Common law restrictions on contracts
In addition to legislative issues, the common law imposes some limits of contractual freedom. Under the general law of contract, parties may agree in advance to a sum of liquidated damages, or a calculation method, that will be paid in the event of a breach. This is useful where monetary damages are difficult to calculate, and the parties wish to avoid the cost of dispute resolution or litigation.
Such an agreement must represent a genuine attempt to estimate the likely damages that may be suffered. However, the provision may be regarded as a mere penalty and not enforced by a court if it is excessive, imposed by one party merely as a threat to enforce compliance, or specified to arise in circumstances that are vague or may be triggered arbitrarily.