The court reconsidered the law relating to penalty clauses in contracts. The first appeal, Cavendish Square Holding BV v Talal El Makdessi, raised the issue in relation to two clauses in a substantial commercial contract. The second appeal, ParkingEye Ltd v Beavis, raised the issue at a consumer level, with a separate issue under the Unfair Terms in Consumer Contracts Regulations 1999.
Held: The appeal of Cavendish was granted, but that in ParkingEye rejected. The law relating to penalties was long establishe and must be maintained. It should not however be extended, having already become an ‘ancient, haphazardly constructed edifice which has not weathered well’ The rule as to penalties regulated only the remedy available under the contract for a breach of a primary contractual obligations. It does not control the fairness of primary obligations under the contract.
A contractual term can be unenforceable as a penalty if it operates on a breach of contract and satisfies the relevant test, which was explained as follows:
‘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’ (per Lord Neuberger of Abbotsbury PSC and Lord Sumption JSC, with whom Lord Carnwath JSC and Lord Clarke of Story- cum-Ebony JSC agreed) and
‘What is necessary in each case is to consider, first, whether any (and, if so, what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable’ (per Lord Mance JSC, with whom Lord Clarke and Lord Toulson JSC agreed) and
‘ . . the correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract’ (per Lord Hodge JSC, with whom Lord Clarke and Lord Toulson agreed).
Lord Neuberger, President, Lord Mance, Lord Clarke, Lord Sumption, Lord Carnwath, Lord Toulson, Lord Hodge
 UKSC 67, 162 Con LR 1,  3 WLR 1373,  RTR 8,  AC 1172,  BLR 1,  CILL 3769,  WLR(D) 439,  1 Lloyd’s Rep 55, UKSC 2013/0280
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Unfair Terms in Consumer Contracts Regulations 1999, Unfair Contract Terms Act 1977
England and Wales
Cited – Astley v Frances Weldon CCP 27-Jan-1801
Clause was a Penalty – Not Estimate of Loss
By articles of agreement between the Plaintiff arid Defendant it was agreed on the part of the former that he should pay the latter so much per week to perform at his theatres, with her travelling expences of removing from one theatre to another . .
See Also – Cavendish Square Holdings Bv and Another v El Makdessi ComC 14-Dec-2012
The parties disputed whether clauses in a share sale agreement between them amounted to a penalty and as such were rendered unenforeable.
Held: Burton J felt able to escape those constraints, and concluded that the two provisions were valid . .
Cited – Wallis v Smith CA 1882
Jessel MR said: ‘You may depart from the literal meaning of words, if reading the words literally leads to an absurdity.’ and ‘It has always appeared to me that the doctrine of the English law as to non-payment of money – the general rule being that . .
Cited – Sir Harry Peachy v Duke of Somerset 1720
Lord Macclesfield said: ‘The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the court gives him all that he expected or desired: but it is quite otherwise in . .
Cited – Sloman v Walter 14-Nov-1783
Common law enforced the bonds according to their letter. But equity regarded the real intention of the parties as being that the bond should stand as security only, and restrained its enforcement at common law on terms that the debtor paid damages, . .
Cited – Roles v Rosewell 12-Feb-1794
The stat, 8 and 9 W. 3, e. 11, s. 8, which enacts ‘That in actions on any penal sum for non-performance of covenants, and co. the plaintiff may assign as many breaches, and co. and if judgment shall be given for the plaintiff on nihil dicit the . .
Cited – Protector Endowment Loan and Annuity Company v Grice 1880
Baggallay LJ considered the equitable doctrine of relief: ‘where the intent is not simply to secure a sum of money, or the enjoyment of a collateral object, equity does not relieve’. . .
Appeal from – El Makdessi v Cavendish Square Holdings Bv and Another CA 26-Nov-2013
The appellants had agreed for the sale of his company by way of a share sale agreement. The price to be paid was to vary accoriding to the operating profits. A large part of the price reflected goodwill. The agreement contained a clause providing . .
Appeal from – Parkingeye Ltd v Beavis CA 23-Apr-2015
The appellant had overstayed the permitted period of free parking in a retail park by nearly an hour. The parking was managed by the respondent who had imposed a charge of 85.00 pounds. The judge had found that the appellant was in breach of a . .
Cited – Hardy v Bern 1794
This case, which is brought by writ of error from the Court of Exchequer, is an action of debt upon articles of agreement containing divers stipulations of things to be done by the defendant; and there is a penal clause, whereby the parties became . .
Cited – Betts v Burch 11-May-1859
Martin B regretted that he was ‘bound by the cases’ and prevented from holding that ‘parties are at liberty to enter into any bargain they please’ so that ‘if they have made an improvident bargain they must take the consequences’. Bramwell B did not . .
Cited – Commissioner of Public Works v Hills PC 24-May-1906
(Cape of Good Hope) A railway construction contract provided that in the event of a breach by the contractor he should forfeit ‘as and for liquidated damages’ certain percentages retained by the Government of the Cape of Good Hope of money payable . .
Cited – Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd HL 1-Jul-1914
The appellants contracted through an agent to supply tyres. The respondents contracted not to do certain things, and in case of breach concluded: ‘We agree to pay to the Dunlop Pneumatic Tyre Company, Ltd. the sum of 5 l. for each and every tyre, . .
Cited – Robophone Facilities Ltd v Bank CA 1966
Parties to a contract should be free to stipulate not only primary obligations and rights but also the secondary rights and obligations, ie those which arise upon non-performance of any primary obligation by one of the parties to the contract, but . .
Cited – Clydebank Engineering Co v Castaneda HL 19-Nov-1904
The House considered a contract for the construction by a Scottish shipbuilder of four torpedo boats for the Spanish government. The contract provided that: ‘The penalty for late delivery shall be at the rate of andpound;500 per week for each . .
Cited – Cooden Engineering Co Ltd v Stanford CA 1953
A payment to be made on a wrongful termination of a lease by a tenant, will attract consideration of the law of penalties, for notwithstanding the requirement for acceptance of it, the amount to be paid is, ‘plainly a sum to be paid in consequence . .
Cited – Modern Engineering (Bristol) Ltd v Gilbert Ash (Northern) Ltd HL 1974
The court considered how to construe a clause in a contract which excluded a remedy provided by law. Lord Diplock said: ‘It is, of course, open to parties to a contract . . to exclude by express agreement a remedy for its breach which would . .
Cited – Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) HL 1983
The House considered giving relief from forfeiture where an owner had justifiably withdrawn his vessel in accordance with the terms of the charter.
Held: A withdrawal clause under a time charter, exercised on the ground of the charterer’s . .
Cited – AMEV-UDC Finance Ltd v Austin 1986
High Court of Australia – Contract – Damages – Penalty – Agreement for hire of chattel – Failure to pay instalments of hire – Termination by owner pursuant to contractual power – Damages – Instalments due but unpaid – Damages for loss of . .
Cited – Else (1982) Ltd v Parkland Holdings Ltd CA 1994
Hoffmann LJ spoke of the giving of relief in the context of a penalty: ‘mechanical in effect and involves no exercise of discretion at all.’ . .
Cited – Moss Empires Ltd v Olympia (Liverpool) Ltd 1939
Lord Atkin said: ‘if it does not apply in its ordinary and natural construction, I do not understand how there can be said to exist any principle of law which would avoid an agreement not in terms avoided by the statute sought to be applied.’ . .
Cited – Campbell Discount Company Ltd v Bridge HL 1962
The parties disputed the validity of a clause in a car hire contract relating to the consequences of a breach.
Held: (Majority) The agreement had been terminated by breach rather than by the exercise of an option, so that the stipulated . .
Cited – Shiloh Spinners Ltd v Harding HL 13-Dec-1972
A right of re-entry had been reserved in the lease on the assignment (and not on the initial grant) of a term of years in order to reinforce covenants (to support, fence and repair) which were taken for the benefit of other retained land of the . .
Cited – Export Credits Guarantee Department v Universal Oil Products HL 1983
A contract provided for the payment of a stated sum by one party to the contract (A) to the other party (B) in the event of the non-performance by A of one of more contractual obligations owed by A not to B himself but to C, who was not a party to . .
Cited – Official Custodian for Charities v Parway Estates Developments (In Liquidation) CA 1985
The consideration for the grant of a lease was not a capital sum, but substantial building works. Application was made for its forfeiture.
Held: Dillon LJ assumed that the words ‘if the tenant shall enter into liquidation whether compulsorily . .
Cited – Street v Mountford HL 6-Mar-1985
When a licence is really a tenancy
The document signed by the occupier stated that she understood that she had been given a licence, and that she understood that she had not been granted a tenancy protected under the Rent Acts. Exclusive occupation was in fact granted.
Held: . .
Cited – Associated British Ports v CH Bailey plc 1990
Cited – Cukurova Finance International Ltd and Others v Alfa Telecom Turkey Ltd PC 23-May-2012
(British Virgin Islands) Interlocutory issue as to who should manage the affairs of the Turkcell mobile telephone business pending the Board’s final adjudication (after a hearing which should take place this autumn) on the rights and wrongs of what . .
Cited – Domina Holles v Wyse 9-May-1693
Interest reserved at 5 pounds per cent. but if not duly paid, then to answer interest at 6 pounds per ann. Great arrear of interest. Mortgagor decreed to pay but 5 pounds per cent., the reservation at 6 per cent. being only as a Nomine Poenae -But . .
Cited – Strode v Parker 27-Apr-1694
Cited – Wallingford v Mutual Society HL 1880
Lord Hatherley said: ‘Now I take it to be as settled as anything well can be by repeated decisions, that the mere averment of fraud, in general terms, is not sufficient for any practical purpose in [a pleading]. Fraud may be alleged in the largest . .
Cited – General Trading Company (Holdings) Ltd v Richmond Corporation Ltd ComC 3-Jul-2008
Cited – White and Carter (Councils) Ltd v McGregor HL 6-Dec-1961
Contractor not bound to accept Renunciation
Mr McGregor contracted with the appellants for them to display advertisements for three years on litter bins. The contract was made on his behalf by an employee, without specific authority. On the day it was made, he sought to cancel the contract. . .
Cited – BICC plc v Burndy Corp CA 1985
Cited – Lordsvale Finance Plc v Bank of Zambia QBD 20-Mar-1996
The court looked at a facility agreement opened by a bank in favour of the defendant which provided that in the event of default the defendant should pay interest during the period of default at an aggregate rate equal to the cost to the bank of . .
Cited – Co-Operative Insurance Society Ltd v Argyll Stores HL 21-May-1997
The tenants of a unit on a large shopping centre found the business losing money, and closed it in contravention of a ‘keep open’ clause in the lease. They now appealed from a mandatory injunction requiring them to keep the store open.
Held: . .
Cited – Cine Bes Filmcilik Ve Yapimcilik and Another v United International Pictures and Others CA 21-Nov-2003
The parties entered into agreements licensing the exclusive distribution of encrypted television channels within Turkey. A clause provided a calculation of damages for a breach amounting to the balance of licence fees due, and other penalties, . .
Cited – Murray v Leisureplay Plc CA 28-Jul-2005
The court considered the extent to which the content of negotiations leading up to the signing of a contract were admissible. Arden LJ said: ‘Lord Dunedin in the Dunlop case makes the point that, although the issue is one of construction, the court . .
Cited – Imperial Tobacco Company (of Great Britain) and Ireland v Parslay CA 1936
Lord Wright MR said: ‘A millionaire may enter into a contract in which he is to pay liquidated damages, or a poor man may enter into a similar contract with a millionaire, but in each case the question is exactly the same, namely, whether the sum . .
Cited – Legione v Hateley 1982
(High Court of Australia) Purchasers of land were put on notice that unless they paid the price by 10th August the contract of sale would be rescinded. On 9th August the purchasers’ solicitor telephoned the vendor’s solicitors and spoke to the . .
Cited – Philips (Hong Kong) Ltd v The Attorney General of Hong Kong PC 9-Feb-1993
After referring to two Australian cases on penalty clauses in contracts: ‘These statements assist by making it clear that the court should not adopt an approach to provisions as to liquidated damages which could, as indicated earlier, defeat their . .
Cited – Euro London Appointments Ltd v Claessens International Ltd CA 6-Apr-2006
The court considered whether a clause in an employment agency’s terms and conditions amounted to a penalty and was unenforceable. The contract provided that if the offer was withdrawn by the eventual employer after acceptance but before the . .
Cited – IAC (Leasing) Ltd v Humphrey 7-Jan-1972
High Court of Australia – Contract – Penalty – Hire of chattels for term – Liability of lessee on repossession and on return Before or at the end of term – Payment of deficiency where equipment sold or valued at amount less than appraisal value . .
Cited – Andrews v Australia and New Zealand Banking Group Ltd 6-Sep-2012
Austlii High Court of Australia – Banker and customer – Penalty doctrine – Consumer and commercial credit card accounts – Honour fee – Dishonour fee – Late payment fee – Non-payment fee – Over limit fee – Whether . .
Cited – Office of Fair Trading (OFT) v Abbey National Plc and Others SC 25-Nov-2009
The banks appealed against a ruling that the OFT could investigate the fairness or otherwise of their systems for charging bank customers for non-agreed items as excessive relative to the services supplied. The banks said that regulation 6(2) could . .
Cited – Chartbrook Ltd v Persimmon Homes Ltd and Others HL 1-Jul-2009
Mutual Knowledge admissible to construe contract
The parties had entered into a development contract in respect of a site in Wandsworth, under which balancing compensation was to be paid. They disagreed as to its calculation. Persimmon sought rectification to reflect the negotiations.
Held: . .
Cited – In re Dagenham (Thames) Dock Co; Ex parte Hulse CA 1873
The Court of Appeal in chancery heard an appeal from the Master of the Rolls from his refusal of the Master of the Rolls to make a declaration in the winding up of the purchaser company. The purchaser had sought a direction that if the balance of . .
Cited – Kilmer v The British Columbia Orchard Lands Limited PC 26-Feb-1913
British Columbia . .
Cited – Ringrow Pty Ltd v BP Australia Pty Ltd 17-Nov-2005
High Court of Australia – Contract – Penalty – Agreement to purchase service station from distributor of fuel – Collateral agreement requiring fuel to be purchased exclusively from distributor – Breach of collateral agreement – Termination of . .
Cited – Office of Fair Trading v Abbey National Plc and seven Others ComC 24-Apr-2008
The Office sought a declaration that the respondent and other banks were subject to the provisions of the Regulations in their imposition of bank charges to customer accounts, and in particular as to the imposition of penalties or charges for the . .
Cited – O’Dea v Allstates Leasing System (WA) Pty Ltd 17-Feb-1983
High Court of Australia – Contract – Breach – Penalty – Hire of vehicle for term – Liability of lessee on repossession before end of term – Provision that entire rent for term due at commencement of term – Entire rent not payable if instalments duly . .
Cited – Wright and Another (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd ChD 6-Mar-2018
IVA is a special form of contract
Liquidators asked the court whether sums sought by the insolvent company’s landlords were payable and or provable. Under an IVA, the copany had been paying reduced rents, but the arrangement document provided that the full rents would be restored on . .
Lists of cited by and citing cases may be incomplete.
Updated: 05 January 2022; Ref: scu.554250