A Constituent of Systematic Synchronisation of Private Law Rules
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Harry Maunder is 22 years old and from Dorset in the South West of England.
This submission concerns the future of the penalty rule doctrine in England and Wales.
A penalty clause, in order to be enforceable by the courts, requires that the clause does not extravagantly exceed an estimate in advance of loss upon breach. The party who is entitled to payment upon breach must also have a legitimate interest in enforcing performance, with the sum payable upon a breach not regarded as extravagant. This essay points to the contention surrounding the United Kingdom Supreme Court’s decision in Cavendish Square Holding BV v Makdessi: ParkingEye Ltd v Barry Beavis [2015], where the penalty rule was regarded as a haphazardly constructed edifice. But such a depiction, in my mind, is not wholly telling and somewhat unconvincing. Instead, what we see over the course of this paper is a prominent theoretical justification for the continued existence of the rule. It is, therefore, my contention that other well-established principles in English law pervade throughout the law of obligations and should be regarded as constituents of a systematic synchronisation of private law rules and not confined to the ash-heap of history.
This paper was written owing to a personal affinity towards advanced private law, more specifically, how parties moderate the courts’ rigid regiment for delivering remedies by inserting their own clauses to deliver desired outcomes.
- Harry Maunder, Author
Introduction
The Supreme Court’s Decision in Makdessi and ParkingEye[1] has fundamentally rewritten the law revolving around penalties. Traditionally, if the parties in a contract agree that, upon the event of a breach, the contract-breaker shall pay the other party a specified sum, the sum fixed might be classified by the courts either as a penalty (considered irrecoverable) or as liquidated damages (considered recoverable).[2] The true test developed by the courts, alongside the clause not extravagantly exceeding an estimate in advance of loss upon breach, is whether the party who is entitled to payment upon breach had a legitimate interest in enforcing performance and the sum payable upon a breach is not extravagant.
The rule is described by Lord Neuberger and Sumption as a “haphazardly constructed edifice which has not weathered well and which in the opinion of some should simply be demolished”.[3] However, the Supreme Court, in this case, chose not to demolish the law, and alternatively, narrowed its application, going against the recommendations of the Scottish Law Commission.[4] This paper contends that, despite pragmatic criticism, the rule is not without its justification for existence; the doctrine’s survival is justified, as it aligns with other well-established principles in English law and is best regarded as part of a coherent and rational set of private law rules.[5] The rule is more than a mere artefact of English Private Law that is preserved from abolition, only by reason of historical nostalgia. Rather, it ought to be rationalised as a manifestation of important principles within the law of obligations.[6]
This paper will be structured in five parts. First, the analysis starts with an outline of the development of the penalty rule doctrine prior to the Supreme Court decision in Makdessi. Second, the paper will evaluate the consequent impacts of the decision of the Supreme Court and discuss why, contrary to the High Court of Australia, a radical departure from the rule was not implemented into modern English contract law. Third, it will contend that the current rule is not without its faults and will proceed to identify pragmatic difficulties within the English position. Despite this, section four maintains that the rule is consistent with well-established principles, namely the law on specific performance and punitive damages, providing a theoretical justification for its continued existence. Fifth, it will be argued that the rule is encompassed by a paternalistic shift within the confines of modern law, which sees the courts relieving parties from oppressive terms that do not infringe upon the parties’ primary obligations; ultimately, upholding the notion of freedom of contract. Finally, it will conclude with comments as to the future direction of the rule.
[1] Cavendish Square Holdings BV v Talal El Makdessi; Parking Eye Ltd v Beavis [2015] UKSC 67.
[2] H Beale, Chitty on Contracts (33rd edn, Sweet & Maxwell 2015) para 27-004.
[3] Makdessi (n 1) [3].
[4] Scottish Law Commission in its discussion paper on penalty clauses (Scot Law Com (discussion paper No 161), (2016).
[5] Kal KC Leung, ‘The Penalty Rule: A Modern Interpretation’ Denning Law Journal 2017 Vol 29 pp 41- 67.
[6] ibid.
