When is a termination payment a penalty?
The courts are frequently asked to determine whether a clause providing for payment of a fixed sum on breach of contract is a penalty (and unenforceable under English law) or a genuine pre-estimate of loss (‘liquidated damages’), in which case the clause will be enforceable. The approach of the courts can be summarised as: ‘Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether, at the time that the contract was entered into, the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred.’
An important point to bear in mind with penalty clauses — often forgotten — is that the rule against penalty clauses only applies where there is a breach of contract. If the trigger event is not a breach, then the payment (which will be a debt rather than damages) cannot be an unlawful penalty…
If you are registered and logged in to the site, click on the link below to read the rest of the Walker Morris briefing. If not, please register or sign in with your details below.
Sign in or Register to continue reading this article
It's quick, easy and free!
It takes just 5 minutes to register. Answer a few simple questions and once completed you’ll have instant access.Register now
Why register to The Lawyer
In-depth, expert analysis into the stories behind the headlines from our leading team of journalists.
Identify the major players and business opportunities within a particular region through our series of free, special reports.
Receive your pick of The Lawyer's daily and weekly email newsletters, tailored by practice area, region and job function.
More relevant to you
To continue providing the best analysis, insight and news across the legal market we are collecting some information about who you are, what you do and where you work to improve The Lawyer and make it more relevant to you.
News from Walker Morris
News from The Lawyer
Briefings from Walker Morris
Employment update, March 2015: Bonuses for disabled employees, e-cigarettes at work, whistleblowers and more
Latest developments that might affect your business and what you can do about them.
Jackson, Denton, Mitchell… anyone involved with civil litigation over the last two years will have heard these names repeatedly and will be aware of their importance to compliance with the new rules.
Analysis from The Lawyer
Which firms are cutting it in this era of slimline rosters, and who are the GC new brooms making clean sweeps? The Lawyer can reveal all
The law school war shows no signs of ending. But we have, perhaps, reached the end of the beginning.