Cavendish Square Holding BV v Talal El Makdessi

The penalty rule applies only to a secondary obligation arising on breach of contract. The controlling question is whether that obligation imposes a detriment out of all proportion to the innocent party’s legitimate interest in enforcing the primary obligation.

Compensation is not the only legitimate interest. A clause may protect goodwill, a trading system or another commercial objective. Deterrence does not itself make a provision penal. In a negotiated contract between properly advised parties of comparable bargaining power, their assessment of legitimate interests carries substantial weight.

A consumer parking charge may therefore be enforceable despite exceeding recoverable loss where it supports efficient parking management and is neither extravagant nor unconscionable. Its fairness under consumer legislation remains a distinct inquiry into significant imbalance and good faith.

Two appeals concerned contractual provisions operating upon breach. In Cavendish Square Holding BV v Talal El Makdessi, a share sale agreement withheld deferred consideration and permitted the compulsory purchase of retained shares at net asset value if a seller breached restrictive covenants protecting goodwill. Burton J upheld the provisions in [2012] EWHC 3582 (Comm), but the Court of Appeal held them to be penalties in [2013] EWCA Civ 1539.

In ParkingEye Ltd v Beavis, a motorist incurred an £85 charge after overstaying a prominently advertised two-hour limit in a free retail car park. The County Court and Court of Appeal, in [2015] EWCA Civ 402, rejected challenges under the penalty rule and the Unfair Terms in Consumer Contracts Regulations 1999.

The common issue was the proper test for an unenforceable penalty. The parking appeal additionally concerned whether the charge was an unfair consumer term.

1. Disposition. The court unanimously allowed Cavendish’s appeal. It dismissed Mr Beavis’s appeal by a majority of six to one. It declared that none of the impugned terms contravened the penalty rule and that the parking charge did not infringe the Unfair Terms in Consumer Contracts Regulations 1999.

2. Lord Neuberger and Lord Sumption, with whom Lord Carnwath agreed, held that the penalty rule regulates remedies for breach rather than the fairness of primary contractual obligations. It applies only to a secondary obligation arising upon breach. Classification depends on substance rather than drafting or labels. The court declined either to abolish the rule or to extend it to obligations arising without breach.

3. The true test is whether the secondary obligation imposes a detriment on the contract-breaker out of all proportion to the innocent party’s legitimate interest in enforcing the primary obligation. Compensation is often the only relevant interest in an ordinary damages clause, but it is not invariably so. Deterrence and the absence of a genuine pre-estimate of loss do not themselves establish a penalty. Lord Mance and Lord Hodge expressed substantially the same test in terms of whether the stipulated consequence was extravagant, exorbitant or unconscionable when measured against the protected interest.

4. In a negotiated contract between properly advised parties of comparable bargaining strength, there is a strong basis for respecting their assessment of the interests requiring protection. The rule nevertheless remains applicable to commercial contracts and may extend to withholding money or requiring the transfer of assets. An English penalty is unenforceable; the court cannot scale it down or enforce it on rewritten terms.

5. Cavendish had a legitimate interest in protecting the goodwill purchased and in securing the sellers’ loyalty. Clause 5.1 operated as a price adjustment and clause 5.6 matched the price of retained shares to the value remaining after a defaulting seller severed his connection with the business. Whether characterised as primary obligations, as in the joint judgment, or tested as secondary obligations, as in parts of the other judgments, neither clause was extravagant, exorbitant or unconscionable.

6. The £85 parking charge engaged the penalty rule because it followed breach and was not a pre-estimate of loss. It was nevertheless enforceable. ParkingEye and the landowner had legitimate interests in securing turnover of spaces, providing free short-stay parking and funding the management scheme. The prominently displayed charge was comparable with relevant parking charges and was not out of all proportion to those interests.

7. The majority also held that the charge was not unfair under regulations 5 and 6. Although it altered the consumer’s position and created an imbalance, the term served legitimate objectives, was prominent and no higher than necessary. A reasonable motorist could objectively have agreed to it. Lord Toulson dissented on this issue. He considered that ParkingEye had not shown that an individually advised consumer would have accepted an unqualified £85 charge.

1. United Kingdom Supreme Court: In Cavendish Square Holding BV v Talal El Makdessi, allowed Cavendish’s appeal from [2013] EWCA Civ 1539. In ParkingEye Ltd v Beavis, dismissed the appeal from [2015] EWCA Civ 402.
2. Court of Appeal—Cavendish: In [2013] EWCA Civ 1539, reversed Burton J and held clauses 5.1 and 5.6 to be unenforceable penalties.
3. Commercial Court—Cavendish: Burton J upheld both clauses in [2012] EWHC 3582 (Comm).
4. Court of Appeal—ParkingEye: In [2015] EWCA Civ 402, affirmed the County Court’s rejection of the penalty and unfair-terms defences.
5. County Court—ParkingEye: Judge Moloney QC held the £85 parking charge enforceable. No neutral citation is stated in the judgment.