Inflated damages in tyres case
In the 1915 landmark case of Dunlop Pneumatic Tyre Company, the House of Lords said that it was legitimate for a contract to specify (“liquidate”) the amount of damages payable following a breach of contract, as long as the amount specified to be payable was not a penalty. In order to be valid, the amount had to be a “genuine pre-estimate” of the maximum possible financial loss of the “innocent” party.
Parking charges
Recent court decisions have been moving away from concept of a “genuine pre-estimate of loss”, as being the test for the validity of liquidated damages clauses, towards a concept of “commercial reasonableness”.
In ParkingEye, 100 years after Dunlop, the Supreme Court (the successor to the House of Lords) has finally shown the red card to the “genuine pre-estimate” test. In that case the court said that the test is now whether the amount specified as being payable following a breach, "is out of all proportion to the innocent party's legitimate interest in the performance of the contract".
The court therefore upheld a charge of £85 for staying 53 minutes after the 2 hours permitted on the basis that “ParkingEye had a legitimate interest in charging overstaying motorists which extended beyond the recovery of any financial loss”.
Payment forfeit for competing
ParkingEye was heard at the same time as another case on penalties, Cavendish Square v Makdessi. This concerned the enforceability of a clause forfeiting certain payments for the sale of an advertising business if the seller competed with the business they had just sold. Although the seller forfeited millions of pounds, the court upheld the clause. The court said that there is a strong presumption that sophisticated commercial parties, with similar bargaining power and the ability to take legal advice, should be able to agree an appropriate remedy for a breach of contract without the court overturning this.
Implications for payment mechanisms
Recent good practice has involved drafting performance incentives in contracts so as to give the contractor additional payments for meeting specific performance targets. Quite often the amount to be used to pay these incentives was first “top slice” deducted from the total amount payable to the contractor.
These were drafted as “incentives”, rather than performance deductions, so as not to fall foul of the law against penalties. In most cases the employer would not suffer any financial loss from the contractor’s failure to meet those performance targets, so the amounts deducted could not properly be regarded as “genuine pre-estimates of loss.”
ParkingEye now enables employers to draft these as deductions for not achieving specified performance targets. Reasonable deductions are likely to be upheld on the basis that they are proportionate to the employer’s legitimate interest in the performance targets being achieved. This is preferable to having to deduct money from the payments to the contractor that is “handed back” as “incentives” for meeting the performance targets. This could lead to a much simpler way of drafting the performance incentive/performance deduction provisions in maintenance, construction and ICT contracts and any other contracts where poor performance is to be penalised financially.
If you would like advice on drafting payment mechanisms, performance incentive/deduction provisions or any aspects of the ParkingEye decision, please contact Andrew Millross .
The Government has announced its intention to lift the shielding requirement for extremely vulnerable people. Katherine Sinclair and Libby Hubbard discuss...
The Corporate Insolvency and Governance Act 2020 has now received Royal Assent. It applies to most companies as well as Limited Liability Partnerships.
The latest development in the long history of sodium valproate was the publication of The Independent Medicines and Medical Devices Safety Review today
Failure to provide minimum pension contribution protection following a TUPE transfer can end up costing a lot more than if provision had been made.
More than 700 people were consulted about their experiences of pelvic mesh, Primodos and an epilepsy drug called Sodium Valproate.
Making an application to the Court of Protection to make or change a Will for someone who is not able to do this themselves due to lacking mental capacity.
The online divorce system is a fantastic facility available to both legal professionals and litigants in person.
In a comprehensive judgement, the High Court rejected a challenge by Stagecoach to the procurement of new franchises for the South Eastern, East Midlands and West Coast rail lines.
With lockdown restrictions further lifting on 4 July, charities have a lot to think about.
We have advised a number of families, alongside Ms Ockenden’s review, in relation to concerns as to the care and treatment provided by maternity services at Shrewsbury and Telford Hospitals Trust.
To receive invitations to our events, as well as information and articles on legal issues and sector developments that are of interest to you, please sign up to Newsroom.