Private Equity Perspectives — March 2013: penalty clauses — the importance of careful drafting
When entering into corporate and commercial contracts, it is common to structure the deal so that if there is a breach it can be compensated without having to bring court proceedings. This can be achieved by mechanisms such as forfeiture clauses, put-and-call arrangements and compulsory buy-back provisions. Any party hoping to rely on such a provision will need to ensure that it does not constitute an unenforceable penalty.
In our May 2013 edition of Private Equity Perspectives, we considered the practical points arising from the case of Cavendish Square Holdings BV and another v El Makdessi (2012), in which the High Court had ruled that certain default provisions in a share purchase agreement were enforceable and not penalties.
The landscape has been further changed by the Court of Appeal’s recent reversal of the High Court’s decision, ruling that the default provisions (which caused the seller to forfeit his deferred consideration and enabled the buyer to acquire the seller’s remaining shares at a reduced price) were, in fact, penalties and, therefore, unenforceable…
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