Changes to Law on Contractual Penalties and Liquidated Damages

New Supreme Court appeal case on contract law

The judgments given in the Supreme Court decision on 4th November 2015 in the cases of 'Cavendish-v-Makdessi' and 'ParkingEye–v–Beavis' have had the effect of making some important changes to the law on penalties in contracts. These important cases are the first authoritative final appeal court decisions in 100 years to fully address, clarify and amend the law on penalties in contracts.

The law on contractual penalties

The background is that many contracts, particularly contracts between commercial entities, include “liquidated damages” clauses, and in some cases as a matter of contract law they might amount to penalties. If a “liquidated damages” clause is deemed by a court to be a penalty, it will not be enforceable. It is therefore important for contract parties to minimise the risk that any clause in their contract is a penalty.

Additions and changes to our portfolio

In the light of the changes in the law made by the recent Supreme Court case and the useful guidance about penalties set out in the judgments in that case, we have taken the opportunity of updating relevant templates .We have also created a new Guidance Note on Contractual Penalties that includes an Annex which provides a detailed explanation on the legal background to the subject of penalties, liquidated damages and other remedies for breach of contract which are often included in contracts.

Updated templates

We have reviewed and amended all relevant agreement templates in our Business folder. Certain Property documents have also been amended; to access them please click here. As a result, all of our business agreement and property agreement templates now fully take account of the changes and clarifications to contract law made in the Supreme Court’s recent decisions in the Cavendish and ParkingEye cases.