The two recent High Court decisions by Haughton J in the cases of Sheehan v Breccia and others Flynn & Anor v Breccia have reassessed the Irish position on penalty clauses. The cases take into account the recent decision by the UK Supreme Court, which is a departure from the traditional test applied both in the UK and Ireland.
A penalty clause is a clause which normally provides for the payment of a sum of money in the event of a breach of contract. In deciding whether or not a commercial provision constitutes a penalty clause, consideration is given as to whether the payment represents a genuine pre-estimate of loss or probable loss by reason of the breach. The Irish position is as set out in ACC Bank plc v Friends First Management Pension Funds Limited.
Recently the UK Supreme Court rejected the traditional test of whether a clause is a genuine pre-estimate of loss in favour of a test which looks at whether the clause imposes a detriment out of all proportion to any legitimate interest of the innocent party in the enforcement of the clause. It was determined that focus should be on whether the clause is unconscionable or extravagant, and not on whether it is a genuine pre-estimate of loss.
Ultimately Haughton J. concluded that he is bound by judicial principles to follow the recent Irish case law, applying the genuine pre-estimate of lost test. It is worth noting that Haughton J stated that it is the role of an appellate court to change the Irish approach to penalty clauses. It remains to be seen whether these cases will be appealed and if so how the Court of Appeal might assess the validity of penalty clauses in light of the recent UK jurisprudence.