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The Supreme Court has allowed the appellant’s appeal against the Court of Appeal’s decision in [2013] EWCA Civ 1539 that two clauses in an agreement for the sale and purchase of an advertising business amounted to unenforceable penalties. At the same time, the Supreme Court dismissed the joined appeal in ParkingEye v Beavis (Court of Appeal decision [2015] EWCA Civ 402) where it had been argued that an advertised excess parking charge was unenforceable at common law as a penalty and/or it was unfair and unenforceable under the Unfair Terms in Consumer Contracts Regulations 1999.

The Supreme Court described the penalty rule as an “ancient, haphazardly constructed edifice which has not weathered well” but that similar rules existed in all other developed systems of law and retention of the rule had been recommended by the Law Commissions of England and Wales and of Scotland. It also pointed out that the rule covered contracts which were not otherwise regulated and should not, therefore, be abolished. Lords Neuberger and Sumption defined the true test relating to the enforceability of penalty provisions as “… 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”.

In Cavendish Square it was held that neither clause was penal, one being a price adjustment clause, the other a call option. Both clauses were primary rather than secondary obligations. In ParkingEye it was held that there was a legitimate interest in charging overstaying motorists which extended beyond mere recovery of loss. Nor did the advertised charge come within the basic test for unfairness under the 1999 Regulations following the recent interpretation of this test by the Court of Justice of the European Communities.

The full judgment can be read here:

Michael Bloch QC acted for the respondent, Talal El Makdessi.

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