The rule against penalties means you must not be too greedy

13th December 2014

In the recent case of El Makdessi v Cavendish Square Holdings, the Court of Appeal has considered whether certain clauses in a share purchase agreement that were penal in their nature were unenforceable as a result.

The clause in question provided that on the seller’s breach of a restrictive covenant, the buyer would be released from obligations to pay deferred consideration and entitled to force the seller to transfer additional shares at a value that was unfavourable to the seller.

The Court of Appeal found that the buyer’s rights went further than compensating the buyer for the loss he had suffered. They were wholly disproportionate to the loss that could be attributed to the breach. As a result the court held that that the buyer could not enforce the clause against the seller.

Generally there is a reluctance by the courts to interfere with the terms of a commercial contract negotiated between two willing commercial parties, particularly where there is equality in bargaining power. However this case provides a reminder that the court will step in if a contractual obligation goes beyond what could have been considered commercially justifiable at the time the contract was entered into.

Cited Case: El Makdessi v Cavendish Square Holdings BV and another [2013] EWCA Civ 1539

Please contact Henry Maples if you would like to discuss any of the issues raised in this article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 13 December 2013. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, December 2013.