The question of whether a clause in a contract amounts to a penalty, and is therefore unenforceable, has long been uncertain. This issue was considered by the highest court in England for the first time in a century when the Supreme Court handed down its decision on 4 November 2015 in the joint cases of Cavendish Square Holding B.V. v Talal El Makdessi and ParkingEye Limited v Beavis. Mainstream media headlines focussed on the impact of the judgment in ParkingEye on motorists who overstayed their free parking while out shopping. Less headline-grabbing, but of equal importance, are the commercial implications of the judgments issued by the various judges in relation to the El Makdessi dispute.
The El Makdessi case arose out of the sale of a media business in the Middle East. Following the sale, El Makdessi acted in breach of various covenants in the sale agreement. This then triggered two clauses in the sale agreement, with the consequence that El Makdessi lost his right to the balance of the purchase price for the shares, and was obliged to sell his remaining shares in the business at a discounted value. El Makdessi challenged these clauses as unenforceable penalties.
The Supreme Court held that the clauses were not penalties, and were therefore enforceable. The decision of the Supreme Court is complex, not least because four detailed judgments were given (one of which was a "joint" judgment). However, despite the differences that exist between the various judgments, some high-level principles can be drawn from the decisions issued by the Supreme Court as follows:
The application of the principles arising out of the Supreme Court decision is unlikely to be straightforward, and considerable further debate and case law in this area is likely. Even on the facts of the El Makdessi case itself, the court was divided on whether the clauses at issue were primary or secondary obligations, and therefore whether the question of whether they amounted to penalty clauses even arose.
What this means for you?
We will be discussing the implications of the El Makdessi decision for businesses in our breakfast seminar on 11 February 2015. If you would like to attend, please click here to request an invitation. If you would like to read more about this decision, you can access our more detailed article, published in November 2015, here.
Previous Dispute Resolution Essentials briefings: