UK: Avoiding Unenforceable Penalty Clauses

The Supreme Court in 2015 reviewed and redefined the rules governing unlawful penalty clauses. The new test considers whether there is a legitimate interest in creating damages or a fine and whether such fine imposes an obligation that is extravagant, exorbitant or unconscionable. When drafting, the new test should be applied to ensure a provision is a valid damages clause, not an unlawful penalty.

Background In the jointly heard appeal of Cavendish Square Holdings BV v Talal El Makdessi and ParkingEye Limited v Beavis1 the Supreme Court found that the clauses put forward as being unenforceable penalty clauses were in fact valid and enforceable.

Cavendish Square Holdings BV v Talal El Makdessi concerned a seller who had breached certain restrictive covenants under a share purchase agreement ("SPA"). The SPA contained provisions that if the restrictive covenants were breached the seller would (i) not be entitled to receive two final instalments of the purchase price; and (ii) be required to sell his remaining shares at a price that excluded the goodwill. The seller argued that this was an unenforceable penalty.

The facts of ParkingEye Limited v Beavis were that Mr Beavis parked his car in a car park managed by ParkingEye for more than the two hour limit. The clearly publicised parking charge for exceeding the two hour limit was Ł85. Mr Beavis disputed the fine, claiming it was an unenforceable penalty clause. In both cases, the Supreme Court found the clauses were not penalties.

Spotting a penalty clause The traditional test for spotting a penalty, in essence, is that the clause has the predominant purpose of deterrence rather than a genuine pre-estimate of loss. The implication of this is that penalty clauses are unenforceable; whereas provisions containing a genuine pre-estimate of loss can be valid liquidated damages clauses.

"Deterrence" and "genuine pre-estimate of loss" were originally included as part of four tests to determine the validity of damages clauses in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd2. One hundred years later in Cavendish/ParkingEye, the Supreme Court found that "deterrence" and "genuine pre-estimate of loss" were unhelpful and the test needed redefining. The Supreme Court held 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"3.

The test may be divided as follows:

Has a primary obligation been breached which has triggered a secondary obligation? If so:

  1. is any legitimate business obligation protected by that secondary obligation? or
  2. does the secondary obligation impose an obligation that is extravagant, exorbitant or unconscionable?

If the answer is yes then...

Drafting tips for avoiding unenforceable penalties

Do consider whether any reimbursement or damages to an innocent party for breach of contract is created by a secondary obligation (for instance, if the secondary obligation of a supplier to pay liquidated damages is created by the breach of the supplier's primary obligation to deliver goods on time). Is there a way of clarifying that the result of any breach forms part of the primary obligation?

And, if there is a secondary obligation imposing damages:

Do make sure that there is a "legitimate interest" which is proportional to the innocent party enforcing the primary obligation. Is there a wider commercial or socio-economic justification for the clause?

Do consider whether it is a genuine pre-estimation of loss. A clause containing a pre-estimation of loss would be valid with no need to show anything further such as "legitimate interest".

Do not make it "unconscionable" or "extravagant". Perhaps consider the industry practice, for instance in ParkingEye the Court considered the standard parking charges.

Do not discard Dunlop. The tests in Dunlop are still good law and the Supreme Court set out that these tests are a useful tool for deciding whether "unconscionable" or "extravagant" can properly be applied to simple damages clauses in standard contracts.

Other things to consider

The parties The sophistication and bargaining power of the parties may make a difference to the Court's willingness to determine that a clause is an unenforceable penalty. If a contract has been negotiated with parties of a similar bargaining power being properly advised, the Court will have a strong initial presumption that the parties are the best judges of what a legitimate provision of the contract is.

The type of agreement

  • Construction contracts: make sure that it is a liquidated damages clause and not a penalty.
  • Acquisition agreements: can restrictive covenants (for example, non-compete provisions) be linked to the primary obligation of the contract (i.e. the sale of the shares or the assets)?
  • Articles of association and shareholders' agreements: May not create primary obligations (for instance bad leaver provisions) but can create secondary obligations imposing damages. In which case, legitimate interest and proportionality should be considered.


  1. [2015] UKSC 67
  2. [1914] UKHL 1
  3. Cavendish Square Holdings BV v Talal El Makdessi and ParkingEye Limited v Beavis [2015] UKSC 67, paragraph 32

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.