Much has been written about the new law of penalties following the decision of the Supreme Court in Cavendish v Makdessi. The new test appears to be whether the clause is a secondary one “which imposes a detriment on the contract breaker out of all proportions to any legitimate interests of the innocent party in the enforcement of the primary obligation”. The fact that a damages clause is not a genuine pre-estimate of loss no longer means that it is penal.
Many of the cases about penalties have been construction cases. I appeared in Tilebox v Alfred McAlpine, a construction case, in which Jackson J identified the anomaly of the common law striking down penalty clauses. The Supreme Court has accepted the anomaly but narrowed it.
One of the old conundrums arose where there were provisions for sectional completion or partial possession but no mechanism for reducing liquidated damages from the figure chosen for the whole of the Works. Keating on Construction Contracts, at 100-006 is quite absolute about the position under the old law.
“Unless there are effective provisions for dividing the single sum between the sections or reducing it in proportion to the part taken into possession, the claim for liquidated damages will fail.“
Under the old law, that was putting it a little high to begin with. What if the figure reserved was £1 and this would not have been extravagant however minor the breach? On analysis the problem was that if you had multiple breaches leading to the same damages it was difficult to see how the sum could be a genuine pre- estimate. The better view was that the choice of a single sum for multiple breaches created a presumption that the sum was a penalty and shifted the onus onto the party seeking to claim to save the provision. To do so the party would have had to show that the sum reserved was either a genuine estimate, or less, for the least serious breach that was covered.
Where this conundrum stands after Cavendish remains to be seen. Certainly the statement of principle in Keating cannot survive, even if it was right to begin with. As a consequence of the abolition of the requirement that the sum be a genuine pre-estimate of loss the effect of Cavendish is probably to put the matter wholly at large. It seems that in each case it will be necessary to look without preconception and see whether assuming the least serious breach possible the figure does or does not offend against the new test.