UNRESOLVED ISSUES IN
THE LAW ON PENALTIES
The article examines several unresolved issues in the law on penalties, following the UK Supreme Court’s restatement of the penalties rule in Makdessi v Cavendish Square Holdings. The discussion is divided into three main parts: the jurisdiction (or scope) of the rule; the test for the validity of impugned clauses; and the effect of the rule. The central argument is that, although the court’s decision to limit the rule’s application at both the jurisdiction and validity stages will increase parties’ certainty that their clauses will be enforced, the restatement leaves the law itself less certain in several respects.
The dust has now had time to settle following the Supreme Court’s restatement of the rule against penalties in Makdessi v Cavendish Square Holdings BV
Yet several issues remain unresolved. The focus of analysis to date has been on what the court did
by contrast, this article addresses the various issues that are likely to require further decision. In holding that the penalties rule survives, albeit in a narrowed form, it has been suggested that the Supreme Court “espoused tests that are clear and workable”.3
This article takes a different view. Although it was perhaps inevitable that the Supreme Court’s restatement would not be entirely comprehensive, Makdessi
creates new uncertainties. The decision to narrow the rule at both the jurisdiction and validity stages will increase parties’ certainty that their clauses will be enforced, but the restatement leaves the law itself less clear than before.
The structure of the article reflects the three separate stages involved in applying the penalties rule: jurisdiction, validity and effect.4
Taking each stage in turn, the article offers a very brief overview of the issues that were settled in Makdessi
(for better or worse), followed by a more detailed analysis of the issues that were left unresolved. The common theme running through this analysis is that, while the new tests for jurisdiction and validity