Anyone drafting liquidated damages clauses should read the Supreme Court’s judgments in the El Makdessi and ParkingEye cases published today, which should make it easier to ensure that these clauses are watertight (see https://www.supremecourt.uk/cases/uksc-2013-0280.html). A seven-judge Supreme Court found the disputed clauses in each case to be valid.
The court upheld the existence of the penalty rule but arguably reduced its scope, finding the concept of a “genuine pre-estimate of loss” to be unhelpful. The true test should now be whether the disputed contractual term is a secondary obligation that imposes a detriment on the contract-breaker that is disproportionate to any legitimate interest of the innocent party in enforcing the primary obligation. In El Makdessi the two disputed clauses were primary obligations and thus not penal. In ParkingEye, the charge levied on overstaying motorists, although high, was not penal for a number of reasons including the fact that it enabled the company to manage the car park efficiently for the benefit of shops, shoppers and motorists.