Revisiting the Penalty Rule

Abstract

John Eldridge reports on Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67.

In Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67, the Supreme Court of the United Kingdom engaged in an extensive review of the rule against penalties (‘the penalty rule’). In declining to extend the penalty rule beyond provisions which, as a matter of substance, provide for the consequences of a breach of contract, the Supreme Court opted not to follow the approach taken in Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205 (Andrews).

The court also revisited the classic statement of law of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, where his Lordship framed the inquiry as turning upon the distinction between a penalty and a genuine pre-estimate of loss. The Supreme Court cautioned against permitting this distinction to obscure the true test, which was said to be whether the impugned clause imposes on the party in breach consequences which are out of all proportion to any legitimate interest of the other party in the contract’s enforcement.

Keywords: penalty rule

JEL Classification: K40