29 Apr 2016

Penalty shoot-out…what clauses avoid the red card?

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Hit 'em where it hurts

You’ve got an agreement.  You want to make sure that the other side do what they’ve promised to do.  To make sure, you want to impose some painful (financial) consequences if they don’t…but you’ve heard that penalties aren’t allowed; what can you do?

What you can do…

You’re right, “penalties” aren’t allowed, even if both parties agree to them with their eyes wide open.   BUT “liquidated damages” clauses are allowed.  So why have “penalties” been in the news and what are they?

What’s new?

Penalties have been in the news because of the recent cases of Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis which went all the way to the Supreme Court (….not bad for a bust up over an £85 parking fine…).

What are penalties?

The good news is that the Supreme Court has reduced the scope of clauses that fall into the category of unenforceable penalties.

In a nutshell, if clauses (a) serve and protect the legitimate interests of the enforcer in securing performance and (b) are not “extravagant, exorbitant or unconscionable”, then they are enforceable.

The final word…

…goes to the court which helpfully noted: “deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages ….”

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