Penalty Clause in Contract – Getting Caught Out


This week has seen one of those rare moments where a court decision has completely changed our understanding of the penalty clause in contract law.

Until this week, it was a long standing legal principle that a penalty clause in a contract was unenforceable at common law. The Supreme Court has now fundamentally changed this principle in the decision in Cavendish Square Holding BV v Talal El Makdessi and Beavis V ParkingEye [2015] UKSC 67.

The case concerned two appeals that the Supreme Court decided to hear together. The first (Cavendish) concerned clauses in a share purchase agreement which took effect when the seller breached certain restrictive covenants.

The second case (Beavis V ParkingEye) concerned clauses in a consumer contract where a Mr Beavis was charged for overstaying a two-hour permitted period of free parking.

In both cases the parties argued that the relevant clauses constituted penalties and were therefore unenforceable.

The Supreme Court allowed the appeal in Makdessi and dismissed the appeal in Beavis V ParkingEye. The Supreme Court held by majority that while penalty clauses in contract would be unenforceable if they were unreasonable, not all penalty clause were invalid. In respect of the appeal in Beavis, the Lords (with the exception of Lord Toulson) held that the reasonableness of a penalty clause in a consumer contract could be judged by whether the clause would contravene the Unfair Terms in Consumer Contracts Regulations 1999. The court held that the penalty clause in Beavis did not and so was valid.

This decision brings clarity and certainty to what is a complex area of law (Penalty clause in contract). It is of particular interest to the motoring public who have been subject to fines in private car parks such as Mr Beavis.

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