Analysis of Penalty Clauses in UK Law: Cavendish vs Makdessi Case

This case study examines the legal concept of penalty clauses in UK law, focusing on the landmark cases of Cavendish vs Makdessi and ParkingEye Ltd vs Beavis. It delves into the evolution of the law, contrasting the old test of 'pre-estimate of loss' with the Supreme Court's reformed approach. The analysis highlights the distinction between primary and secondary contractual obligations, clarifying that penalty clauses primarily regulate a party's obligations and remedies for breach. The study concludes that the judgments in these cases have refined the understanding and application of penalty clauses in UK contract law, moving away from a punitive approach towards a more nuanced consideration of legitimate interests and price adjustment clauses.

Law-summary writing

TASK
In UK law, Penalty is a type of punishment which is given for non- observance of a
contractual stipulation wherein an additional or different liability is imposed upon carrying out
the breach of contractual stipulation. The real question that arises in the case when challenge is
given to a contractual provision on penalty is whether it is penal or whether it is a pre- estimate
of loss(Doralt, 2021).
The Supreme Court of England, in the two appeals that came to it considered the law
relating to contractual penalty clauses. One appeal was relating to the share purchase and
Shareholders Agreement (Case of Cavendish vs Makdessi) and the other appeal was a charge
imposed on individual for overstaying a two hour free parking time period (case of Parking Eye
Ltd vs Beavis). Both gave rise top the question of penalty rule' ambit under English Law.
The previous law stated that in a contract parties may agree on the contractual breach and
its certain specified consequences (Jian, 2018). Until now, this old test was implied in the court
of England and Wales that would upheld such clauses if the specification of the consequence was
a pre-estimate of loss that the innocent party would suffer due to breach. So if the clause was
considered as a penalty clause by the court that means that the contract breaker would be
punished instead of giving the innocent party a compensation then that would be held
unenforceable.
But these cases stated above created better law with respect to penalty clauses by the so
called new test. The supreme court rather than abolishing the penalty rule, they tried to reform it.
They considered the real question based on whether the clause was penal and not on pre-estimate
of loss (Leung, 2019). It thus made a point on the difference among the contract's primary and
secondary obligations and clarified that penalty clause can only regulate a party's primary
obligations under the remedy available for breach in the contract. The court explained it saying
that contractual obligation is when one party has to perform an act and if they don't do so, then
they have to pay a specified sum of money to the other party and this obligation of payment of a
sum is a secondary obligation which can be called a penalty. But if there is no obligation to

perform an act under the contract but only a simple statement defining that if one party does not
perform then sum must be paid to the other party then this condition is not primary obligation
and thus it cannot be a penalty.
So in the Makdessi appeal it was held by SC that the complaint on clauses were in actual
sense price adjustment clauses as part of primary obligations under the contract. And in the
ParkingEye appeal, it was held by SC that provisions in question were not penal and owners of
car park had proper interest in making the use of parking space in efficient manner (Rowan,
2019).
This judgement thus created better law than the previous law on penalty clauses in UK.

REFERENCES
Doralt, W., 2021. Penalty Clauses in Commercial Contracts.
Jian, W.W., 2018. PENALTY CLAUSES. Singapore Journal of Legal Studies, pp.104-127.
Leung, R.L.H., 2019. In Defence of the Halfway House-The Cavendish Penalty Rule since
2015. HKJ Legal Stud., 13, p.55.
Rowan, S., 2019. THE “LEGITIMATE INTEREST IN PERFORMANCE” IN THE LAW ON
PENALTIES. The Cambridge Law Journal, 78(1), pp.148-174.