UK Supreme Court Provides Welcome Clarification to Rules on Penalty Clauses for First Time in a Century

10 November 2015
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Key takeaways

  • The Supreme Court’s decision brings welcome clarification and certainty to the law of penalties.
  • While Dunlop remains good law, the modern and authoritative test that will be applied is whether “the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.
  • Going forward, it will likely be difficult, but not impossible, for a party to challenge the enforceability of a provision in a negotiated commercial contract on the basis that it is a penalty.