test for uncon-
scionability, but emphasized that the unfairness must stem from an ine-
quality of bargaining power.12 The majority and the minority also
agreedperhaps too hastily (more on this below)that this particular
contract was characterized by an inequality of bargaining power, noting
that when it was formed the applicants were unable to negotiate or
change its terms.13 Unfortunately, the court did not resolve the perennial
question of whether unfairness is to be assessed by reference to circum-
stances at the time the stipulated remedy is invoked (the approach
adopted in equity when determining whether it would be unconscionable
to deny relief from forfeiture), or the circumstances prevailing when the
parties entered the contract.14 Nonetheless, the Ontario Court of Appeals
10 See supra note 3. Compare Telecommunications Workers Union Local 2002 v. Macmil-
lan, 2008 ABQB 657, 458 A.R. 367 at paras. 35-40, 97 Alta. L.R. (4th) 393, leave to ap-
peal to S.C.C. refused, 32940 (7 May 2009). Here, in contrast to Birch, the Alberta Court
of Queens Bench upheld a lower courts refusal to enforce a unions fine primarily on
the grounds that it was a penalty rather than a genuine pre-estimate of compensatory
damages. In this case, however, unlike in Birch, the unions constitution left the fines
quantum to be determined by the trial board rather than specifying either the amount
of the fine, or a formula for its calculation (ibid. at para. 6).
11 Birch, supra note 1 at para. 45.
12 Ibid. at para. 79.
13 Ibid. at paras. 50, Armstrong J.A., 81, Juriansz J.A.
14 See Peachtree II, supra note 2 at para. 25; Dimensional Investments Ltd. v. Canada
(1967), [1968] S.C.R. 93 at 100-101, 64 D.L.R. (2d) 632 [Dimensional]. For an overview
of the debate from an Anglo-Canadian perspective, see Waddams, supra note 3 at 388.
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 157
consensus on the basic test for unconscionability should help allay con-
cerns that unconscionability offers too vague or indeterminate a standard
to replace the bright-line rule embodied in the penalty doctrine.
So where did the majority and the minority part ways? Essentially,
they disagreed about the significance of two factors bearing on the unfair-
ness of the penalty clause. First, they disagreed about the significance of
the fact that the applicants could have avoided the fines by resigning from
the union before crossing the picket line. If the applicants had resigned
they would not have sacrificed any of the employment benefits enjoyed by
other members of the bargaining unit, but they would have lost the ability
to participate in union governance. For Justice Juriansz, this meant that
the liability found unconscionable by the application judge stemmed from
the applicants decision not to resign from the union rather than from any
lack of bargaining power.15 Meanwhile, the majority believed that the
presence of the option to resign was irrelevant to the analysis of whether
the penalty clause was unconscionable: The penalty clause in the union
constitution is either unconscionable or it is not.16 They rejected the view
that a fine that would otherwise be clearly unconscionable could be saved
by giving union members the option to resign before crossing a picket
line.17
A second point of disagreement stemmed from the fact that Justice
Juriansz was not convinced that a fine equal to the applicants gross pay
was necessarily disproportionate to the damage suffered by the union as a
consequence of the breach. He acknowledged that the damage suffered by
the union was difficult to estimate, but rejected the conclusion that the
task was impossible. He accepted that the applicants harmed the union by
diminishing its strength in its economic struggle with the employer.18
He also accepted that [t]he amount by which the unions strength has
been diminished is equal to the quantity of labour provided to the em-
ployer, and that [t]he best measure of the labour provided to the em-
ployer is the amount that the employer paid for it.19 Consequently, he
concluded that a fine equal to the applicants gross pay was a reasonable,
The lack of consensus in American law is reflected in the Uniform Commercial Code
(U.C.C. 2-718(1) (1995)) and the Restatement (Second) of Contracts ( 356(1) (1981)
[Restatement]), which state that damages must be reasonable in light of the antici-
pated or actual loss caused by the breach. This topic is beyond the scope of this com-
ment.
15 Birch, supra note 1 at para. 86.
16 Ibid. at para. 61.
17 Ibid.
18 Ibid. at para. 94.
19 Ibid.
158 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
if not a particularly apt pre-estimate of the unions damages from the
breach.20 Justice Armstrong dismissed this argument summarily on the
grounds that no evidence had been adducednot a scintillaof any
damage to the union or its members.21
II. Missed Opportunities
The majoritys opinion fails to realize the potential benefits of using
the doctrine of unconscionability rather than the penalty doctrine as the
lens through which courts can analyze the enforceability of stipulated
remedies. The majority could have used the new lens to examine features
of the case that would have been overlooked in an analysis conducted ex-
clusively through the penalty doctrine. Instead, it dismissed those fea-
tures as irrelevant to its analysis. The dissent picked up on some but not
all of the missing points.
Which features of the case were neglected? To begin with, a central
problem with penalty doctrine, at least in its traditional form, is that it
determines the enforceability of stipulated damages clauses without ref-
erence to other terms of the contract. For instance, it ignores the possibil-
ity that the prejudicial impact of a penalty clause on a breaching party
has been offset by a benefit such as a price reduction conferred by another
term of the contract.22 By contrast, a determination of unconscionability
typically entails an examination of all the terms of the contract.23 The
ability to undertake a holistic analysis of the problem is a key advantage
20 Ibid. at para. 95.
21 Ibid. at para. 63.
22 See e.g. Ringrow Pty Ltd. v. BP Australia Pty Ltd., [2005] HCA 71, 224 C.L.R. 656 at
paras. 37-38 (confirming that the penalty doctrine may be applicable even when a
clause that would otherwise amount to a penalty has been offset by a reduction in the
purchase price). For a much less traditional approach to the penalty doctrine, see
Murray v. Leisureplay Plc, [2005] EWCA Civ 963, [2005] IRLR 946 at paras. 54, 71-76
[Murray] (permitting a stipulated remedy to be enforced even though it exceeded a
genuine pre-estimate of the damages in part because other terms of the contract con-
ferred benefits on the breaching party). For a discussion of why parties may agree to
pay penalties in exchange for concessions on other terms of a contract, see Robert E.
Scott & George G. Triantis, Embedded Options and the Case Against Compensation in
Contract Law (2004) 104 Colum. L. Rev. 1428.
23 See e.g. Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co. (1997), 34 O.R.
(3d) 1, 148 D.L.R. (4th) 496 (relief from an exclusionary clause should be granted only if
the clause is unconscionable seen in light of the entire agreement O.R. at 10); Harry v.
Kreutziger (1978), 95 D.L.R. (3d) 231, 9 B.C.L.R. 16 (C.A.) (Lambert J.A. holding: [the]
single question is whether the transaction, seen as a whole, is sufficiently divergent
from community standards of commercial morality that it should be rescinded D.L.R.
at 241).
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 159
of using the unconscionability doctrine instead of the penalty doctrine to
determine the enforceability of stipulated remedies.
In the present case, a holistic analysis of the enforceability of the
stipulated remedy issue would have involved considering its interaction
with the provisions governing members rights to resign. The contract es-
sentially gave the applicants the right to elect between two potential sanc-
tions for strike breaking: being excluded from the benefits of union mem-
bership, or paying the prescribed fine. It thus seems artificial to deter-
mine whether they were the victims of abuse without considering the sub-
stance of their options. Such an evaluation would not predetermine the
outcome of the analysis. As Justice Armstrong noted in passing, being ex-
cluded from the benefits of union membership is a significant penalty in
itself.24 If the court concluded that forced resignation from the union
would have been an unconscionable penalty for breach, then the presence
of an option to resign could not buttress the case for enforcing the provi-
sion calling for a fine. Therefore, my complaint here is not that the major-
ity in the Ontario Court of Appeal or the court below reached the wrong
conclusion on the facts of the case. Instead, my concern is about the rea-
sons offered in support of that conclusion. By dismissing the option to re-
sign as irrelevant to the unfairness branch of its unconscionability analy-
sis, the majority perpetuated the unduly narrow analytical frame that is
one of the most problematic features of the penalty doctrine.
The second point of disagreement between the majority and minority
also reflects the majoritys exceptionally narrow conception of the factors
relevant to the enforceability of a stipulated remedy. A common complaint
about the penalty doctrine is that, at least in its stricter forms, it ignores
some of the benign reasons why parties adopt stipulated remedies that
provide for damages higher than the losses that can be proved at trial.25
For instance, in some cases, damages suffered as a result of breach of con-
tract are virtually impossible to prove. This supports the conclusion that
it is reasonable to enforce stipulated remedies adopted in circumstances
where actual losses are likely to be difficult to prove, so long as they qual-
ify as a genuine pre-estimate of damages.26 On this view, difficulty of prov-
ing actual loss ought to be treated as a factor that weighs in favour of en-
forcing a stipulated remedy that otherwise appears to operate as a pen-
24 Birch, supra note 1 at para. 57.
25 See generally Aaron S. Edlin & Alan Schwartz, Optimal Penalties in Contracts (2003)
78 Chicago-Kent L. Rev. 33.
26 See Coal Harbour, supra note 2 at para. 10.
160 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
alty.27 In H.F. Clarke Ltd. v. Thermidaire Corp. Ltd., however, the Su-
preme Court of Canada adopted a strict version of the penalty doctrine
and refused to treat the difficulty of proving actual losses as a factor
pointing toward the conclusion that the stipulated damages clause in
question was enforceable.28 Operating under the rubric of the doctrine of
unconscionability, the court in Birch had an opportunity to take a differ-
ent view. Instead, the majority opinion left the impression that, on ac-
count of the potentially significant impact of the fine on the applicants,
the onus was upon the union to show that the fine was proportional to the
unions actual damages. The court thus construed the doctrine of uncon-
scionability as no more open to arguments based on difficulty of proving
loss than the strictest version of the rule against penalty clauses.
The minority unhelpfully tried to deny or at least downplay the diffi-
culty of determining the unions losses resulting from the breach. Justice
Juriansz seemed satisfied that the union had met the burden of showing
that the fine was proportional to its actual losses, but the arguments he
endorsed are weak. It is eminently plausible that breaking a strike would
cause damage to the interests of a union and its members by altering the
relative bargaining power of the union and the employer during a strike,
and ultimately reducing the tangible benefits the union can secure
through collective negotiations. However, Justice Jurianszs suggestion
that the magnitude of the effect on relative bargaining power would be
equal to the quantity of labour provided to the employer entails an inde-
fensible leap of logic.29 By crossing the picket line, strike breakers benefit
the employer to the extent that they are less costly or more skilled than
replacement workers. Strike breakers enhance employers bargaining
power by reducing the cost of the strike. In addition, to the extent that
strike breaking reduces union solidarity, it may reduce the anticipated
length of the strike, which simultaneously reduces the employers willing-
ness to bargain, and increases the unions willingness to do the same. It
seems reasonable to presume that the magnitude of these effects will be
significant. Yet there is no evident reason to presume that the damage
will correspond even roughly to the quantity of labour supplied to the em-
ployer. The more defensible conclusion is that none of these potential
losses are amenable to calculation or proof at trial.
By ignoring or denying the difficulty of calculating and proving com-
pensatory damages, both the majority and the minority missed an oppor-
27 See Dimensional, supra note 14 at 100; Dunlop Pneumatic Tyre Co., Ltd. v. New Garage
and Motor Co., Ltd., [1915] A.C. 79 at 87-88, [1914-1915] All E.R. Rep. 739 (H.L.)
[Dunlop]. See also Restatement, supra note 14.
28 (1974), [1976] 1 S.C.R. 319 at 338-39, 3 N.R. 133 [H.F. Clarke].
29 Birch, supra note 1 at para. 94.
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 161
tunity to explore whether, in the presence of these factors, a system of
contract law freed of the strictures of the penalty doctrine can justify en-
forcing stipulated remedies on the ground that they are reasonable penal-
ties rather than genuine pre-estimates of compensatory damages. Such an
approach would be consistent with the civil laws treatment of penalty
clauses under article 1623 of the Civil Code of Quebec.30 The union does
not appear to have adopted this argument. But it could well have argued
that when breach is likely to cause significant but incalculable losses, a
party should be permitted to stipulate damages expressly designed to de-
ter rather than compensate for breach.31 Only the most liberal articula-
tions of the traditional penalty doctrine go that far.32
I do not mean to suggest that this would necessarily have been a win-
ning argument for the union. One would think that a fine equal to the ap-
plicants net pay would be a sufficient deterrent (and in fact, the clause
could easily be construed to refer to net rather than gross pay). The ques-
tion of whether the union could have been required to seek injunctive re-
lief against the applicants also remains open. It is conceivable, however,
that the union could have shown that injunctive relief was inappropriate
or unavailable. The imposition of a fine equal to gross pay might then
have been defended on the theory that it was necessary to deprive the ap-
plicants of the time value of money, or that the difference between net pay
and gross pay for each employee would have been too difficult to calculate.
Another criticism of the penalty doctrine is that it treats as irrelevant
the process by which a contract that contains a stipulated remedy has
been formed. The traditional rule dictates that a penalty clause is unen-
forceable per se, regardless of the sophistication of the parties to the con-
tract (or lack thereof), the alternatives they faced, or how much time they
spent negotiating the clause.33 One of the attractions of employing the un-
30 See also Aristides N. Hatzis, Having the Cake and Eating It Too: Effi-
cient Penalty Clauses in Common and Civil Contract Law (2002) 22 Intl Rev. L. &
Econ. 381.
31 For a narrower formulation of this argument, see Gregory Klass, Contracting for Coop-
eration in Recovery (2007) 117 Yale L.J. 2.
32 See Murray, supra note 22 at paras. 54, 69-76 (permitting a stipulated remedy to be en-
forced even if it provides for an amount that exceeds a genuine pre-estimate of the
damages if the discrepancy is justified for some other reason). Cf. Dunlop, supra note
27.
33 See e.g. H.F. Clarke, supra note 28 at 330 (penalty doctrine applies even to contracts be-
tween businessmen or business corporations with relatively equal bargaining power).
See also Imperial Tobacco Co. Ltd. v. Parsley, [1936] 2 All E.R. 515 (C.A.) (inequality of
bargaining power is irrelevant to the analysis of whether the clause was a penalty
clause); John Carter & Elisabeth Peden, A Good Faith Perspective on Liquidated
Damages (2007) 23 J. Cont. L. 157 at 162.
162 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
conscionability doctrine in this context is that it explicitly calls for analy-
sis of the procedural as well as the substantive elements of the contract.34
Unfortunately, the majority in Birch paid scant attention to the proc-
ess by which the contract between the union and the applicants was
formed. In concluding that the process involved inequality of bargaining
power, it focused exclusively on the fact that the terms were not negotia-
ble before the applicants joined the union. They appear to have been led
in this direction by a recent Supreme Court of Canada decision in which
Justice Iacobucci characterized a member who was unable to bargain over
the terms of his contract with the union as having no bargaining
power.35
The fact that the process by which a contract was formed did not in-
volve an opportunity to negotiate its termsin other words, that it is a
contract of adhesionis neither sufficient nor necessary to justify special
scrutiny of the contracts substance.36 In principle, unconscionability doc-
trine should enable an evaluation of the contracts terms that incorporates
factors relevant to its formation.
The majority failed to realize this principle in several respects. To be-
gin with, the presence of viable alternatives to the signing of a contract
can offset the effects of an inability to negotiate. Those alternatives might
involve contracting with a competitor (e.g., the price of dry cleaning may
not be negotiable, but in a city where there is a dry cleaner on every cor-
ner it seems wrong to conclude that customers suffer from inequality of
bargaining power).37 When it comes to contracts between unions and pro-
spective members, contracting with a competing union is not a viable al-
ternative for the workers. But, at least according to Justice Juriansz, not
contracting with any union at all may have been a viable alternative. This
in turn raises the argument that the need to attract members would
automatically induce unions to offer reasonable terms of membership,
even without any explicit negotiation. Justice Juriansz raised but did not
press this position.38 Of course, this argument may ultimately have
34 Some commentators recommend that the focus be placed almost exclusively on the
process by which the contract was formed. See Goetz & Scott, supra note 3. For details
regarding the unconscionability doctrine, see generally Rick Bigwood, Antipodean Re-
flections on the Canadian Unconscionability Doctrine (2005) 84 Can. Bar Rev. 171.
35 Berry, supra note 5 at para. 49.
36 See M.J. Trebilcock, The Doctrine of Inequality of Bargaining Power: Post-Benthamite
Economics in the House of Lords (1976) 26 U.T.L.J. 359.
37 Ibid.
38 See Birch, supra note 1 at paras. 80-81. I argue that Juriansz J.A. did not press the is-
sue because he conceded that it followed from prospective members inability to negoti-
ate that there was an inequality of bargaining power (ibid.).
COMMENT: BIRCH V. UNION OF TAXATION EMPLOYEES, LOCAL 70030 163
proven to be ill-founded; it may have been unreasonable to expect the ap-
plicants to stay out of the union. But for the sake of clarifying the law, the
Ontario Court of Appeal should have indicated that it was worth examin-
ing the applicants opportunities to avoid signing the contract.
Other features of the contracting process also warrant attention in de-
termining procedural unconscionability. In particular,
in deciding
whether to enforce an onerous contractual provision, it seems important
to consider whether and to what extent the disadvantaged party was in-
formed of its existence and significance. Whether onerous terms were bur-
ied in the fine print of a lengthy agreement (as opposed to highlighted in
bold font, marked with a big red arrow, and accompanied by an oral warn-
ing), and whether the parties were likely to be familiar with the terms in
question by virtue of their past experience, are typically highly relevant in
determining whether a contract is tainted by unconscionability.39 Yet
none of the opinions in Birch address these topics.
III. Should the Courts Reasoning Be Taken at Face Value?
So far I have taken the Ontario Court of Appeal at face value when it
stated that it would analyze the enforceability of the stipulated remedy
provision through the lens of the generally applicable doctrine of uncon-
scionability. But this may be a misreading of their decision.40 Perhaps the
members of the majority felt obliged to pay lip service to the new ap-
proach to stipulated remedies but remained sympathetic to the traditional
penalty doctrine and its bright-line clarity. Or perhaps they concluded
that the unconscionability doctrine has some merit but that the nuanced
analysis applied in other unconscionability cases was inappropriate for a
case involving stipulated remedies in a contract of adhesion. Finally, per-
haps the court was moved by considerations specific to the labour law con-
text. These might include unstated factual assumptions about the circum-
stances of unions and their members, or a lingering reluctance to have the
relationship between unions and their members defined by courts as op-
posed to either the legislature or the parties arrangements. I am inclined
to take the majoritys opinion at face value. However, if I am wrong and
these sorts of unarticulated considerations did influence their ruling, then
the majority in the Ontario Court of Appeal missed more opportunities to
clarify the law than I suggest above.
39 See e.g. Calloway Reit (Westgate) v. Michaels of Canada, 2009 CanLII 7760 at para. 97
(Ont. Sup. Ct. J.) (no inequality of bargaining power where disadvantaged party was a
sophisticated commercial developer familiar with penalty clauses and represented by a
sophisticated leasing agent), affd on other grounds 2009 ONCA 713.
40 I am grateful to two anonymous reviewers for encouraging me to address these alterna-
tive interpretations.
164 (2010) 55 MCGILL LAW JOURNAL ~ REVUE DE DROIT DE MCGILL
Conclusion
By this point, my central concern about the majority opinion in Birch
should be clear: the opinion misses several opportunities to examine fea-
tures of the case that would have been ignored under the penalty doctrine
but ought to have been prominent once the issue in the case was framed
in terms of unconscionability. Those features include: other provisions of
the contract; the relative difficulty of arriving at a genuine pre-estimate of
the loss as opposed to a reasonable penalty; and the process by which the
contract was formed. By failing either to examine those features of the
case or to explain why they could be safely ignored, the court missed an
opportunity to clarify the law.
Employing the unconscionability doctrine instead of the traditional
penalty doctrine was a bold and valuable step. But the potential benefits
of that innovation will not be realized so long as courts vision continues to
be occluded by the remnants of the penalty doctrine.
