Damages Clauses less likely to be Unenforceable Penalties

In Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67, the Supreme Court considered a combined appeal relating to whether certain contractual clauses were unenforceable penalties.

By way of background, it is not uncommon for parties to commercial contracts to agree that specified sums be paid upon breach of a contractual provision. The general rule though is that, if a clause is a liquidated damages clause, it is enforceable and the sum set out in the clause is recoverable. However, if it is a penalty, it will not be enforced beyond the actual loss of the Claimant. The question as to where damages ends and a penalty begins has been the subject of much litigation over the years.

In an eagerly anticipated ruling, the Supreme Court has reset and clarified the penalty rule, unanimously allowing the appeal in Cavendish and dismissing, by a majority of six to one, the appeal in ParkingEye. In both cases, the clauses which Mr Makdessi and Mr Beavis argued were penalties (and therefore invalid) were upheld as valid and enforceable.

In Cavendish, the appeal was allowed on the basis that neither of the clauses in issue constituted unenforceable penalty clauses. In ParkingEye, the appeal was dismissed on the basis that, although the clause engaged the penalty rule, the parking charge did not contravene that rule or the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). Lord Toulson dissented on the grounds that he considered the clause in issue infringed the UTCCRs.

A century has passed since the House of Lords considered the principles underlying the law relating to contractual penalty clauses in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. The Supreme Court’s judgment in this combined appeal has, therefore, been eagerly anticipated by the legal profession in the hope that it would bring clarity and certainty to this complex area of law.

Matthew Howat, Commercial & Dispute Partner, comments: “This decision by the Supreme Court could have huge consequences for the commercial world. Not only will liquidated damages clauses be much harder to dismiss as being penalties but companies might see this decision as giving a green light to beef up their liquidated damages clauses. Check your contracts very carefully!”.

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