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Liquidated Damages and Penalty Clauses by Halson, Roger (8th March 2018)


Hon Lord Dyson

From: Liquidated Damages and Penalty Clauses

Roger Halson

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This is an area of law which is so important and of application in so many different contexts that it is remarkable that we have had to wait so long for a detailed consideration of it by an academic writer in the UK. But it has been worth the wait. Professor Halson has written an excellent book which will be an invaluable resource for any lawyer who is interested in the law of contract.

It is Professor Halson’s good fortune that he has written the book so soon after the promulgation in 2015 of the most important UK decision on the subject for more than 100 years, namely Cavendish Square Holding BV v Makdessi. He has subjected this difficult decision to a most penetrating analysis. His criticisms of it are fair, well reasoned, and compelling. He discusses in some detail the important issue of whether the penalty rule should have been abolished altogether and whether, if it was to be retained by the Supreme Court, a breach of contract was an essential prerequisite to its application. Unlike the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd, the Supreme Court decided that a breach of contract was an essential prerequisite. Professor Halson illustrates the way in which insistence on breach of contract can be evaded by various drafting techniques.

But as he points out, it is with respect to the ascertainment and application of the test for a penalty that the Cavendish case effected the greatest change to our understanding of the law. The magnitude of the change should not be disguised by the fact that the previous leading authority, Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, was not formally overruled, but rather was reinterpreted. The test laid down in Cavendish is that a clause will be unenforceable as a penalty which seeks to impose on a party in breach of contract (i) a detriment which is not proportionate to any legitimate interest of the other party, or (ii) in ‘straightforward’ cases, a detriment which is ‘extravagant and unconscionable’ in comparison with a ‘genuine pre-estimate’ of the loss that would result from the payer’s breach of contract. Professor Halson criticises this dual approach on a number of grounds, not least because it produces uncertainty as to which test is applicable on a given set of facts.

The book is replete with references to cases from other common law and civil law jurisdictions. The question of in what circumstances a provision should not be enforced by the courts on the grounds that it is a penalty has exercised judges for a very long time and no doubt will continue to do so. Judges have much to learn (p. vi) from each other. That is why copious citation from high-quality foreign decisions is so valuable.

There is much else of value in the book. Chapter 4 contains an excellent discussion of the rationale for the ‘penalty’ jurisdiction. This is the section which is the most rarefied and perhaps of least utility to the practitioner. But it makes for fascinating reading to anyone who is interested in the law.

Chapter 5 contains an insightful consideration of provisions which are analogous to stipulated damages clauses. Examples are advance payments, forfeiture clauses, and deposits. In this chapter, Professor Halson discusses some of the drafting techniques that are used to avoid the application of the penalty rule to them.

This is a significant and much-needed treatise on an important area of our law. In view of the importance of Cavendish, it is not surprising that it is a motif that runs right through the book. Much case law will be needed to work out the full effect and implications of the decision. Professor Halson’s invaluable book will be indispensable for all judges and practitioners who undertake that exercise.

The Rt Hon Lord Dyson

Master of the Rolls 2012–16