Penalty clauses

This post has been contributed by Professor Roger Halson, Module Convenor for Contract law.

The Supreme Court’s judgement in Cavendish Square Holding BV v Makdessi; Parking Eye Ltd v Beavis (Consumers’ Association Intervening), (the Cavendish case)  [2015] UKSC 67 involved two conjoined appeals the first Makdessi,concerned the validity of two clauses in a substantial commercial contract which if upheld would reduce the consideration payable by more than $44M; the second, Parking the enforceability of an £85 charge for ‘overstaying’ at a car park. The Supreme Court found both clauses to be enforceable.

The Cavendish Law Report was the longest for the Supreme Court in 2015 but actually established three simple things.

  • For a clause to be reviewed as a possible penalty clause it must require payment (or other act) to be performed after the performer’s breach of contract

When a clause is subject to review it is only valid if:

  • It seeks to protects a legitimate interest of the party who benefits from it AND
  • The sum to be paid is not out of proportion to the interest it is protecting

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