## Facts

- The case combined appeals in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis, both addressing the enforceability of alleged penalty clauses.
- In Cavendish v El Makdessi, Cavendish purchased a controlling interest in a marketing business from El Makdessi, with a non-compete covenant restricting El Makdessi from competing. Breach would forfeit final purchase installments and allow Cavendish to force the sale of remaining shares at a discounted rate.
- El Makdessi breached the non-compete clause, and Cavendish sought to enforce these consequences; El Makdessi claimed the clauses were unenforceable penalties.
- In ParkingEye v Beavis, ParkingEye operated a retail car park allowing two hours’ free parking, after which an £85 charge was imposed for overstaying. Beavis exceeded the time limit and was issued the charge, which he argued was an unenforceable penalty.
- Both cases explored whether the given clauses were penal and thus unenforceable under contract law.

## Issues

1. Whether the contractual clauses in both cases constituted unenforceable penalties under the traditional rule.
2. What the appropriate legal test is for determining if a clause is penal.
3. Whether the clauses in both the Cavendish and ParkingEye cases satisfied the requirements of the penalty rule as reformulated.

## Decision

- The Supreme Court established a new test for penalty clauses, focusing on whether the detriment imposed is out of proportion to any legitimate interest of the innocent party beyond compensation.
- The clauses in Cavendish v El Makdessi were upheld; the Court found Cavendish’s interests in protecting goodwill justified the consequences for breach.
- The £85 parking charge in ParkingEye v Beavis was also upheld; the Court found ParkingEye had a legitimate interest in regulating parking and ensuring space availability, making the charge proportionate.
- The Court departed from the traditional focus on genuine pre-estimate of loss, adopting a broader, more commercial approach.

## Legal Principles

- The penalty rule renders unenforceable any clause that imposes a detriment on the contract-breaker that is out of all proportion to the innocent party’s legitimate interest.
- Legitimate interests can extend beyond financial compensation and include broader commercial objectives.
- The proportionality of the clause to the legitimate interest is the central question; unconscionable or extravagant clauses remain unenforceable.
- Courts should generally not interfere with clauses freely agreed between parties of comparable bargaining strength.

## Conclusion

The Supreme Court in Cavendish and ParkingEye clarified and reformulated the penalty rule in English contract law, allowing enforcement of clauses proportionate to a party’s legitimate commercial interests and establishing that protection against penalties is limited to cases where clauses are unconscionable or grossly disproportionate.


Cavendish Square Holding BV v El Makdessi, ParkingEye Ltd v Beavis [2015] UKSC 67