Recent Contract Law Cases

Makdessi Case

In the Supreme Court consolidated appeals of Cavendish Square Holding BV v Talal El Makdessi (Cavendish) and Parking Eye Limited v Beavis (Parking Eye), a more flexible test on whether a contract term is considered penal and thus unenforceable was introduced.

The traditional English law test on penalty clauses centred on whether a clause that takes effect on breach of contract is a "genuine pre-estimate of loss" and therefore compensatory or whether it is aimed at deterring a breach and therefore penal. This penalty rule has been around for over 100 years and in the words of Lord Sumption had become, "an ancient, haphazardly constructed edifice which [had] not weathered well".

In the consolidated appeals, the Supreme Court restated this rule, by introducing a more flexible test as to "whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation."

Following this decision, the question is no longer whether "the clause [is] unconscionable or a genuine pre-estimate of loss"; rather the innocent party's wider interest will be taken into account when enforcing obligations.

Commentators have since criticised this decision by highlighting the uncertainty of what will amount to a legitimate interest and the circumstances in which a clause will be considered out of proportion to that interest, as this is likely to be open to debate on a case-by-case basis. The new rule does, however, make way for greater freedom of contract; parties of equal bargaining power will be the best judges of what is a legitimate response...