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 the contract.
Held: Even if an agreement is an onerous and commercially imprudent one for the principals to have signed, it is not for the court to relieve them from their bargain: ‘. . the reason why the defendant’s submissions failed in the courts below can be simply stated. The clause was not a penalty clause because it provided for payment of money on the happening of a specified event other than a breach of contractual duty owed by the contemplated payer to the contemplated payee.’ and ‘[P]erhaps the main purpose, of the law relating to penalty clauses is to prevent a plaintiff recovering a sum of money in respect of a breach of contract committed by a defendant which bears little or no relationship to the loss actually suffered by the plaintiff as a result of the breach by the defendant. But it is not and never has been for the courts to relieve a party from the consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain.’
Lord Roskill: ‘[Counsel] invited your Lordships to look at the number of authorities in support of his proposition that the relevant law should now be extended, and contended that those authorities showed that the way remained open for such an extension. Those cases are referred to in the judgments of the courts below and I shall not refer to them again for, with respect, I am unable to find the slightest support in any of them for [Counsel’s] submissions.
My Lords, one purpose, perhaps the main purpose, of the law relating to penalty clauses is to prevent a plaintiff recovering a sum of money in respect of a breach of contract committed by a defendant which bears little or no relationship to the loss actually suffered by the plaintiff as a result of the breach by the defendant. But it is not and never has been for the courts to relieve a party from the consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain. The defendants could only secure the finance from Kleinworts if the ECGD were prepared to give Kleinworts the guarantee which Kleinworts required. The ECGD were only prepared to give their guarantee to Kleinworts on the terms of the premium agreement which included the stringent right of recourse provided for in cl 7(1). The defendants accepted those terms which provided for the right of recourse to arise on the happening of a specified event, and that specified event has now happened. But, as . . . Lord Keith observed during the argument, this is not a case where the ECGD are seeking to recover more than their actual loss as compensation by way of damages for breach of a contract to which they were a party. They are seeking, and only seeking, to recover their actual loss, namely the sums which they became legally obliged to pay and have paid to Kleinworts. I am afraid I find it impossible to see how on the facts there can be any room for the invocation of the law relating to penalty clauses.’
 1 WLR 399,  2 All ER 205
England and Wales
Approved – In re Apex Supply Co Ltd 1942
A hire purchase agreement provided that if the hirer should go into liquidation, and the owner should retake possession, the hirer would pay a sum by way of compensation for depreciation.
Held: The provision for the payment of compensation was . .
Cited – Duffen v Fra Bo Spa CA 30-Apr-1998
The plaintiff had been appointed as an exclusive sales agent for the defendant for a minimum period of four years. The defendants terminated it eighteen months early claiming fraudulent misrepresentation.
Held: The clause setting the damages . .
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 – 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 – Cavendish Square Holding Bv v Talal El Makdessi; ParkingEye Ltd v Beavis SC 4-Nov-2015
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, . .
Lists of cited by and citing cases may be incomplete.
Updated: 14 October 2021; Ref: scu.197032