Contentioius Commentary 1 Newsletter December 2015 Contentious Commentary Contract money, the obligation to pay the On the penalty spot specified sum is a secondary obligation which is capable of being Contents The rule on penalty clauses is alive! a penalty; but if the contract does English contract law generally adopts The rule on penalty clauses is not impose (expressly or impliedly) a laissez faire approach – the parties restricted but left in place an obligation to perform the act, but can usually do what they want (at simply provides that, if one party Tolling agreement extends to least, unless consumers are involved). does not perform, he will pay the fraud despite lack of mention The rule on penalty clauses is one of other party a specified sum, the Waiver of immunity for assets the few common law rules that obligation to pay the specified sum allows an injunction controls what the parties can agree. is a conditional primary obligation Terms will rarely be implied It bans an agreement requiring a and cannot be a penalty." into contracts party in breach of contract to pay a Contractual remoteness sum out of all proportion to the losses The rule can therefore be evaded by applies to tort claim caused by the breach in order to deter appropriate drafting in some – breach. Because of the rule's perhaps many – cases (though the Securitisation vehicle can sue exceptional nature, it has always court will look to the substance rather valuers been controversial. than the form). Legal context is wide for privilege purposes In Cavendish Square Holding BV v When the rule applies, the test is no Potential waiver of privilege Makdessi [2015] UKSC 67, the longer about reasonable pre- can be undone Supreme Court was offered the option estimates of damages or whether a of abolishing the rule altogether or, clause is a deterrent to breach. Secret recordings not like Australia, of enlarging its scope. Instead, according to the majority privileged The Supreme Court did neither. reasoning, the question is whether the Company's legal advice not Instead, the Supreme Court fenced in clause "imposes a detriment on the privileged from shareholders the rule a little, but left it in place, contract breaker out of all proportion Forged charge replaced by though now with some uncertainty as to any legitimate interest of the subrogation rights innocent party in the enforcement of to the exact location of its boundaries. Directors' fiduciary duties the primary obligation". The Supreme Court decided that the owed only to the company rule only controls secondary The innocent party has no legitimate Personal service effected obligations that arise on breach of interest in punishing the contract- despite refusal to take contract. The rule does not enable breaker, but may have a broader document the court to determine the fairness or interest in performance than simply otherwise of the primary obligations obtaining compensation. Equally, Makdessi concerned the sale of an agreed by the parties, such as the since the rule interferes with freedom advertising business. The sellers price or when the price is payable. As of contract, the court should not be were paid certain sums up front, with a result astute to find penalties, and the two further payments to follow based parties' bargaining power will be a "in some cases the application of on operating profits. However, if the relevant factor (shading into the the rule may depend upon how the sellers broke the restrictive covenants territory occupied occasionally by the relevant obligation is framed... in the sale contract not to compete Unfair Contract Terms Act 1977). [W]here a contract contains an with the business they sold, the two Basically, if the clause doesn't, overall, obligation on one party to perform further payments ceased to be due seem too outrageous, the clause will an act, and also provides that, if he and, in addition, the buyer was be enforceable. does not perform it, he will pay the entitled to exercise an option to buy other party a specified sum of the shares that the sellers retained at 2 Contentious Commentary a price that did not include goodwill, Makdessi was heard with ParkingEye Consumer Rights Act 2015). which formed a large part of the price Ltd v Beavis, which concerned an £85 Whither the rule on penalty clauses? otherwise paid charge imposed on anyone who Wither it might well do. Cases parked for more than two hours at the The Supreme Court decided that holding clauses to be penalties have, Riverside Retail Park, next to neither clause was subject to the rule historically, been rare. That's not Chelmsford railway station. The on penalties because they were not likely to change - indeed, the Supreme Court accepted that the secondary clauses. The Supreme Court's approach will make charge was within the rule on penalty disappearance of the two additional it harder still to show that a clause is a clauses but also that it was well within payments was a price adjustment penalty. One might question whether the legitimate and proportionate clause, even though triggered by a test that includes the words interests concerned. These interests breach of contract. The upfront "proportion" and "legitimate" is really were wider than those of the party payments were all that the buyer was a test at all, but the Supreme Court that imposed the charge (a company prepared to pay for the acquisition of clearly intended "legitimate interests" that didn't own the shopping centre or a business from sellers who did not to be an expansive category, allowing the car park but ran the car park in observe their restrictive covenants. the court to take into account more return for collecting fines from The Supreme Court acknowledged than just a comparison with damages. overstayers). They included the that if the buyers could prove that In practice, a clause will have to be interests of the owner of the shopping they had suffered losses as a result of seriously egregious to offend the centre, which wished to ensure that the breach of contract, they could courts' sensibilities. And the bigger commuters didn't use the car park recover those losses as well as the parties and the better their advice, and to ensure a good turnover of avoiding the further payments. The the less likely that will be. The real customers at the shops it rented out. same applied to the call option. issue may be how far contracting The Supreme Court also decided parties are prepared to push at the In any event, even if the law on (Lord Toulson dissenting on this point) new boundaries. penalties had applied, it is clear that that the parking penalty charge did the Supreme Court would have found Clifford Chance LLP acted for the not offend the Unfair Terms in the clauses to be legitimate and defendant in Makdessi. Consumer Contracts Regulations (the proportionate. provisions of which are now the Immunity Art of the state A state's waiver of immunity does not need to mention injunctions expressly. Sovereign states have immunity from the jurisdiction of the English courts and also a separate immunity from enforcement procedures. Waiver of jurisdictional immunity does not carry with it waiver for enforcement purposes. The provisions in the State Immunity Act 1978 dealing with enforcement refer, in section 14(2)(a), to injunctions and specific performance and, in section 14(2)(b), to enforcement against assets. In Pearl Petroleum Co Ltd v Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm), Burton J held (obiter) that a contract under which a state waived "any claim to immunity for itself and assets" (sic) was enough to allow the court to grant an injunction. A waiver aimed at enforcement (the reference to assets) was enough to allow the grant of an injunction even though an injunction was not expressly mentioned, ie there need only be a dual waiver (jurisdiction and enforcement), not a triple waiver (jurisdiction, enforcement and injunctions). In Pearl Petroleum, the judge also decided that the constituent parts of a federal state do not enjoy immunity; only the state itself has immunity. However, if the constituent part is a separate entity within the meaning of section 14 and is exercising the state's sovereign powers, it might still be immune. Though somewhat opaque on the point, Burton J indicated that this meant that if a constitution allocates certain responsibilities to the constituent part, which then carries out those responsibilities, that will not constitute the exercise of the state's sovereign authority even if the nature of the activity is such that it would have done if carried out by the state itself. Instead, it will constitute the performance of the constituent part's authority, and the constituent part has no sovereignty for the purposes of the Act. An appeal might be useful. 35245-5-71-v1.0 UK-0010-LDR-CCE Contentioius Commentary 3 Toll gates Hoffmann's views on contractual claimant can, if it matters, rely on interpretation in Arnold v Britton [2015] whichever has the longer limitation A tolling agreement covers claims in fraud. UKSC 36, in Marks & Spencer plc v period. But this has come in for BNP Paribas Securities Services academic criticism, which has C alleged that D had been negligent Trust Company (Jersey) Ltd [2015] favoured confining the claimant to the in its valuation of 49 properties. C UKSC 72 Lord Neuberger meted out contractual measure of damages. In and D then reached a tolling the same treatment to Lord Wellesley Partners LLP v Withers LLP agreement that recited the allegations Hoffmann's views on implied terms.