The Supreme Court has, for the first time since the House of Lords’ ruling in 1915, reviewed the law on penalty clauses. In a 110 page judgment, it has decided to keep the rule, but not to extend it. The real question when a contractual provision is challenged as a penalty is, according to the Supreme Court, whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not there- fore, at any rate without more, mean that it is penal, and to describe it as deterrent does not add anything.
The true test is 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.