Penalty clauses revamped

The law on penalty clauses, a bugbear to commercial lawyers for some time, has been re-written by the Supreme Court. The court declined to abolish the doctrine — mainly for the rather unconvincing reason that other European jurisdictions all had restrictions on liquidated damages stipulations, that English lawyers shouldn’t be bad Europeans, and that the Council of Europe thought them a Good Thing.

But the court did rationalise the law, saying that essentially the question is whether the amount stipulated for is wholly disproportionate to the interest of the claimant in protecting his right to performance. If it isn’t, then the clause has the green light. This should be a relief to commercial lawyers, who provided they don’t go completely bananas in setting the amount payable now have some guarantee that the courts won’t allow the other party to come snivelling that the provision is a technical penalty.

Hence in one case a seller of a business can validly forfeit a goodly proportion of the selling price if he breaks a noncompete agreement; and in the other (more homely) case a parking operator can set a substantial charge for overstaying. Neither is an objectionable penalty.

See Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (4 November 2015), available on BAILII.

AT

Published by

Professor Andrew Tettenborn

Professor Andrew Tettenborn joined Swansea Law School and the Institute of International Shipping and Trade Law in 2010 having previously taught at the universities of Exeter (Bracton Professor of Law 1996-2010), Nottingham and Cambridge. Professor Tettenborn is a well-known scholar both in common law and continental jurisdictions. He has held visiting positions at Melbourne University, the University of Connecticut and at Case Law School, Cheveland, Ohio. He is author and co-author of books on torts, damages and maritime law, and of numerous articles and chapters on aspects of common law, commercial law and restitution.