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PENALTY!!!…… BUT was it REALLY a penalty?

With the upcoming football European Championship it will be likely that the debate over whether a penalty is awarded or not will be reverberating through the pubs and clubs in the land this summer …… especially with the English fans who have many disturbing memories of penalties taken ….. and missed …..

However, in legal circles the penalty debate is all over, well it is now ….. after the 2015 cases on that very subject hit the courts.

Cavendish Square v Makdessi and Parking Eye Ltd v Beavis [2015] were jointly decided on the issue of penalties and albeit neither case was construction related, these have a significant impact on the manner in which the application of liquidated and ascertained damages (‘LAD’s’) will be assessed in the future.  In future, it will not just be about whether LAD’s  are a ‘genuine pre-estimate of loss’ as was the case prior to this ruling, but whether these LAD’s are ‘unconscionable’ or ‘extravagant’ with respect to the parties ‘freedom’ to agree contractual terms.  This will follow with the presumption that the parties themselves are the best judges of their respective positions on potential damages and that the courts will not be eager to meddle with that presumption, unless the LAD’s are ‘out of all proportion’.  Further, it will be necessary to establish whether the LAD’s clause is a ‘secondary’ obligation and a detriment to the contract, in the enforcement of a primary obligation of the innocent party.

  • Makdessi was related to share valuation and the breach by Makdessi of the covenant, which led to the contract machinery allegedly ‘penalising’ him for that breach – this was found not to be a penalty.
  • Beavis was where payment of a fine of £85 was alleged as a ‘penalty’ – this was also found not to be a penalty, as Parking Eye had a legitimate interest in imposing a reasonable level of fine, rather than just a genuine pre-estimate of potential damages.

It is thought that it is more difficult now to challenge LAD’s and that consideration is needed for their assessment to prevent them being either ‘unconscionable’ or ‘extravagant’, rather than simply a genuine pre-estimate as previously was the case.  The courts are likely to be reluctant to interfere in what the parties have agreed, unless the amount goes beyond the employer’s legitimate interest in seeking to avoid delay.

Some Employer’s may decide to draft such LAD clauses as primary obligations to avoid the ‘penalty or not’ debate, as this ruling only applies to secondary obligations and not primary obligations.

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