Penalty clauses: how to stay sweet following Candy

This update looks at the recent case of Holyoake v Candy (Holyoake), which provided useful guidance on how the English courts interpret the Penalty Rule and how careful drafting can sometimes take a clause outside of its scope.

Parties will often agree in advance a specified sum that will be payable in the event of certain breaches of contract. These clauses are known as liquidated damages clauses and are an important feature of engineering, procurement and construction (EPC) contracts or operation and maintenance (O&M) contracts of the type typically used in large-scale energy infrastructure projects and contracts based on the FIDIC, IChemE and MF/1 forms of contract. They are important as they may, where there has been delay, be the clause which allows the project to remain financially viable (and may be an essential term from the perspective of securing financing for the project).

However what purports to be a liquidated damages clause may, as a matter of English law, be regarded as a penalty, and would therefore be unenforceable (the Penalty Rule). The approach to whether a particular clause is, or is not, a penalty clause, has relatively recently been reviewed in Cavendish Square Holdings BV v El Makdessi and Parking Eye Ltd v Beavis. Holyoake offers further insight into the practical application of the Penalty Rule.