Contracts: penalty clauses, (2021)

For educational use only

Last date of review: 28 January 2021

Last update: General updating.

Authored by

Daniel Greenberg CB
Daniel Greenberg

This article addresses the common law applicable to contractual penalty clauses, as discussed in and affected by the decision of
the Supreme Court in Makdessi v Cavendish Square Holdings BV [2015] UKSC 67; [2015] 3 W.L.R. 1373. This article extracts
key passages from the judgment to serve as a base for recording continuing judicial developments and any other relevant events
(including legislative intervention, the possibility of which is referred to in the judgments).

Overview of Topic
Introduction

1. The Cavendish judgments address two combined appeals on penalty clauses. Lord Neuberger and Lord Sumption said:
"These two appeals raise an issue which has not been considered by the Supreme Court or by the House of Lords for
a century, namely the principles underlying the law relating to contractual penalty clauses, or, as we will call it, the
penalty rule. The first appeal, Cavendish Square Holding BV v Talal El Makdessi, raises the issue in relation to two
clauses in a substantial commercial contract. The second appeal, ParkingEye Ltd v Beavis, raises the issue at a consumer
level, and it also raises a separate issue under the Unfair Terms in Consumer Contracts Regulations 1999/2083".

Nature of the penalty rule

2. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "The penalty rule in England is an ancient,
haphazardly constructed edifice which has not weathered well, and which in the opinion of some should simply be
demolished, and in the opinion of others should be reconstructed and extended. For many years, the courts have
struggled to apply standard tests formulated more than a century ago for relatively simple transactions to altogether
more complex situations. The application of the rule is often adventitious. The test for distinguishing penal from other
principles is unclear. ... The penalty rule originated in the equitable jurisdiction to relieve from defeasible bonds. ... The
common law enforced the bonds according to their letter. But equity regarded the real intention of the parties as being
that the bond should stand as security only, and restrained its enforcement at common law on terms that the debtor
paid damages, interest and costs. ... The equitable jurisdiction to relieve from penalties had been closely associated
with the jurisdiction to relieve from forfeitures which developed at the same time. ... With the gradual decline of the
use of penal defeasible bonds, the common law on penalties was developed almost entirely in the context of damages
clauses - i.e. clauses which provided for payment of a specified sum in place of common law damages. Because they

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were a contractual substitute for common law damages, they could not in any meaningful sense be regarded as a mere
security for their payment. If the agreed sum was a penalty, it was treated as unenforceable. ... The distinction between
a clause providing for a genuine pre-estimate of damages and a penalty clause has remained fundamental to the modern
law, as it is currently understood. The question whether a damages clause is a penalty falls to be decided as a matter of
construction, therefore as at the time that it is agreed ... As Lord Diplock put it in The "Scaptrade" at p 702: "The classic
form of penalty clause is one which provides that upon breach of a primary obligation under the contract a secondary
obligation shall arise on the part of the party in breach to pay to the other party a sum of money which does not represent
a genuine pre-estimate of any loss likely to be sustained by him as the result of the breach of primary obligation but is
substantially in excess of that sum. The classic form of relief against such a penalty clause has been to refuse to give
effect to it, but to award the common law measure of damages for the breach of primary obligation instead".

In what circumstances is the penalty rule engaged?

3. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "In England, it has always been considered
that a provision could not be a penalty unless it provided an exorbitant alternative to common law damages. This
meant that it had to be a provision operating upon a breach of contract. ... As Lord Hodge points out in his judgment,
the Scottish authorities are to the same effect. ... This principle is worth restating at the outset of any analysis of the
penalty rule, because it explains much about the way in which it has developed. There is a fundamental difference
between a jurisdiction to review the fairness of a contractual obligation and a jurisdiction to regulate the remedy for
its breach. Leaving aside challenges going to the reality of consent, such as those based on fraud, duress or undue
influence, the courts do not review the fairness of men's bargains either at law or in equity. The penalty rule regulates
only the remedies available for breach of a party's primary obligations, not the primary obligations themselves. This
was not a new concept in 1983, when ECGD was decided. It had been the foundation of the equitable jurisdiction,
which depended on the treatment of penal defeasible bonds as secondary obligations or, as Lord Thurlow LC put it in
1783 in Sloman as "collateral" or "accessional" to the primary obligation. And it provided the whole basis of the classic
distinction made at law between a penalty and a genuine pre-estimate of loss, the former being essentially a way of
punishing the contract-breaker rather than compensating the innocent party for his breach. ... This means that in some
cases the application of the penalty rule may depend on how the relevant obligation is framed in the instrument, i.e.
whether as a conditional primary obligation or a secondary obligation providing a contractual alternative to damages at
law. Thus, where a contract contains an obligation on one party to perform an act, and also provides that, if he does not
perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary
obligation which is capable of being a penalty; but if the contract does not impose (expressly or impliedly) an obligation
to perform the act, but simply provides that, if one party does not perform, he will pay the other party a specified
sum, the obligation to pay the specified sum is a conditional primary obligation and cannot be a penalty. However, the
capricious consequences of this state of affairs are mitigated by the fact that, as the equitable jurisdiction shows, the
classification of terms for the purpose of the penalty rule depends on the substance of the term and not on its form or on
the label which the parties have chosen to attach to it. ... Payment of a sum of money is the classic obligation under a
penalty clause and, in almost every reported case involving a damages clause, the provision stipulates for the payment
of money. However, it seems to us that there is no reason why an obligation to transfer assets (either for nothing or
at an undervalue) should not be capable of constituting a penalty. ... Where a proprietary interest or a "proprietary or
possessory right" (such as a patent or a lease) is granted or transferred subject to revocation or determination on breach,
the clause providing for determination or revocation is a forfeiture and cannot be a penalty, and, while it is enforceable,
relief from forfeiture may be granted ... What is less clear is whether a provision is capable of being both a penalty
clause and a forfeiture clause. ... it is right to mention the possibility that, in some circumstances, a provision could, at
least potentially, be a penalty clause as well as a forfeiture clause".

4. "61. The law in this area has recently been clarified by the Supreme Court in its decision in the conjoined appeals of
Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis. I gratefully adopt the concise summary
of those decisions given by Lionel Persey QC (sitting as a Judge of the High Court) in ZCCM Investments Holdings

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plc v Konkola Copper Mines plc: (1) The question of whether a damages clause is a penalty falls to be decided as a
matter of construction as at the time that it is agreed: see Lords Neuberger and Sumption at [9] and [87]; Lord Hodge at
[243]; (2) The test for a penalty was variously described by their Lordships as follows "…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…", per Lords Neuberger
and Sumption at [32]; "…What is necessary in each case is to consider, first, whether any (and if so what) legitimate
business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the
provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable …", per
Lord Mance at [152]; "…I therefore conclude that the correct test for a penalty is whether the sum or remedy stipulated
as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's
interest in the performance of the contract…", per Lord Hodge at [293]." - GPP Big Field LLP v Solar EPC Solutions
SL (Formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm).

What makes a contractual provision penal?

5. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "... the penal character of a clause depends
on its purpose, which is ordinarily an inference from its effect. As we have already explained, this is a question of
construction, to which evidence of the commercial background is of course relevant in the ordinary way. But, for the
same reason, the answer cannot depend on evidence of actual intention: ... A damages clause may properly be justified
by some other consideration than the desire to recover compensation for a breach. This must depend on whether the
innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation
flowing directly from the breach in question. ... In our opinion, the law relating to penalties has become the prisoner of
artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of
loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of
Lord Dunedin's four tests and a tendency to treat them as almost immutable rules of general application which exhaust
the field. ... The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that
it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent
provision in a contract is simply one species of provision designed to influence the conduct of the party potentially
affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the
policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting
party's conduct is to be influenced are "unconscionable" or (which will usually amount to the same thing) "extravagant"
by reference to some norm. 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. The innocent party can have no proper interest in simply punishing the defaulter. His interest
is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause,
that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin's
four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only
legitimate interest that the innocent party may have in the performance of the defaulter's primary obligations. ... The
penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to expect
of the law. ... a negotiated contract between properly advised parties of comparable bargaining power, the strong initial
presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with
the consequences of breach".

6. "43. As is made clear in the passages I have quoted above, in particular at paragraph [32] in Cavendish, the question at
the first stage is whether Clause 8.12 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 this regard Cargill had a legitimate interest
in ensuring that Uttam repaid the money Cargill had advanced and at a time at which Uttam had undertaken to repay
it. 44. Cargill then submits that the default compensation rate was not disproportionate or exorbitant in relation to that
interest because it was commercially justified. The existence of a legitimate commercial justification will mean that

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a contractual provision is not disproportionate or exorbitant and therefore is not a penalty - see Chitty on Contracts,
33rd edition paragraph 26-210 and Lordsvale Finance Plc v Bank of Zambia [1996] QB 952 at 763E-G and 763H
to 764A. ... 70. Even outside of the context of the Indian market and the Indian steel industry, I am satisfied there is
no basis for concluding that the Default Compensation Rate was arguably so obviously exorbitant or oppressive as
to constitute a penalty. On the contrary, as illustrated by a number of existing reported cases, higher rates of default
interest have been upheld in numerous cases." - Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2019]
EWHC 476 (Comm).

7. "67. Nevertheless, in my judgment, clause 21.5 of the Hamptworth contract does not constitute an unenforceable
penalty. As Mr Parker correctly submitted, delay damages provisions of this kind are common in construction contracts,
and the first claimant and the Contractor were experienced and sophisticated commercial parties, of equal bargaining
power, who were well able to assess the commercial implications of clause 21.5. I am satisfied that the sum specified in
clause 21.5 does not exceed a genuine attempt to estimate in advance the loss which the first claimant would be likely
to suffer from a breach, and that that sum is not in any way extravagant or unconscionable in comparison with the
legitimate interest of the first claimant in ensuring timely performance." - GPP Big Field LLP v Solar EPC Solutions
SL (Formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm).

8. "74. Courts have consistently stated that they are reluctant to declare a contractual provision to be a penalty where it
has been freely negotiated at arm's length between commercial parties and there is no indication of oppression: Chitty
on Contracts (33rd edition) at [26-195] and Cavendish, supra, at [33] and [152]." - Cargill International Trading Pte
Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm).

9. "141. The decision in Makdessi is heavily underpinned by a recognition that contracting for a legitimate commercial
interest is a different thing to imposing a penalty. That is a point made repeatedly in the review of the authorities -
for example at 1200F-G, 1204D. And as is so often the case, a citation of a judgment of Colman J (here in Lordsvale
Finance plc v Bank of Zambia [1996] QB 752 at 763-4) puts the matter with impeccable clarity: "[There is] no reason in
principle why a contractual provision the effect of which was to increase the consideration payable under an executory
contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances
be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party
from breach."" - Banco San Juan Internacional Inc v Petroleos de Venezuela SA [2020] EWHC 2937 (Comm).

Effect of description by parties

10. " As for the use by the parties of the word "penalty" to describe the payment required by clause 21.5, the parties also
used the words "Delay Damages" to define the sum. This reference to the sum as a "penalty" is therefore an equivocal
indication. I must look at the substance of the matter." - GPP Big Field LLP v Solar EPC Solutions SL (Formerly
Prosolia Siglio XXI) [2018] EWHC 2866 (Comm).

Should the penalty rule be abrogated?

11. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "The first point to be made is that the penalty
rule is not only a long-standing principle of English law, but is common to almost all major systems of law, at any
rate in the western world. ... It is true that statutory regulation, which hardly existed at the time that the penalty rule
was developed, is now a significant feature of the law of contract. In England, the landmark legislation was the Unfair
Contract Terms Act 1977. For most purposes, the Act was superseded by the Unfair Terms in Consumer Contracts
Regulations 1994/3159, which was in turn replaced by the 1999 Regulations, both of which give effect to European
Directives. ... Further, although there are justified criticisms that can be made of the penalty rule, it is consistent with
other well-established principles which have been developed by judges (albeit mostly in the Chancery courts) and
which involve the court in declining to give full force to contractual provisions, such as relief from forfeiture, the

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equity of redemption, and refusal to grant specific performance, as discussed in paras 10-11 and 29-30 above. Finally,
the case for abolishing the rule depends heavily on anomalies in the operation of the law as it has traditionally been
understood. Many, though not all of these are better addressed (i) by a realistic appraisal of the substance of contractual
provisions operating upon breach, and (ii) by taking a more principled approach to the interests that may properly be
protected by the terms of the parties' agreement." (The 1999 Regulations have been overtaken by Pt 2 of the Consumer
Rights Act 2015.)

Should the penalty rule be extended?

12. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "We would accept that the application of the
penalty rule can still turn on questions of drafting, even where a realistic approach is taken to the substance of the
transaction and not just its form. But we agree with what Hoffmann L.J. said in Else (1982) at p 145, namely that, while
it is true that the question whether the penalty rule applies may sometimes turn on "somewhat formal distinction[s]",
this can be justified by the fact that the rule "being an inroad upon freedom of contract which is inflexible … ought not
to be extended", at least by judicial, as opposed to legislative, decision-making".

Application of the rule

13. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "We are, however, prepared to assume, without
deciding, that a contractual provision may in some circumstances be a penalty if it disentitles the contract-breaker from
receiving a sum of money which would otherwise have been due to him. But even on that assumption, it will not always
be a penalty. That must depend on the nature of the right of which the contract-breaker is being deprived and the basis on
which he is being deprived of it. The provision thought to be penal in Gilbert-Ash was a good example of a secondary
provision operating upon a breach of the subcontractor's primary obligations. It authorised the contractor to withhold
all remuneration due to the subcontractor if the latter had committed any breach of contract until the contractor's claim
had been resolved. It was a security, albeit an exorbitant one, for the contractor's claim. The retrospective cesser clause
in the West of England Club's rules in The "Padre Island" was very different. It forfeited an accrued right to indemnity
permanently. Clauses of this kind are potentially harsher than those which operate simply as a security. But they may
define the primary obligations of the parties, in which case the penalty rule will not apply to them. It is not a proper
function of the penalty rule to empower the courts to review the fairness of the parties' primary obligations, such as the
consideration promised for a given standard of performance. For example, the consideration due to one party may be
variable according to one or more contingencies, including the contingency of his breach of the contract. There is no
reason in principle why a contract should not provide for a party to earn his remuneration, or part of it, by performing
his obligations. If as a result his remuneration is reduced upon his non-performance, there is no reason to regard that
outcome as penal. Suppose that a contract of insurance provided that it should be cancelled ab initio if the insured
failed to pay the premium within three months of inception. The effect would be to forfeit any claim upon a casualty
occurring in the first three months but it would be difficult to regard the provision as penal on that account. One reason
why Bingham L.J. disagreed with Stuart-Smith LJ was that he considered the retrospective cesser clause to be no
different. "I do not myself think it unreasonable", he said (p 254), "that a member should lose his cover in respect of
a period for which he fails to pay his premium." He may well have been right to analyse the clause in that way, but it
is a fair criticism of Stuart-Smith L.J's approach that he did not consider this aspect of the matter at all. ... Although
clause 5.1 has no relationship, even approximate, with the measure of loss attributable to the breach, Cavendish had
a legitimate interest in the observance of the restrictive covenants which extended beyond the recovery of that loss.
It had an interest in measuring the price of the business to its value. The goodwill of this business was critical to its
value to Cavendish, and the loyalty of Mr Makdessi and Mr Ghossoub was critical to the goodwill. The fact that some
breaches of the restrictive covenants would cause very little in the way of recoverable loss to Cavendish is therefore
beside the point. As Burton J. graphically observed in para 43 of his judgment, once Cavendish could no longer trust
the Sellers to observe the restrictive covenants, "the wolf was in the fold". Loyalty is indivisible. Its absence in a

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business like this introduces a very significant business risk whose impact cannot be measured simply by reference to
the known and provable consequences of particular breaches. It is clear that this business was worth considerably less
to Cavendish if that risk existed than if it did not. How much less? There are no juridical standards by which to answer
that question satisfactorily. We cannot know what Cavendish would have paid without the assurance of the Sellers'
loyalty, even assuming that they would have bought the business at all. We cannot know whether the basic price or
the maximum price fixed by clause 3.1 would have been the same if they were not adjustable in the event of breach
of the restrictive covenants. We cannot know what other provisions of the agreement would have been different, or
what additional provisions would have been included on that hypothesis. These are matters for negotiation, not forensic
assessment (save in the rare cases where the contract or the law requires it). They were matters for the parties, who
were, on both sides, sophisticated, successful and experienced commercial people bargaining on equal terms over a
long period with expert legal advice and were the best judges of the degree to which each of them should recognise
the proper commercial interests of the other. ... In our view, the same legitimate interest which justifies clause 5.1
justifies clause 5.6 also. It was an interest in matching the price of the retained shares to the value that the Sellers were
contributing to the business. There is a perfectly respectable commercial case for saying that Cavendish should not be
required to pay the value of goodwill in circumstances where the Defaulting Shareholder's efforts and connections are
no longer available to the Company, and indeed are being deployed to the benefit of the Company's competitors, and
where goodwill going forward would be attributable to the efforts and connections of others. It seems likely that clause
5.6 was expected to influence the conduct of the Sellers after Cavendish's acquisition of control in a way that would
benefit the Company's business and its proprietors during the period when they were yoked together. To that extent it
may be described as a deterrent. But that is only objectionable if it is penal, ie if the object was to punish. But the price
formula in clause 5.6 had a legitimate function which had nothing to do with punishment and everything to do with
achieving Cavendish's commercial objective in acquiring the business. And, like clause 5.1, it was part of a carefully
constructed contract which had been the subject of detailed negotiations over many months between two sophisticated
commercial parties, dealing with each other on an equal basis with specialist, experienced and expert legal advice."

14. In Cavendish Square Holding Lord Neuberger and Lord Sumption said: "In our opinion, while the penalty rule is plainly
engaged, the £85 charge is not a penalty. The reason is that although ParkingEye was not liable to suffer loss as a result
of overstaying motorists, it had a legitimate interest in charging them which extended beyond the recovery of any loss.
The scheme in operation here (and in many similar car parks) is that the landowner authorises ParkingEye to control
access to the car park and to impose the agreed charges, with a view to managing the car park in the interests of the
retail outlets, their customers and the public at large. That is an interest of the landowners because (i) they receive a
fee from ParkingEye for the right to operate the scheme, and (ii) they lease sites on the retail park to various retailers,
for whom the availability of customer parking was a valuable facility. It is an interest of ParkingEye, because it sells
its services as the managers of such schemes and meets the costs of doing so from charges for breach of the terms
(and if the scheme was run directly by the landowners, the analysis would be no different). As we have pointed out,
deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not
satisfied by the mere right to recover damages for breach of contract. Mr Butcher QC, who appeared for the Consumers'
Association (interveners), submitted that because ParkingEye was the contracting party its interest was the only one
which could count. For the reason which we have given, ParkingEye had a sufficient interest even if that submission be
correct. But in our opinion it is not correct. The penal character of this scheme cannot depend on whether the landowner
operates it himself or employs a contractor like ParkingEye to operate it. The motorist would not know or care what
if any interest the operator has in the land, or what relationship it has with the landowner if it has no interest. This
conclusion is reinforced when one bears in mind that the question whether a contractual provision is a penalty turns on
the construction of the contract, which cannot normally turn on facts not recorded in the contract unless they are known,
or could reasonably be known, to both parties. None of this means that ParkingEye could charge overstayers whatever
it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for
whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests. The
trial judge, Judge Moloney QC, found that the £85 charge was neither extravagant nor unconscionable having regard
to the level of charges imposed by local authorities for overstaying in car parks on public land. The Court of Appeal
agreed and so do we. It is higher than the penalty that a motorist would have had to pay for overstaying in an on-street

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parking space or a local authority car park. But a local authority would not necessarily allow two hours of free parking,
and in any event the difference is not substantial. The charge is less than the maximum above which members of the
BPA must justify their charges under their code of practice. The charge is prominently displayed in large letters at the
entrance to the car park and at frequent intervals within it. The mere fact that many motorists regularly use the car park
knowing of the charge is some evidence of its reasonableness. They are not constrained to use this car park as opposed
to other parking facilities provided by local authorities, Network Rail, commercial car park contractors or other private
landowners. They must regard the risk of having to pay £85 for overstaying as an acceptable price for the convenience
of parking there. The observations of Lord Browne-Wilkinson in Workers Bank at p 580 referred to in para 35 above
are in point. While not necessarily conclusive, the fact that ParkingEye's payment structure in its car parks (free for
two hours and then a relatively substantial sum for overstaying) and the actual level of charge for overstaying (£85) are
common in the UK provides support for the proposition that the charge in question is not a penalty. No other evidence
was furnished by Mr Beavis to show that the charge was excessive".

Application of rule in the Cavendish Square case

15. "As the judge said, the fee had nothing to do with damages for breach of contract; it was payable on the happening
of a specified event. Accordingly, it does not fall foul of the rules against penalties: see Makdessi v Cavendish Square
Holdings BV [2015] UKSC 67; [2015] 3 W.L.R. 1373 per Lord Neuberger and Lord Sumption at paragraphs 12-15". -
Edgeworth Capital (Luxembourg) Sarl v Ramblas Investments BV [2016] EWCA Civ 412.

16. "Since the Lord Ordinary issued his opinion, the UK Supreme Court has carried out a comprehensive review of the
law of unenforceable penalty clauses in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2015] 3 WLR
1373. It is clear from this authority that the law on penalty clauses applies not just to a specific fixed sum in the event
of breach of contract, but to a range of circumstances, including the situation in which a person is required to give up
or surrender property at other than value." - Gray v Braid Group (Holdings) Ltd [2016] CSIH 68; 2016 S.L.T. 1003.

17. "130. The issue on this aspect of the case is simply whether the relevant clause is in law an unenforceable penalty
clause. It is common ground that following Makdessi v Cavendish Square Holding BV [2015] UKSC 67, [2016] AC
1172, to impugn a provision as an unenforceable penalty, it must be (i) a secondary obligation (ii) triggered on breach
of contract which (iii) imposes a disproportionate detriment on the contract breaker. ... 134. In this case it seems to me
that the three limbs of the Makdessi test are very much intertwined. If one looks at the acceleration which gives rise to
this clause as being something which is a breach, and as bringing the contract to an end, it suggests the approach which
Mr Malek advocated, namely that the contract has come to an end and providing for payment of the overall interest
and other amounts payable over the lifetime of the contract (albeit discounted) might be disproportionate." - Banco San
Juan Internacional Inc v Petroleos de Venezuela SA [2020] EWHC 2937 (Comm).

Penalty clauses potentially void for unfairness

18. The Consumer Rights Act 2015 includes in Sch. 2 a list of consumer contract terms which have the potential to be
regarded as unfair, depending on all the circumstances. The list includes at para.5 "A term which has the object or
effect of requiring that, where the consumer decides not to conclude or perform the contract, the consumer must pay
the trader a disproportionately high sum in compensation or for services which have not been supplied".

Deemed contracts

19. The rule against penalties does not apply to a statutory system which operates through a deemed contractual arrangement
- SHB Realisations Ltd (formerly BHS Ltd) (In Liquidation), Re [2018] EWHC 402 (Ch); [2018] Bus. L.R. 1173.

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Repayment on demand

20. "I have no hesitation in rejecting KCM's assertion that the right to accelerate future payments constitutes a penalty. The
Settlement Agreement in effect operated as a loan pursuant to which KCM was, subject to compliance with certain
agreed terms, granted yet further time in which to discharge its admitted liability to ZCCM. An accelerated payment
clause in a loan agreement entitles the lender to immediate repayment of the sums that he has lent: i.e. to the repayment
of his own money. As Neill LJ observed in The Angelic Star [1988] 1 Lloyd's Rep. 122 at p.126: "…I know of no rule that
prevents a lender from stipulating that in the event of a failure to make an instalment payment on the due date the whole
loan becomes due and repayable forthwith…" There is to my mind nothing extravagant, exorbitant or unconscionable
in requiring a commercial party under the terms of a settlement agreement such as the present immediately to pay the
full amount of the loan in the event of any non-compliance with its terms. ZCCM had a legitimate interest in requiring
strict compliance with the Settlement Agreement and KCM knew exactly what it was signing up to when concluding
this arms' length agreement with the benefit of expert legal advice." - ZCCM Investments Holdings Plc v Konkola
Copper Mines Plc [2017] EWHC 3288 (Comm).

Procedure: determination as preliminary point of law

21. "Whether Clause 8.12 of the APSA agreements is a penalty is a matter that is appropriate to be determined at a summary
judgment hearing - see Chitty on Contracts, 33rd edition, at paragraph [36-196] as a short question of law. The leading
case is Cavendish Square Holding BV v Makdessi [2016] AC 1172." - Cargill International Trading Pte Ltd v Uttam
Galva Steels Ltd [2019] EWHC 476 (Comm).

Legislation
Key Acts
Unfair Terms in Consumer Contracts Regulations 1999/2083

Unfair Terms in Consumer Contracts Regulations 1994/3159

Unfair Contract Terms Act 1977

Consumer Rights Act 2015

Key Subordinate Legislation

Key Quasi-Legislation
None.

Key European Union Legislation

Key Cases
Makdessi v Cavendish Square Holdings BV [2015] UKSC 67; [2015] 3 W.L.R. 1373

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ParkingEye Ltd v Beavis

Edgeworth Capital (Luxembourg) Sarl v Ramblas Investments BV [2016] EWCA Civ 412

Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2015] 3 WLR 1373

Gray v Braid Group (Holdings) Ltd [2016] CSIH 68; 2016 S.L.T. 1003

SHB Realisations Ltd (formerly BHS Ltd) (In Liquidation), Re [2018] EWHC 402 (Ch); [2018] Bus. L.R. 1173

ZCCM Investments Holdings Plc v Konkola Copper Mines Plc [2017] EWHC 3288 (Comm)

GPP Big Field LLP v Solar EPC Solutions SL (Formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)

Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm)

Banco San Juan Internacional Inc v Petroleos de Venezuela SA [2020] EWHC 2937 (Comm)

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