Cavendish Square Holding BV v El Makdessi, ParkingEye Ltd v Beavis [2015] UKSC 67

KEY POINTS

• The underlying principle states that the penalty rule exclusively governs the contractual remedy that can be sought in the event of breaching primary contractual obligations. It does not, however, evaluate the fairness of those primary obligations themselves.

• This rule primarily pertains to monetary payments as a contractual remedy, but it also extends to obligations involving asset transfers or clauses that entail the forfeiture of a deposit due to a party's own breach of contract.

• The enforceability of a contractual clause that outlines the consequences of a breach of contract is contingent upon the existence of a legitimate interest for the innocent party.

• While there is a legitimate interest in seeking compensation that reasonably estimates the damages suffered, the innocent party may also have a legitimate interest in the actual performance of the contractual obligations that goes beyond mere financial compensation.

• Generally, the law does not uphold a contractual remedy if its adverse effects outweigh the innocent party's legitimate interest.

FACTS

• Under an agreement, Mr. Makdessi agreed to sell Cavendish a controlling stake in the holding company of the largest advertising and marketing communications group in the Middle East.

  • The contract included provisions stating that if Mr. Makdessi violated certain restrictive covenants related to competitive activities, he would not receive the final two instalments of the price paid by Cavendish (clause 5.1).

  • Additionally, he could be obligated to sell his remaining shares to Cavendish at a price that did not include the value of the business's goodwill (clause 5.6).

  • Mr. Makdessi subsequently breached these covenants.

• Mr. Makdessi argued that clauses 5.1 and 5.6 constituted unenforceable penalty clauses.

• The Court of Appeal, in contrast to the decision made by Burton J in the first instance, ruled that the clauses were indeed unenforceable penalties under the traditional interpretation of the penalty rule.

COMMENTARY

• The court's ruling reaffirms the fundamental principle that the penalty rule primarily regulates the availability of contractual remedies in cases of breach, rather than assessing the fairness or reasonableness of the primary obligations themselves.

  • The decision underscores the importance of distinguishing between genuine pre-estimation of damages and penalties, emphasising that penalty clauses that go beyond reasonable compensation are unenforceable.

• The case highlights the need to determine whether the innocent party has a legitimate interest in the enforcement of the penalty clause.

• The court takes into account not only the recovery of a reasonable pre-estimated sum of damages but also the broader legitimate interest in performance that extends beyond mere pecuniary compensation.