Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis

United Kingdom

04.11.2015

Contract

Stand aside Dunlop there’s a new penalty sheriff in town

The United Kingdom Supreme Court passed rulings that are likely to send at least a few flutters of joy amongst the contract-writing community. Determining what makes a contract clause penal, penalty clauses of course not generally accepted by British courts for imposing performance beyond the recovery of pecuniary compensation, the Court was unequivocal about the law laid down in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd and Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo y Castaneda, terming it a “prisoner of artificial categorisation…fairly said to be too wide”, inasmuch it couldn’t differentiate between a true penalty and a genuine pre-estimate of loss. It substituted instead: “The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”

The Court, allowing the appeal in Cavendish Square Holding BV v Talal El Makdessi, held contractual terms disentitling the seller of equity in an advertising firm from receiving the final instalments and being required to sell the remaining shares as well pursuant to breach of restrictive covenants against competitive activities were not unenforceable penalties, as was previously understood. It dismissed the appeal in ParkingEye Limited v Beavis determining that a fixed rate charge for overstaying at a parking lot was neither unfair nor a penalty. The charge was part of the contractual licence and was a common scheme preserving the interest of the land owners.

Tags : Penalty clause unfair united kingdom test

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