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Penalty Clauses in the Supreme Court: A Legitimately Interesting Decision?

Document Cited in Related
Vincent
Published date01 May 2016
Pages204-210
Author
Date01 May 2016
DOI10.3366/elr.2016.0342
<p>The joint appeals in <italic>Cavendish Square Holdings v El Makdessi</italic> and <italic>Beavis v ParkingEye</italic> <xref ref-type="fn" rid="fn1"><sup>1</sup> </xref> offered the UK Supreme Court its first opportunity – since moving across Parliament Square – to consider the penalty doctrine. The exercise of judicial control over contractually stipulated remedies has long been controversial and the joint appeals presented an opportunity either to modernise the doctrine's principles or to repudiate it entirely from English law.</p> BACKGROUND

For quite some time the law has appeared relatively settled. The classic test for the validity of an agreed damages clause, encapsulated in Viscount Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd,2 hinged on whether or not the stipulated sum was arrived at through a genuine attempt to pre-estimate the loss that would ensue from breach of the related contractual term. If that was the case the clause would be enforceable as liquidated damages; if not, and the stipulated amount bore little relation to the greatest conceivable loss, the clause would be unenforceable as a penalty. However, in the supervening century at least two aspects of this orthodoxy have been questioned. First, the exclusive focus on loss may be myopic. There may be a good justification for a clause otherwise falling foul of Lord Dunedin's formula, and the validity of this may be assessable by reference to some interest beyond the compensatory. Secondly, the so-called breach limitation,3 confining the scope of the penalty rule to clauses triggered by a breach of contract, has often been denigrated as imperilling the doctrine's protection by rendering it easily circumventable by adroit drafting and contractual structuring.

 THE FACTS

These issues were brought to the fore in Cavendish and Beavis. However, the transactions in the two cases could not be more different.

<italic>Cavendish Square Holdings v El Makdessi</italic>

Mr Makdessi, a Lebanese businessman of considerable repute, was at the helm of the largest communications group in the Middle East. He and his partner contracted to sell the majority of their stake in the group's holding company to Cavendish. A substantial element of the purchase price related to the goodwill surrounding Mr Makdessi. As his continuing loyalty was crucial, the agreement contained a series of time-limited restrictive covenants precluding him from using his skills or contacts to compete with the business. These were breached, triggering the two clauses at issue. Clause 5.1 disentitled Makdessi, who had already received a substantial upfront sum, from receiving interim and final payments potentially totalling $44,181,600. Clause 5.6 would force him to sell his remaining stake in the holding company to Cavendish at a value excluding goodwill, which was around 23% of the total value. When Cavendish sought to enforce the clauses, they were met with the submission that both were unenforceable as penalty clauses. Burton J rejected that contention,4 but his decision was reversed by the Court of Appeal.5 The Supreme Court granted Cavendish permission to appeal.

 <italic>Beavis v ParkingEye</italic>

The British Airways Pension Fund portfolio includes the Riverside Retail Park in Chelmsford. The Fund selected ParkingEye to provide car park management services. Those wishing to park their car could do so for free for two hours. Drivers exceeding that period would become liable for an £85 parking charge, reducible to £50 if paid within a fortnight. These charges were ParkingEye's sole source of revenue: no fee was received from the landowners or those returning to their cars on time. Mr Beavis was not so prompt, over-parking for fifty-six minutes. He received a parking charge notice, which he ignored. Eventually, ParkingEye raised a small claim against him in the County Court, which was successful. Beavis's...

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