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Penalty or pre-estimate of loss?

A forthcoming case in the Supreme Court will ultimately determine the future of penalty clauses in contracts, write Carole Spiller and James Whittaker

21 July 2015

The landmark case of Talal El Makdessi v Cavendish Square Holding BV [2013] EWCA Civ 1539 will be heard by the Supreme Court in July and will grapple with the tricky issue of how to justify penalty clauses. While this can seem a somewhat technical and obscure point, its relevance is demonstrated by another case being heard at the same time – Beavis v ParkingEye Ltd [2015] EWCA Civ 402 – which has definitely caught the public’s imagination since it deals with the ever-contentious issue of parking fines.

The basic legal principle is that any clause which requires a party who breaches the terms of the contract to either pay or forfeit a sum of money to the other party (a ‘penalty clause’) is deemed unlawful, unless such payment or forfeiture can be justified as a genuine pre-estimate of the loss which the innocent party will suffer as a consequence of the breach.

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