Damages Lecture

Introduction to remedies and damages

We have now covered the formation of the contract, privity of contract, the construction of the contract, vitiating factors and how obligations under the contract are discharged. This brings us onto the final element of contract law, the remedies for a breach of contract.

There are a number of different remedies under English law. The next chapter will cover all of these, but this chapter will focus solely on the most common and sought after remedy - damages. Damages in contract law can be defined as a sum of money paid to the innocent party in compensation for a breach of contract.

As you will know by now, contract law is based upon the freedom of the contracting parties. This concept is difficult to apply to the remedies and damages. When the parties make the agreement, they will hope that they both fulfil their obligations. Therefore, the intentions of the parties cannot usually be used in order to calculate an amount of damages that should be awarded under the contract. Instead, the amount of damages will be awarded based on the value of the interest the innocent party has in the contract. This may well be more than the value of the actual contract, as you will begin to understand as you progress through this chapter.

The case of Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 explained the basis of the remedy of damages. Lord Diplock stated that every contracting party has a secondary obligation to pay monetary compensation to the other party in the event they breach the contract.

The different types of damages

Before we begin examining the law behind damages, you should understand the two different types of damages:

  1. Compensatory damages
  2. Non-compensatory damages

Compensatory damages are an award of a sum of money which aims to compensate the claimant for his loss under the contract. This need not be limited to loss from the contract itself, and may compensate the innocent party for losses relating to subsequent contracts, which will be covered later in the chapter.

Non-compensatory damages are an award of a sum of money not only to compensate the claimant for his contractual losses, but also aim to compensate the claimant in relation to any bad conduct of the other party.

Compensatory damages are the most common form of damages, and will form the content of this chapter.

Compensatory damages

In order to assess whether an innocent party may be entitled to damages, there are six things that should be considered:

  1. Has the claimant suffered any loss?
  2. Is the loss suffered actionable?
  3. Did the breach of contract cause the loss?
  4. Was the type of loss reasonably foreseeable?
  5. Did the claimant mitigate the loss?
  6. Did the claimant contribute to the loss?

We will now examine each step in turn and consider the relevant legal principles

  1. Has the claimant suffered a loss?

The first step is to ascertain the loss the claimant has suffered under the contract. The general rule is that the claimant may only recover for his own loss - Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.

The claimant does not need to be able to identify an exact amount of loss. The fact there is a loss at all is sufficient to satisfy this first requirement. The courts will attempt to quantify the loss no matter the difficulty.

Case in focus: Chaplin v Hicks [1911] 2 KB 786

In this case, the claimant was a finalist in a competition along with fifty other people. The prize was a job as an actress. Each finalist was to book an appointment to have an opportunity to showcase their skills. The defendant did not allow the claimant to have an appointment, and they therefore missed out on the opportunity to win the competition.

The court held that the defendant had breached the contract with the claimant by not giving her a fair opportunity to participate in the contract. The court awarded damages. Despite the difficulty in calculating the value of her lost opportunity, the court was happy to award damages on this basis.

Chaplin v Hicks brings us onto an important rule relating to loss. In that case, there was no tangible loss as such, it was a lost opportunity. The loss of an opportunity can only amount to an actionable loss where it is the actions of a third party which determine whether the claimant would have made a gain (Allied Maples Group Ltd v Simmons & Simmons [1995] 4 All ER 907). The claimant need only to show that there was a speculative chance that they would have made the gain, it does not need to be likelihood or a certainty. Assessing this rule in relation to Chaplin v Hicks, the third party in that case was the panel of judges who would decide the winners of the competition, whereas the contracting party did not determine the potential gain of the claimant, they were only required to arrange the appointment.

Assessing the amount of the loss

The court will assess the loss at the date of the breach, but under circumstances where this would not be appropriate may assess the loss at a chosen date (Johnson v Agnew [1980] AC 367).

The aim of damages is to put the non-breaching party in the position they would have been in had the contract been performed as agreed (Robinson v Harman(1848) 1 Ex 850). In order to calculate this, we need to know the extent of the loss which results from the breach. There are two different ways in which this can be measured:

  1. Expectation measure
  2. Reliance measure

Expectation measure

Expectation measure involves a comparison between the claimant’s current position, and the position they would have been in had the contract been performed correctly. An example of this would be a contract for the sale of a car which should be worth £1,000. If the car is faulty, and is only worth £200, the expectation measure would be £800, as the car is worth £800 less than it should have been worth.

At this point it is worth noting that the expectation measure is subject to step four of our approach to assessing damages; whether or not the damage was foreseeable. This means that not absolutely everything under an expectation measure can be claimed, but this will become clearer when we move on to the forseeability later in the chapter.

The first important rule of the expectation measure is that it is calculated on the expectation that the breaching party would have performed their obligations under the contract, but no more and no less (Lavarack v Woods of Colchester Ltd [1966] EWCA Civ 4). Therefore, care should be taken when assessing the obligations under the contract - for example, take a contract of employment where a bonus may be awarded every month. This bonus would not fall under the expectation measure because it is not certain, it is only discretionary.

The above rule relating to discretionary parts of the contract does not apply where there is discretion as to how the contract is to be performed.

Case in focus: Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485

In this case, Bmibaby agreed to operate two aircraft from the airport for ten years. The contract did not expressly state a minimum number of flights. The airport generated money from each flight. Bmibaby only operated one aircraft for some time, and eventually stopped operating an aircraft at all, therefore breaching the contract. There was a question as to the amount of damages that should be awarded, as there was no minimum number of flights, there was no clear expectation measure.

The court identified this contract as being discretionary as to how the contract is to be performed. In other words, it was up to the defendant to choose how many flights they wanted to do. Therefore, the expectation measure will be assessed by the court considering how the contract would have been performed if there was no breach, rather than considering the minimum level of performance.

Exam consideration: In light of the above case, consider a contract that does specify a minimum level/amount of performance. What would the result for the amount of damages be?

The second important rule in relation to the expectation measure is the conversion of expectation loss to an amount of money which successfully puts the claimant into the position they would have been had the contract been completed correctly. There are two viable methods, and they often result in the same award. On some occasions, one method will be preferable as it will result in a higher amount of damages.

The first method is the difference between the value of performance provided and the value of performance that should have been provided. If we think back to the earlier example of the £1,000 car actually worth £200 - the value of performance £200, when it should have been £1,000, which gives us our difference of £800 which would be the amount awarded under damages. This is usually the applicable method for sales of goods.

The second method is the cost of curing the breach. In other words, how much will it cost the innocent party to rectify the breach of the defendant, either by paying someone else or the defendant to rectify it the breach. This method is more likely to be applicable in contracts for the provision of services. For example, in the case of a contract for the building of a house, if the contract was breached due to the unsatisfactory quality of the house, and it was going to cost £5,000 to get the house in a satisfactory state, the damages would amount to this cost. This is known as the ‘cost of cure’ approach.

There are certain circumstances which will not allow the ‘cost of cure’ approach to be used when calculating damages:

  • If the claimant does not intend to rectify the issues with the damages (Tito v Waddell (No 2) [1977] Ch 106
  • If the cost of cure is wholly disproportionate to the value the cure will add to the end product, for example, the cost of building an extension on a house which does not add little or no value to the market value of the house (Ruxley Electronics & Constructions Ltd v Forsyth [1995] UKHL 8)

Case in focus: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8

This case is an Australian case, and therefore is not binding on English law but only persuasive. However, it provides an excellent illustration of when the cost of cure might be disproportionate to the diminution in value.

In this case, a tenant of a commercial property destroyed the foyer of the property, with the knowledge that the landlord had specifically picked this foyer for the property. The tenant replaced the foyer with a different one. The landlord claimed for breach of contract, arguing that the tenant should pay the cost of the cure to replace the foyer with the previous one.

The new foyer only diminished the value of the property by $34,820 Australian Dollars, but to restore the foyer to its original condition would have costed $580,000 Australian Dollars. The court held that because of the actions of the defendant, removing a foyer they were aware the landlord had specifically chosen, the damages would not be limited to the $34,820 loss of value in the property, and the whole $580,000 was recoverable.

This case shows it is important to analyse the actions of the defendant in such cases, if they acted unconscionably the court are not likely to limit damages.

Exam consideration: If the tenant was never aware of the importance of the foyer in Tabcorp Holdings Ltd, do you think it would be likely that the damages would have been limited to the $34,820?

Reliance measure

The reliance measure aims to put the claimant back in the position he was before the contract was made. This is relevant for where one of the parties has incurred expenditure in preparing for their side of the bargain. At this point you need to remember that only one measure of damages can be relied on, expectation or reliance, as per Culinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292. Therefore, before a claimant decides to pursue a claim for damages, they should decide which of the measures is likely to compensate them more favourably.

Generally, the expectation measure is more favourable, as the claimant should always be expecting to profit from the contract. However, where the claimant has entered into a bad bargain, meaning the contract would not have been profitable, the reliance measure will be advantageous. Below is a quick example:

  • Party A enters into a contract with Party B to build a house 
  • Party A has spent £9,000 on the preparation for the contract
  • Party B then breaches the contract so that Party A can claim for damages
  • Party A has now realised that the contract would have made a loss of £5,000
  • Party A’s expectation measure would be a loss of £5,000
  • Party A’s reliance measure is £9,000 (the money spent on preparing for the contract)
  • As the reliance measure is more favourable, Party A would use this to calculate damages

However, in C & P Haulage v Middleton [1983] EWCA Civ 5 the court ruled that where the defendant can show that the reliance measure of damages exceeds the claimant’s expectation loss, the claimant cannot claim the reliance measure.

Therefore, in our example, the reliance measure of £9,000 exceeds the expectation loss of £5,000, meaning the reliance measure could not be claimed for. This means that the reliance measure is not as effective as it might be. The justification for this rule is that the courts are unwilling to put the parties in a better position that they would have been in had the contract been properly performed. However, there are two situations where it still may be used:

  • Where the reliance measure is less than the expectation measure (but in this case it would be preferable to just claim via the expectation measure)
  • Where the expectation measure is difficult to calculate as it is hard to show what would have happened if the contract was properly performed
  1. Is the loss suffered actionable?

Now we have established how loss will be calculated, it must be considered whether or not the loss suffered is actionable. This section will examine a number of common categories and provide the legal principles relating to them.

Financial Loss

Financial loss refers to where the claimant is in a worsened financial position as a result of the contract, either through less money, or less assets. This is the most common category of loss and it will always be an actionable type of loss (subject to causation and remoteness).

The consumer surplus

This consumer surplus is the amount by which a particular consumer values the performance of a contract above its market value for some particular reason. In order to understand this, here are some cases where this was relevant:

  • Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 - The contract was for a holiday, the consumer surplus being the value the claimant put on the relaxation on holiday;
  • Ruxley Electronics and Construction Ltd  v Forsyth - The contract was for the building of a swimming pool, the consumer surplus being the value the claimant put on the swimming pool being particularly deep because he was very tall.

The matters are not of a financial value - in Jackson, the claimant has not missed out on anything financial, only the relaxation that was important to them. Therefore, it can be said that the claimant has suffered a loss of some sort. However, it is difficult to assess the value of these consumer surpluses, and whether they should be an actionable loss.

The case of Watts v Morrow [1991] 1 WLR 1421 ruled that damages cannot be awarded for distress caused by breach of contract. Therefore, these consumer surpluses are not actionable. However, they created a particular category which would be actionable:

Where the contractual objective is to provide relaxation, pleasure or peace of mind, damages may be awarded if this is not provided.

This approach is slightly narrower than the consumer surplus. Consider Ruxley and the purchase of the swimming pool. The object of the contract was to build a swimming pool; therefore it would not fall inside this category. However, in Jackson it would be accepted that a contract for a holiday has the objective of providing relaxation, meaning it would fall inside this category and damages would be able to be claimed.

The rules regarding claiming for consumer surplus were clarified in Farley v Skinner [2001] UKHL 49. In this case, Farley purchased a house near Gatwick airport. He asked his surveyor of the house to take note of any noise from the airport, as he wanted it to be sufficiently quiet. The surveyor reported the noise would not be a problem, but Farley found it was very noisy once he had moved in.

The court awarded Farley £10,000 worth of damages for discomfort. The judges in this case came to the same decision, but under two different grounds:

  1. The concept of consumer surplus - peace and quiet were evidently important to the claimant. It was not required to show that this was the sole object of the contract
  2. Distress (this will be covered in the next section of the chapter)

Therefore, it can be seen that the English courts are willing to accept consumer surplus as an actionable loss, but it must be treated with caution and be clear that the consumer surplus was important to the claimant. Here are some important things to remember:

  • The award for non-financial loss will be small
  • The foreseeability of the loss will be difficult to prove (see the section on causation)

Exam consideration: When answering a question which relates to a consumer surplus it would be wise to discuss Farley v Skinner and Watts v Morrow, explaining the courts conservative approach to such cases. As long as you justify your thoughts and talk about the ‘objective’ of the contract for the claimant, you should be able to come to a logical conclusion and ensure you get a lot of marks.

Distress

Distress resulting from a contract was the basis of Lord Scott’s decision in Farley v Skinner. Distress is different to consumer surplus in that it actually results in a negative experience, physically or mentally, for the individual. Consumer surplus relates to an expectation, whereas distress is an actual result.

Distress being an actionable type of loss was questioned by the other judges in Farley v Skinner. Lord Scott explained that the question to ask is whether there has been distress caused by an unwelcome sensory experience. In Farley, the distress was caused by the unwelcome noise.

However, the difficulty in using the test from Farley v Skinner is that the legal authority is questionable. The test did not form the ratio decidendi of the decision. Every other judge based their decision on the consumer surplus.

Usually, there is an overlap between the consumer surplus and distress. One or the other may be claimed. It is suggested that the legal basis for claiming under consumer surplus is favourable due to the majority of the judges opting for it in Farley v Skinner. This is not to say the test for distress from Lord Scott should not be applied, just that it should be done cautiously and you should explain the weakness of the concept.

  1. Did the breach of contract cause the loss?

In order for a loss to be actionable, the claimant must show that the breach of contract caused the loss. Causation requires both legal, and factual causation.

Factual causation

Factual causation requires an application of the ‘but for’ test; but for the breach of contract, would the claimant have suffered the loss?

This is a simple concept and is the easier of the two tests to prove.

Legal causation

Legal causation requires the breach of contract to be the direct cause of the loss. There must not be any subsequent actions which breach the ‘chain of causation’. This actions can be those of the claimant, or a third party.

If the claimant may have broken the chain of causation, the courts will consider whether the acts of the claimant were reasonable or not. The claimant will break the chain of causation where they were so unreasonable that it must relieve the defendant of all liability. This threshold is very high and difficult to prove.

If it is a third party who has broken the chain of causation, there are a number of things to consider:

  • Did the claimant have a duty to prevent the act occurring? (Stansbie v Troman [1948] 2 KB 48). If the claimant had a duty to prevent the act occurring, the action may break the chain of causation.
  • How likely was the intervening act to happen? (Monarch Steamship Co Ltd v Karlshamms Oljefabriker [1949] AC 196). The more likely the act to happen, the less likely it would break the chain of causation.
  • How reasonable was the intervening act?  The more reasonable the act, the less likely it would break the chain of causation.
  1. Was the type of loss reasonably foreseeable?

This stage of assessing whether damages will be an appropriate remedy is the most important stage, and is where a lot of claims will fail. The purpose of this stage is to consider the remoteness of the damage. Consider the following example:

  • Party A contracts with Party B for some denim
  • Party A intends to use the denim to make into jeans and sell to Party C
  • The denim is of a poor quality, meaning Party A cannot fulfil their contract with Party C
  • As a result, Party C ceases all dealings with Party A
  • Party A has been dealing with Party C for ten years, and would be dealing with them for the foreseeable future
  • Can Party A claim for all future earnings they would have made with Party C from Party B, as Party B’s breach of contract caused Party C to cease dealings with them?

This is a question of foreseeability; is it reasonable that Party B would have foreseen that Party A would lose their lucrative contracting deal with Party C? In this case, probably not, those subsequent contracts could be worth millions. Therefore, the courts have some tests which impose limitations on what damages can be claimed.

In the case of Hadley v Baxendale, the test for foreseeability of damages was laid out. Alderson B explained that where there is a breach of contract, damages can be claimed under two different limbs:

  1. The damages which would fairly and reasonably be considered to arise naturally from the breach of contract itself
  2. Damages which reasonably would have been supposed to have been in the contemplation of both parties at the time of the making of the contract as a probably result of a breach

Case in focus: Hadley v Baxendale [1854] EWHC J70

This case is the leading authority on the test of foreseeability of damages. In this case, the claimant ran a mill. The mill broke down as a result of a broken crank-shaft, and they did not have a replacement. The claimant therefore contracted with the defendant to provide them with a replacement crank-shaft. At the time of the contract, the defendant was unaware that the claimant’s mill was unable to operate without the crank-shaft. The defendant did not provide the crank-shaft on time, and the claimant sued for breach of contract. They claimed damages for the loss of profits suffered due to the fact that the mill was not operating.

It was held that the damages for the loss of profits were not claimable. This was because they did not fall under either limb of the test laid out in the case. Those losses would not have fairly and reasonable arisen from the breach of contract, and the defendants were unaware that the mill was not in operation without the crank-shaft. Therefore, the claim fails under limb two, as those losses were not in the contemplation of both parties at the time of the making of the contract (it was only in the mind of the claimants).

The first limb of the test is relatively easy to understand. These are damages that would be obvious under a contract. For example, in a sale of goods, if the goods are faulty, the natural damages fairly arising out of this would be the repair/replacement of the goods.

The second limb of the test is the more complicated one. These are those losses which would not normally be ordinarily expected for somebody to suffer as a result of the breach. Therefore, for them to be actionable, they must have been reasonably contemplated by both parties at the time of contracting. The easiest way this will arise is where the claimant directly informs the defendant of the potential loss. If we take the above case of Hadley v Baxendale, if the claimant had explained the importance of the crank-shaft, telling the defendant that their mill was not in operation and they needed to crank-shaft for it to work, the loss would have then been in both parties’ reasonable contemplation.

There are various cases which should help outline the rules of the test of foreseeability. The first of these is Victoria Laundry Ltd v Newman Industries Ltd [1949] 2 KB 528. In this case, the contract was for a boiler which was required for the expansion of the claimant’s business, and the defendant was aware of this. The claimant attempted to claim for their loss of profits, and the loss of some lucrative contracts that they would have obtained with the boiler. The court held that the loss of profits would have been in the reasonable contemplation of the defendants, and would thus be claimable, but the loss of the lucrative contracts would not have been in the reasonable contemplation of the defendants, and were not claimable. Therefore, it is clear in our original example with the denim and jeans, the loss of the future contracts would not have been reasonably foreseeable.

Exam consideration: Do you think the decision in Victoria Laundry Ltd would have been different if they had specifically told the defendant that if the boiler was not delivered they would miss out on some contracts? (The answer is yes!) Why?

The case of Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 confirmed an important part of the rule from Hadley v Baxendale. It is the type of loss which needs to be reasonably contemplated under the second limb, not the extent or the exact nature. Therefore, if we consider Hadley v Baxendale, the defendant need not know exactly how extensive the loss of profits would have been for the mill if that type of loss was contemplated, the defendant would be responsible for the extent of them. This rule has been criticised, as it could result in a defendant being responsible for a million-pound contract when in fact they only contemplated the loss of a sub-contract which was worth £100.

  1. Did the claimant mitigate the loss?

In order for a claim for damages to be successful, the claimant must take reasonable steps in order to mitigate the loss. There are three general rules relating to mitigation.

First, as per British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 the claimant will be unable to claim for damages in respect of any loss that he could have reasonably avoided.

For example, if there was a contract for the sale of steel which was faulty, the claimant must mitigate their loss by attempting to sell the faulty steel on. They may only make 20% of the price they paid, but this is a step in mitigating the loss.

Secondly, the claimant may recover all expenses incurred whilst taking reasonable efforts to mitigate the loss. In our above example, costs of advertising, shipping and other expenditure incurred attempting to sell the steel would be claimable.

Thirdly, if the claimant avoids further potential losses, they cannot recover for the loss they avoided. If we consider a breach of a contract of employment, if the claimant then finds another job one week later, they cannot continue to claim for loss of salary, because they have mitigated this further loss by finding another job.

  1. Did the claimant contribute to the loss?

If the claimant contributed to the loss in question, the courts may reduce the amount of damages the claimant is able to claim, proportionately in line with the fault of the claimant. This rule has statutory footing in Section 1 of the Law Reform (Contributory Negligence) Act 1945.

There are three types of contributory negligence in relation to breaches of contract:

  1. Where the defendant’s liability arises from a contractual provision which does not rely on the negligence of the defendant
  2. Where the defendant’s liability arises from a contractual obligation which is expressed in terms of ‘taking care’
  3. Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract.

The case of Barclays Bank plc v Fairclough Building Ltd [1994] EWCA Civ 3 confirms that contributory negligence will only be available in situation ‘3’. Therefore, there must be a concurrent liability in tort in order to claim contributory negligence as to a claim for damages.

Once the claim falls into situation ‘3’, the defendant must show the claimant was at fault, and the fault was a factual cause of the loss the claimant sustained (the ‘but for’ test). The courts will then reduce the damages ‘to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage’ as per Section 1(1) of the Law Reform (Contributory Negligence) Act 1945.

Agreed damages clauses

So far, this chapter has dealt with the situation in which the courts will assess the amount of damages to be awarded. The contractual freedom of parties allows them to pre-agree an appropriate amount of damages in the event of certain things. These are common in commercial contracts, and are advantageous for a number of reasons:

  • They provide certainty
  • The claimant does not have to prove the amount of loss, as the amount will be pre-agreed under the contract
  • The defendant cannot claim the loss was unforeseeable, as they are contracted into it
  • They are efficient, and prevent the relationship between two parties being disruption through large amounts of litigation

There are two types of damages clauses; a liquidated damages clause and a penalty clause.

Liquidated damages clause

A liquidated damages clause is one which can be considered a genuine attempt to pre-estimate the loss which will be suffered by the breach (Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79).

If a damages clause is identified as a liquidated damages clause, the sum in the clause will be payable, irrespective of whether the actual loss is greater or smaller than the sum in the clause. In Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd [1933] AC 20 the contract provided for a liquidated damages clause of £20 per week late. The delay was thirty weeks long, and actual loss for delay was £5,850, but as the £20 clause was a genuine pre-estimate of loss, the non-breaching party could only claim for £600 (£20 per week for 30 weeks).

Penalty Clauses

A clause will be classified as a penalty clause where the sum in the clause is not a genuine pre-estimate of the loss suffered in event of a breach, but instead is a threat to compel the other party to perform.

Case in focus: Jobson v Johnson [1989] 1 WLR 1926

In this case, the contract was for the purchase of shares in a football club. One of the terms was that if there was a failure to pay one of the instalments of the purchase price, the shares would need to be retransferred for £40,000. The defendant failed to pay one of the instalments when he had already paid £140,000.

It was held that the retransfer for £40,000 was a penalty clause, as it was not a genuine pre-estimate of the loss, instead it was akin to a penalty.

The general rule is that penalty clauses will be unenforceable. The case of Dunlop Pneumatic Tyre gives guidance on how far a clause must go in order to be considered a penalty clause; it must be ‘extravagant and unconscionable’ in comparison to the greatest loss that might be caused by the breach.

The case of Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 has provided some well-needed clarity in this area. Lord Neuberger explained that the test to apply 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”

Case in focus: ParkingEye Limited v Beavis [2015] UKSC 67

In this case, Parkingeye managed a carpark who imposed an £85 penalty on those who did not comply with the two hour only free parking stay. Beavis breached this term of the car park, and was issued an £85 penalty. Beavis refused to pay the penalty, arguing that it was a penalty clause.

The court held that this was not a penalty clause. Despite the £85 perhaps not being representative of any loss suffered by the car park, it was a deterrent which had a legitimate interest; it protects overstaying in the car park which was important for the efficiency and management of the car park. The £85 was also not any more exorbitant than penalties imposed for other parking violations.

You should use the test from Makdessi v Cavendish Square Holdings when assessing whether a clause is a penalty. The test for penalty clauses is yet another one which can be difficult to apply in practice. A sensible approach would be to consider:

  1. Is there a legitimate interest protected by the penalty?
  2. Is the amount exorbitant in comparison to other similar contracts/breaches of this type?
  3. Is the protection of the interest proportionate?

That brings us to the end of this chapter on damages. The next and final chapter will cover all of the other remedies available for a breach of contract.


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