The following Dispute Resolution practice note provides comprehensive and up to date legal information covering:
Parties will sometimes seek to agree in their contract what sums should be payable upon breach of a particular term or several terms. Where they do so, whether or not such a clause will be enforceable will depend on whether the courts construe it as:
a liquidated damages clause (enforceable), or
a penalty (unenforceable)
Understanding how these clauses work and the factors the court will take into account in interpreting them is, therefore, key. Much will turn on the specific circumstances of each case.
Lord Neuberger and Lord Sumption in the 2015 Supreme Court decision in ParkingEye v Beavis and Cavendish v Makdessi stated that the existing rule against penalties is:
‘An ancient, haphazardly constructed edifice which has not weathered well, and which, in the opinion of some should simply be demolished, and in the opinion of others should be reconstructed and extended.’
This Practice Note considers what liquidated damages clauses are and the court's approach when determining whether a purported liquidated damages clause is, in fact, a penalty; tracing the authorities through to how the question should now be approached in light of the ParkingEye decision.
It is clear from the Supreme Court's decision (had it not already been the case) that there is a fundamental difference between a jurisdiction to review the fairness of a contractual obligation and a jurisdiction
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