The Business > Resources > OnHand Counsel's The Business: Legal Briefing November 2015
OnHand Counsel's The Business: Legal Briefing November 2015

Dear reader

Just the one article in this briefing, because it's very recent and it's a biggie (for lawyers anyway):

English penalties will be missed

Apparently for the last 100 years we have been getting a law wrong.

This law says that a clause in a contract which sets out in advance the consequences of a breach of contract will be unenforceable if it is extravagant, exorbitant or unconscionable. It is one of the few exceptions in UK law to the principle of freedom of contract.

A test for this law was set out by Lord Dunedin in 1915 in the case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. The test said that a clause was a penalty clause if the consequences are designed as a deterrent to discourage the defaulting party from committing the breach, and are not a ‘genuine pre-estimate’ of the loss that would be suffered by the aggrieved party as a result of the breach.

For the last 100 years this test has become entrenched, and UK lawyers (including me for the last 30 years) have gone around advising businesses to be very careful not to draft a clause which could be construed as a penalty clause and which could therefore be unenforceable.

On 4th November 2015 the UK Supreme Court (what used to be the House of Lords) gave its decisions in two cases which it heard together. The result is that the law of penalties has been turned on its head. The Supreme Court set out a new test of whether a clause is a penalty clause, namely whether the agreed consequences of a breach impose a detriment to the contract breaker out of all proportion to the innocent party’s legitimate interest in the enforcement of the clause that has been breached. It doesn’t then seem to matter whether they are also designed to be a deterrent to discourage the defaulting party from committing the breach.

Read on for answers to some of the questions arising out of this case, including some drafting tips.


Rating system:
Reading time (1-10 minutes): 10 for the full monty
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 6

In this series of legal briefings I update you about recent developments in corporate or commercial law. Some of these briefings will hopefully resonate with some of you some of the time. I explain some of the context and background law, and perhaps give some specific tips. And maybe ramble or even rant a bit.

If you have any questions about anything raised in any of my legal briefings please do not hesitate to get in touch.

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All the best,
Andrew James
OnHand Counsel Limited
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