The Supreme Court in 2015 reviewed and redefined the rules
governing unlawful penalty clauses. The new test considers whether
there is a legitimate interest in creating damages or a fine and
whether such fine imposes an obligation that is extravagant,
exorbitant or unconscionable. When drafting, the new test should be
applied to ensure a provision is a valid damages clause, not an
unlawful penalty.
Background In the jointly heard appeal of
Cavendish Square Holdings BV v Talal El Makdessi and ParkingEye
Limited v Beavis1 the Supreme Court found that the
clauses put forward as being unenforceable penalty clauses were in
fact valid and enforceable.
Cavendish Square Holdings BV v Talal El Makdessi
concerned a seller who had breached certain restrictive covenants
under a share purchase agreement ("SPA"). The SPA
contained provisions that if the restrictive covenants were
breached the seller would (i) not be entitled to receive two final
instalments of the purchase
