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Penalty clauses - a move towards a flexible approach - 5th Aug 2015

  Penalty clauses - a move towards a flexible approach The law on clauses which specify a remedy or payment for breach of contract is being reviewed by the courts. For a century since Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd [1915] A.C.79 it has been widely understood that such clauses are unenforceable if they specify a payment greater than the loss which could reasonably be caused by the breach. By contrast, clauses which try genuinely to pre-estimate that loss (often called liquidated damages clauses) are binding.

That simple ‘dichotomy’ is being challenged in the courts. By returning to the underlying principles which ban “penalty clauses” the courts appear to be taking a more flexible approach.

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