UK: Liquidated Damages Following Cavendish

On 4 November 2015, the Supreme Court handed down judgment in joint appeals relating to Cavendish Square Holdings Ltd v Talal El Makdessi (the "Cavendish Appeal") and ParkingEye Ltd v Beavis (the "Beavis Appeal")1. These appeals provided the first opportunity for the Supreme Court, or the House of Lords, to consider the law concerning penalty clauses in approximately 100 years.

The two appeals related to non-construction-related disputes. The Cavendish Appeal concerned the effect of two clauses related to non-compete covenants in an agreement regarding the sale of a controlling stake in business. The Beavis Appeal concerned the enforceability of a parking fine.

As Andrew Weston sets out below, the Supreme Court judgment is relevant to construction contracts as it impacts upon the law relating to liquidated damages.

The most important proposition of law impacting on liquidated damages provisions typically found in construction contracts is derived from the leading judgment of Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New Garage Motor Co Ltd (1915).2

Following Dunlop the test commonly applied was: are the liquidated damages a genuine pre-estimate of the loss (rendering the clause compensatory)? If so, the clause was unlikely to be regarded as a penalty. However, if the amount of liquidated damages bore absolutely no resemblance to the loss, was extravagant and unconscionable, and was intended to deter a breach of contract, the court would be more willing to construe it as an unenforceable penalty.

As a consequence, an employer did not need to prove that it had actually suffered the loss covered by the liquidated damages provision. The liquidated damages could be recovered even if its actual loss was lower, providing they represented a genuine pre-estimate of the loss. If not, the provision was open to challenge on the basis it was a penalty clause, and not recoverable as a matter of law.

The Cavendish Appeal

Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. The terms of a share sale agreement ("the Agreement") contained restrictive covenants requiring Mr Makdessi not to become involved in a competing business. The sanctions for default were that Mr Makdessi would:

(i) forfeit the balance of price payable by Cavendish for his shares; and

(ii) be required to transfer all his remaining shares to Cavendish at a price which excluded any goodwill value.

Mr Makdessi accepted he had breached the restrictive covenants, but he denied the clauses were enforceable on the basis they were penalties.

At first instance, Mr Justice Burton found that the purpose of the restrictive covenants was not to deter a breach of contract, but to adjust the consideration between the parties. Cavendish was entitled to assess the value of a breach of the restrictive covenants by reference to the greatest loss that could conceivably be proved to have followed from the breach, given the potential for a substantial impact on the goodwill of Cavendish's business. Accordingly, the clauses were not found to be penalty clauses. Mr Makdessi appealed.

The Court of Appeal reviewed the law on penalties. It noted that the purpose of a penalty clause was to deter breaches of contract, and a clause would only be a penalty if it was "extravagant" and "unconscionable". Reference was also made to the more flexible approach taken in cases since Dunlop and focused on the dominant purpose of such clauses. It concluded that if the dominant purpose of a clause was to deter a breach of contract, and the amount of the sanction was commercially justified, then it was not a penalty clause.

The Court of Appeal upheld the appeal, finding that the two clauses were unenforceable penalty clauses intended to deter a breach of contract. It was found the provisions did not reflect a genuine pre-estimate of loss, were extravagant and unreasonable compared with the likely damage arising from the breach, and had no commercial justification. As a result, they were unconscionable. Cavendish appealed to the Supreme Court.

The Beavis Appeal

Mr Beavis parked his car at the Riverside Retail Park car park, Chelmsford, a car park operated by ParkingEye. Prominent signs were displayed around the car park advising that the maximum stay was two hours, after which time a parking charge of £85 would apply. Mr Beavis overstayed the maximum stay by one hour, as a result of which he was charged £85. He refused to pay on the basis that the clause was a penalty and was therefore unenforceable.

At first instance HHJ Moloney QC found in favour of ParkingEye. The Judge held that a motorist who parked in the car park did so on the terms and conditions at the entrance and on the noticeboards, which represented the contract between ParkingEye and Mr Beavis. The contract included an obligation to leave within two hours, in default of which there was an agreement to pay the £85 charge. The Judge acknowledged that the charge had the characteristics of a penalty as ParkingEye did not suffer any identifiable financial loss as a result of Mr Beavis' breach.

The Judge found that the predominant purpose of the £85 charge was to deter motorists from breaching the maximum two-hour free stay period (and therefore the contract), which would at first glance render it a penalty. However, the Judge found that the charge was commercially justifiable, was not improper or excessive in amount in the circumstances, and was not unfair pursuant to the Unfair Terms in Consumer Contract Regulations 1999 ("UTCCR"). Accordingly, the charge was enforced. Mr Beavis appealed.

The Court of Appeal considered:

(i) whether the £85 charge was unenforceable at common law on the basis it was a penalty; and

(ii) whether the charge was unfair (and therefore unenforceable) under the UTCCR.

In relation to the penalty issue and deciding whether the charge was extravagant and unconscionable under Dunlop, the Court of Appeal followed Judge Moloney QC's approach of considering the charge having regard to the actual loss suffered, the deterrent effect of the clause, and whether it was justifiable commercially.

The court held that the charge was not a genuine pre-estimate of loss; it was aimed at deterring motorists from overstaying the permitted period; was not extravagant or unconscionable; and crucially, was justifiable for both commercial and social reasons. The £85 charge was therefore upheld. Mr Beavis appealed to the Supreme Court.

Decision of the Supreme Court

The Supreme Court considered the development of the law in relation to penalty clauses. It noted that the distinction between a clause providing for a genuine pre-estimate of damages and a penalty clause had remained fundamental to the modern law as it was understood.

Two questions were posed:

(i) in what circumstances is the penalty rule engaged at all: and

(ii) what makes a contractual provision penal?

In relation to the circumstances in which the rule is engaged, it is necessary to consider how the obligation is framed, i.e., whether it is a conditional primary obligation or a secondary obligation providing an alternative to damages. This is fundamental as "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".

Conversely, "if the contract does not impose... 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."

In relation to the question as to what makes a contractual provision penal, reference was made to the four tests formulated by Lord Dunedin in Dunlop and to the essential question as to whether the agreement was "unconscionable" or "extravagant".

It was acknowledged that Lord Dunedin's four tests were useful tools for deciding whether a provision was unconscionable or extravagant where there were simple damages clauses in standard contracts. They were not easily applied to more complex cases. Lord Neuberger and Lord Sumption also noted that the assumption that a provision cannot have a deterrent purpose if there is commercial justification seemed to be questionable.

The Supreme Court was unanimous that the doctrine of penalties should not be abolished. However, the traditional test set down in Dunlop that a clause will be a penalty if it is not a genuine pre-estimate of loss and is found to be extravagant or unconscionable, or if its purpose is to deter a breach of contract, was rejected. The majority held that the correct approach in commercial cases was to have regard to the nature and extent of the innocent party's interest in the performance of the obligation that was breached as a matter of construction of the contract.

The test, formulated by the majority and set out at paragraph 32 of the Judgment, 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."

They went on to note:

"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."

Application of the test – the Cavendish Appeal

Applying this test to the facts in the Cavendish Appeal, the Supreme Court unanimously held that the two clauses in question were not penal in nature. The majority held that the clauses were primary obligations under the contract, as they provided for an adjustment to the purchase price that was equivalent to other primary price calculation clauses in the contract which meant the penalty rule was not engaged. This was distinct from secondary obligations that only come into play once a breach of contract occurs (such as an obligation to pay liquidated damages if the works are delayed). Further, the clauses were justified commercially by Cavendish's legitimate interest in protecting the goodwill of the business, and the parties were the best Judges of how that interest should be reflected in the contract.

Application of the test – the Beavis Appeal

In the Beavis Appeal the Supreme Court held that whilst the £85 charge was a secondary obligation, intended to deter motorists from a breach of contract (i.e. overstaying), it was not a penalty. This was so because ParkingEye, and also the car park owner, had a legitimate commercial interest in deterring motorists from overstaying by imposing a charge on them. The interest of the car park owner was the provision and efficient management of customer parking for the retail outlets.

The interest of ParkingEye was income from the £85 charge which met the running costs of what was considered by the Supreme Court to be a legitimate commercial scheme, plus a profit margin. The reasoning behind the imposition of the charge was entirely reasonable, and proportional to the commercial interests of ParkingEye and the car park owners. Accordingly, it was not penal.

Why is this case important to the construction industry?

A number of points arise out of the judgment:

  • Liquidated damages are secondary obligations and are in principle caught by the new rule for penalties.
  • As a general rule, there will be a strong presumption that the clause is not out of all proportion with the innocent party's legitimate interests if a commercial contract has been negotiated between two parties of comparable bargaining strength, and survived advisors' scrutiny. This is the case even if it is penal in nature, is intended to deter a breach of contract, and is not representative of any actual financial loss the innocent party would suffer.
  • Losses that cannot be easily quantified, such as reputational issues, goodwill and third party interests (i.e. other commercial "interests") may fall to be considered in determining the level of liquidated damages.
  • It is important to challenge liquidated damages that appear not to be commensurate with the commercial impact of delayed completion before the contract is executed.


The decision of the Supreme Court in the Cavendish and Beavis Appeals has replaced the century-old test in Dunlop with a more modern and flexible test. The test reflects the fact that parties may have a legitimate commercial interest to protect in enforcing the performance of contractual obligations which may extend beyond compensation for any identifiable commercial losses that breach may cause, or the deterrence of a breach of contract.

In the context of construction projects this new test will require consideration of the commercial justification for the liquidated damages clause at the time the contract was entered into; and whether the amount of liquidated damages is out of all proportion to the employer's legitimate commercial interest in deterring late completion of the works.

1. [2015] UKSC 67

2. AC 79 ("Dunlop")

This article is taken from Fenwick Elliott's 2016/2017 Annual Review. To read further articles go to

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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions