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In February 2008 Mr Talal El Makdessi, a key figure in the Middle Eastern advertising and marketing world, sold part of his advertising group to WPP, retaining a 20% shareholding. The sale and purchase agreement (SPA) contained extensive restrictive covenants prohibiting Mr Makdessi from competing with the group following the sale (the Restraints). The purchase consideration was to be paid to Mr Makdessi in instalments linked to the group’s operating profits between 2007 and 2011 and Mr Makdessi was given a put option in respect of his retained 20% shareholding (the Put Option).

Clauses 5.1 and 5.6 of the SPA provided that if Mr Makdessi should breach any of the Restraints, in any respect:-
(a) He would forgo any and all outstanding instalments of the purchase consideration;
(b) He would forgo the Put Option; and
(c) He could be required to sell his remaining shares in the Company at 20% of NAV, i.e. at a price ignoring the value of goodwill.

After the sale WPP claimed that Mr Makdessi had breached the Restraints and sought specific performance of Clauses 5.1 and 5.6. Mr Makdessi argued that the clauses were penal and unenforceable in that their effect was to deprive him of up to US$115 million in circumstances where WPP had suffered no losses recoverable at law.  For WPP it was said that the clauses merely adjusted the consideration payable under the SPA and were “commercially justified” in all the circumstances.  Much emphasis was placed on the fact that the SPA had been heavily negotiated by experienced lawyers on both sides.

At first instance Burton J ruled for WPP but the Court of Appeal (Christopher Clarke LJ, Patten LJ and Tomlinson LJ) unanimously reversed him, striking down the clauses as penalties.

Michael Bloch QC of Blackstone Chambers and Camilla Bingham QC of One Essex Court acted for Mr Makdessi.

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