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Penalty clauses and the courts – Does the UK approach differ from the rest of Europe?

by Prof Paula Giliker, Professor of Comparative Law (University of Bristol Law School).*

Contractual penalty clauses raise questions going to the heart of contract law: should the courts enforce clauses which make payment of a large sum of money due on breach of contract? The argument is that such clauses act as a penalty for breach and are used by economically stronger parties to “discourage” the other party from breaching the contract. The sums in question are often extortionate and bear no resemblance to the true losses of the parties. Should the courts intervene – and diminish the parties’ freedom to contract as they will – or should they simply enforce the contract?

This question was addressed by the UK Supreme Court in Cavendish Square Holdings BV v Makdessi; ParkingEye Ltd v Beavis ([2015] UKSC 67) and raises profound questions of the role of judges in policing contractual agreements and the “morality” of contract law. Continue reading