Penalty Clause

The Supreme Court reformulated the penalty rule in the joined appeals of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis. It rejected the older 'genuine pre-estimate of loss' test as unhelpful, holding instead 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.

Applying that test, a clause will only be an unenforceable penalty if the provision made for the innocent party's legitimate interest is extravagant, exorbitant or unconscionable. In ParkingEye's own case, an £85 charge for overstaying a car park's free period was not a penalty because both ParkingEye and the landowners had a legitimate interest in charging overstaying motorists that the sum was not out of proportion to.