Last month, we reported on the Supreme Court judgment which restated the test for what is an unenforceable penalty. Commercial contracts often include a clause agreeing that a set amount of money will be paid or some other remedy may take effect if a particular provision of the contract is breached. Where the provision is a liquidated damages clause, it is enforceable. If, however, the clause is found to represent a penalty, it is unenforceable. This is a long-standing principle of English law. Since its formulation in 1915, the test laid down in the leading House of Lords judgment in, Dunlop Pneumatic Tyre Co Ltd v Garage and Motor Co. Ltd, has become increasingly entrenched as the one to consider when deciding whether a clause is a liquidated damages or a penalty clause. While this test may still be of use in claims involving straightforward damages, we now have a new test, formulated by Lords Neuberger and Sumption in the leading judgment i.e.:

whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.