Penalty Clauses

Penalty Clauses

The Penalty Clauses rule has been around for a long time and many people think it should be demolished or reconstructed, due to the fact that the courts have struggled to apply standard tests that were created over a century ago.

Two recent cases on penalty clauses – Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis – have highlighted the need for businesses to get help with both drafting contracts and the enforcement of them. Both cases raised the issue of the principles underlying the law relating to contractual penalty clauses.

Cavendish Square Holding BV v Talal El Makdessi:

This case raised the issue above, in relation to two clauses in a substantial commercial contract. The Supreme Court allowed the appellant’s appeal against the Court of Appeal’s decision that two clauses in an agreement for the sale and purchase of an advertising business amounted to unenforceable penalties.

ParkingEye Ltd v Beavis:

This case raised the same issue but at consumer level – the charge was imposed for overstaying in a private car park. The appeal was dismissed, as the penalty was not ‘extravagant and unconscionable’ (at £85). This decision was hugely significant in the private parking industry – leading to the Protection of Freedoms Act being introduced. This allowed Parking Eye to issue thousands of claims against motorists who had refused to pay their Parking Charge Notices for overstaying in private car parks.

Any type of contract that imposes a penalty for a breach has always been at risk of being unenforceable. A new legal test to determine when it is unenforceable has been introduced, asking whether the detriment imposed upon breach is ‘proportionate to a legitimate interest’, thereby allowing for wider commercial considerations to be taken into account.

If you’d like more advice on drafting contracts or the enforcement of breaches to contracts contact else on 01283 526200.

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