Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis
A clause is a penalty only if it imposes a detriment out of all proportion to the innocent party's legitimate interest in performance.
Facts
In the first case, Mr Makdessi sold a controlling stake in the largest advertising and marketing communications group in the Middle East to Cavendish, part of the WPP group, for up to US$147 million, paid in instalments. He agreed to restrictive covenants not to compete. The contract provided that if he broke the covenants, he would lose the right to the final two instalments of the price, worth up to about US$44 million, and Cavendish could buy his remaining shares at a price that excluded any value for goodwill. He broke the covenants. In the second case, Mr Beavis parked in a retail park car park in Chelmsford managed by ParkingEye, where signs stated that parking was free for two hours and that a charge of £85 would be payable for overstaying. He stayed for nearly three hours and was charged £85.
Legal principle
The Supreme Court restated the penalty rule. Lord Neuberger and Lord Sumption said that the true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party's interest is not limited to compensation for loss. In Makdessi, the clauses were primary obligations, part of the price adjustment, and in any event protected Cavendish's legitimate interest in the goodwill of the business, so they were not penalties. In ParkingEye, the £85 charge was not a penalty, because it served the legitimate interests of ParkingEye and the landowner in managing the car park efficiently, deterring long stays and generating income, and it was not out of proportion to those interests. It was also not unfair under the consumer protection rules.
Related cases on remedies
- Addis v Gramophone Co Ltd [1909] AC 488
- Anglia Television Ltd v Reed [1972] 1 QB 60
- Attorney General v Blake [2001] 1 AC 268
- British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673
- Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1
- Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79
- Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732
- Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353
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