Case Law Update: The Law of Penalties

POSTED BY Cecil Hanafin
16 December 2015

posted in Caselaw | Contract Law | Dispute Resolution

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Clauses in contracts which try to add a specific penalty amount or calculation have always been problematic. Generally, the courts have held that unless the party seeking to rely on the clause can show that the penalty is a genuine pre-estimate of the loss suffered by the innocent party, the clause will not be enforceable. All is not lost since, if damages can be proved, they can still be recovered on normal principles but being able to claim a defined penalty will always be a lot easier.

The UK Supreme Court has recently reviewed the law on penalties (in Cavendish Square Holdings BV v Makdessi [2013] EWCA Civ 1539 and Parking Eye Ltd v Beavis [2015] EWCA Civ 402), which could well result in fewer clauses being held to be unenforceable. As a result the test in the UK is no longer focused on whether or not the purpose of a damages clause is to deter the breach and whether or not the amount payable on breach is a genuine pre-estimate of loss.

The outcome is likely to have an impact on New Zealand decisions with regard to penalty clauses (both in commercial and consumer contracts) although quite to what degree remains to be seen.

The full bench of 7 UK judges heard two appeals, the facts of which sat at very different ends of the spectrum. The first concerned a large commercial contract involving two sophisticated parties and the other was a case bought by a consumer in relation to an £85 fee charged for overstaying in a carpark.

In both cases the Court refused to find that the clauses were unenforceable penalties. In essence the UK Supreme Court applied a new broader test focusing on whether the damages clause protects the legitimate interest of the innocent party. Where it does, the clause will not be an unenforceable penalty unless it is out of all proportion to that interest.

Image courtesy of National Library of New Zealand.

POSTED BY Cecil Hanafin
16 December 2015

posted in CaselawContract LawDispute Resolution

VIEWED 5277 TIMES

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