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On 4 November 2015, the Supreme Court handed down its judgment in ParkingEye v Beavis and Cavendish Square v El Makdessi, two associated cases on penalty clauses in commercial contracts. In the cases, the court reviewed the development of the law of penalties and clarified a new 'true test' which must be considered when assessing whether a clause is an unenforceable penalty. The new broader test, which incorporates the concept of 'legitimate interest', means that businesses may now seek to impose charges in more circumstances, such as where a customer or client is late or doesn't turn up.
The court set out its 'true test' for penalties in contract law. The questions under this new, broader test are as follows:
is the penalty rule engaged at all?
is there a legitimate interest served and protected by the clause?
if so, is the provision purporting to serve that interest disproportionate (by being extravagant, exorbitant or unconscionable)?
If the answer to all of these questions is 'yes', then the clause is likely to be an unenforceable penalty.
For more information on this case, the new 'true test' in detail and more straightforward cases (ie where the old Dunlop test may still be more relevant), see News Analyses:
ParkingEye and El Makdessi—Supreme Court clarifies penalty rule
Clarifying the doctrine of penalties, and
ParkingEye v Beavis—reaction from the
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