QCR Spring 2017: Is my deterrent clause enforceable?

Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC67

The Supreme Court considers the principles governing penalty clauses for the first time since 1915.

Contracts often contain deterrent clauses which require one party to pay a fine or liquidated damages to the other party if they breach the contract. Such clauses can be unenforceable if they are categorised as a “penalty clause”.

The rule on what amounts to a penalty clause has recently been revised by the English Supreme Court. Its decision should be of interest to anyone entering into commercial contracts, to ensure their clauses are enforceable.

The test for whether a clause is a penalty now requires consideration of whether the innocent party has a legitimate interest which is protected by the clause. In assessing this it is likely that its commercial and business objectives will be of paramount importance.

This article looks at the Supreme Court’s decision in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC67. This is the first time this court has considered the principles governing penalty clauses since 1915.

The Supreme Court’s judgment involved two separate cases.

Read the UK Defence Club's Soundings here.