Articles

Introduction 

For centuries, obligees have been proposing agreed damages for breach of contract set at levels that are designed to deter the obligor from under-performing. And yet for the last three hundred years or so, parties entering into contracts governed by one of the mainstream common law systems (outside North America) have recognised a judge-made prohibition on an agreed damages provision having a dominant deterrent purpose. Rather, it must genuinely pre-estimate the loss that will flow from the relevant breach of contract. In practice, the "penalty rule" has rarely been applied to strike-down an agreed damages clause. Most clauses considered in the reports have been held to be a genuine pre-estimate of loss even if they are imperfect. 

English law has just under-gone change in this regard. Late last year, in the combined hearing of two appeals, Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis, the Supreme Court of the United Kingdom reviewed the old authorities and restated the penalty rule in broader terms. This article explains the ruling in the first case, Cavendish Square Holding BV v El Makdessi ("Cavendish v Makdessi"). It then identifies the critical questions that parties ought to consider when assessing whether agreed damages are enforceable under English law. 

Contributed by Nicholas A. Brown, Partner of Pinsent Masons MPillay LLP