As indicated in our briefing on penalty clauses in June, the El Makdessi and ParkingEye cases have been reviewed by the Supreme Court, which has now given an important ruling aimed at clarifying the law.
What's the issue?
If a court rules that a clause in an agreement is an unlawful penalty, it cannot be enforced. The classic example is a clause triggered by a breach of contract which requires the party in breach to pay a sum of money to the innocent party (often referred to as "liquidated damages"). Where the amount involved is "extravagant and unconscionable", the clause will be regarded as a penalty.
Until now, the courts have tended to approach this question by focussing on whether the clause amounted to a "genuine pre-estimate of loss" and whether the purpose of the clause was to compensate the innocent party (rather than deter breach). The Supreme Court was asked to decide whether the law on penalties should still apply and if so, whether its scope should be extended and/or clarified.