1278

Cavendish Square Holding BV v Makdessi (SC(E))

(SC(E)) [2016] AC
Lord Hodge JSC

proposition that Parties cannot lawfully enter into an agreement that the A
one party shall be punished at the suit of the other. Lord Young enunciated
a similar principle in Robertson v Drivers Trustees (1881) 8 R 555, 562,
stating that the law will not let people punish each other. In the Forrest &
Barr case 8 M 187, which concerned the purchase and erection of a crane in
a shipyard by a specied date and a penalty of £20 per day for delay, Lord
President Inglis stated, at p 193, that equity would interfere to prevent a
B
claim being maintained to an exorbitant and unconscionable amount. Lord
Deas, Lord Ardmillan and Lord Neaves used the same expressions, at
pp 198, 199 and p 203 respectively; Lord Kinloch, at p 201, spoke of a claim
being so utterly extravagant and unreasonable that the court could infer
that it was a penalty or punishment.
254 This approach to penalty clauses is consistent with the judgments
of the House of Lords in the Dunlop case [1915] AC 79 in which an C
extravagant disproportion between an agreed sum and the innocent partys
interest in the due performance of the contract would amount to what Lord
Parmoor described, at p 100, as a penal sum inserted as a punishment on
the defaulter irrespective of the amount of any loss which could at the time
have been in contemplation of the parties . . .
255 I therefore conclude that the correct test for a penalty is whether the
D
sum or remedy stipulated as a consequence of a breach of contract is
exorbitant or unconscionable when regard is had to the innocent partys
interest in the performance of the contract. Where the test is to be applied to
a clause xing the level of damages to be paid on breach, an extravagant
disproportion between the stipulated sum and the highest level of damages
that could possibly arise from the breach would amount to a penalty and
thus be unenforceable. In other circumstances the contractual provision that E
applies on breach is measured against the interest of the innocent party
which is protected by the contract and the court asks whether the remedy is
exorbitant or unconscionable.

Whether the rule against penalties should be abrogated or altered?

256 I am not persuaded that there is any proper basis for abrogating the F
rule against penalties or restricting its application to commercial
transactions where the parties are unequal in their bargaining power and
there is a risk of oppression.
257 The rule against penalties is an exception to the general approach
of the common law that parties are free to contract as they please and that
the courts will enforce their agreementspacta sunt servanda. The rule
against penalties may have been motivated in part by a desire to prevent G
oppression of the weaker party by the more powerful party to a contractual
negotiation. As I have said, Viscount Stair spoke of this danger when he
spoke of necessitous debtors having to yield to exorbitant penalties: IV.3.2.
Diplock LJ in the Robophone case [1966] 1 WLR 1428, 1447A recognised
the reality that many contracting parties could not contract ¼ la carte but
had to accept the table dhte of the standard term contract. In AMEV-
H
UDC Finance Ltd v Austin (1986) 162 CLR 170, 193—194 Mason and
Wilson JJ suggested that the rule was aimed at preventing oppression and
that the nature of the relationship between the contracting parties was a
factor relevant to unconscionableness. In Philips v Hong Kong (1993) 61
BLR 41, 58—59 Lord Woolf suggested that in some cases the fact that one of

' 2016 The Incorporated Council of Law Reporting for England and Wales