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Recent Contract Law Cases

Tim Johnson


United Kingdom

Two recent cases, Makdessi and PST Energy are discussed to highlight changes to the law on penalty clauses and the use of retention clauses in the context of the Sales of Goods Act 1979.

Makdessi Case

In the Supreme Court consolidated appeals of Cavendish Square Holding BV v Talal El Makdessi (Cavendish) and Parking Eye Limited v Beavis (Parking Eye), a more flexible test on whether a contract term is considered penal and thus unenforceable was introduced.

The traditional English law test on penalty clauses centred on whether a clause that takes effect on breach of contract is a "genuine pre-estimate of loss" and therefore compensatory or whether it is aimed at deterring a breach and therefore penal. This penalty rule has been around for over 100 years and in the words of Lord Sumption had become, “an ancient, haphazardly constructed edifice which [had] not weathered well”.

In the consolidated appeals, the Supreme Court restated this rule, by introducing a more flexible test as to “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.”

Following this decision, the question is no longer whether "the clause [is] unconscionable or a genuine pre-estimate of loss"; rather the innocent party's wider interest will be taken into account when enforcing obligations.

Commentators have since criticised this decision by highlighting the uncertainty of what will amount to a legitimate interest and the circumstances in which a clause will be considered out of proportion to that interest, as this is likely to be open to debate on a case-by-case basis. The new rule does, however, make way for greater freedom of contract; parties of equal bargaining power will be the best judges of what is a legitimate response to a breach of contract and commercially justified, even if, on the old test, this would be seen as a deterrent for breach.

Retention of Title

In the recent case of PST Energy 7 Shipping LLC Product Shipping & Trading S.A. v O.W. Bunker Malta Ltd and others [2015] EWCA Civ 1058, the Court of Appeal ruled that a retention of title clause prevented a contract from being a sale of goods contract. Although the case was decided in the context of shipping, producing direct implications for ship owners, it is likely to have wider implications for retention of title clauses in the context of the Sale of Goods Act 1979 (SGA). In this case, the contract included a clause that, pending payment, the ship owner held the fuel as a baillee but was able to continue using the bunker.  This did not release the ship owners from their obligation to pay for the fuel, but the contract did not gain protection under s49(1) of SGA.

Overall, as reported, this decision has implications for contracts for the supply of consumable goods where a retention of title clause provides ever diminishing security for payment. An appeal to the Supreme Court is predicted.

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