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

Cavendish Square BV v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 is a significant conjoined case in English contract law that dealt with the validity of penalty clauses. The UK Supreme Court, in its ruling on November 4, 2015, updated the established legal rule on penalty clauses, replacing the traditional genuine pre-estimate of loss test with a new test. The new test evaluates whether a clause imposes a detriment that is out of proportion to any legitimate interest of the innocent party.

Cavendish Square Holding BV v Talal El Makdessi
The case involved a sale and purchase agreement between Mr El Makdessi and Cavendish. The agreement included clauses prohibiting competitive activities and specified consequences, such as the loss of interim and final payments, if these clauses were breached. Mr El Makdessi admitted to breaching the non-competition clause. The Supreme Court, by a majority, held that the clauses in the Cavendish case were not penalties. The new test for penalty clauses is whether the provision is a secondary obligation imposing a detriment out of proportion to any legitimate interest of the innocent party. The court emphasised that the penalty rule is an interference with freedom of contract and should not be applied too stringently.

ParkingEye Ltd v Beavis
Mr Beavis parked in a retail shopping car park with a sign indicating a 2-hour maximum stay and an £85 penalty for non-compliance. Mr Beavis overstayed by 56 minutes and challenged the penalty as unenforceable. The Supreme Court, by a majority, held that the £85 charge was not an unlawful penalty. The new test for penalty clauses applies, considering whether the provision imposes a detriment out of proportion to any legitimate interest of the innocent party. The court found that the charge was not unfair under the Unfair Terms in Consumer Contracts Directive.

The cases clarified the law on penalty clauses, moving away from the strict genuine pre-estimate of loss test. The new test focuses on whether the detriment is proportionate to the innocent party's legitimate interest. The court emphasised the importance of freedom of contract and the need to avoid setting too stringent standards. It became more challenging for parties to challenge the validity of liquidated damages provisions, especially when negotiated by parties on a level playing field with professional advisors.

The judgment in Cavendish also had implications for equitable relief from forfeiture. Relief may be available for contractual provisions, such as forfeiture clauses, if the forfeiture is not wholly disproportionate. The court may consider granting relief from forfeiture after determining the clause is not a penalty, taking into account the circumstances of the breach and the parties' positions.

In summary, the cases provided welcome clarification to the law but also introduced some uncertainty. The new test made it harder for parties paying liquidated damages to challenge their validity in negotiated contracts. Relief from forfeiture could be extended to contractual provisions, and the court could consider both the penalty doctrine and equitable relief in such cases.
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