Penalty clauses

2023 CLC 1411 LAHORE-HIGH-COURT-LAHORE Judicial Precedent

Ss.20, 22 & 12Suit for specific performance of agreement to sellPenalty clause

Suit of the respondent was decreed to the extent of double of the amount paid by her to the appellant but in appeal the suit was allowed holding her entitled to the decree for specific performance

Held, that only resistance to the suit was rested on the fact that there was a penalty clause in the agreement to sell that in case of failure by the appellant to abide the terms of the agreement, he would pay double of the amount received at the market value to the respondent, so the respondent was precluded to ask for specific performance of agreement to sell

Relief of specific performance is a discretionary relief in terms of S.22 of the Specific Relief Act, 1877 but such discretion cannot be exercised arbitrarily and the court while exercising the discretion is bound to follow the well settled principle that discretion shall always be structured on reasoning and fairness

In the facts and circumstances of the case, S. 20 of the Specific Relief Act, 1877, would come into play, which provided that even if there is a stipulation in agreement that in case of its breach a penalty would be the outcome, this by itself would not impede the specific performance of the agreement

First Appellate Court was justified in forming the opinion that the respondent was entitled for the decree of specific performance, in the circumstances

Second appeal was dismissed, in circumstance.

2022 SCMR 1433 SUPREME-COURT Judicial Precedent

S. 74Penalty clauses

Purpose of penalty clauses stated.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesCar parkTime limit of 2 hours for free parkingParking charge for customers overstaying the two hour limit

Notice and signs at entrance of car park mentioning that any customer overstaying the two hour limit would pay a £85 charge

Said charge of £85 was not penal because it was justified by parking company's legitimate interest in imposing the charge, which went beyond recovery of any loss

Said charge had two main objects; managing the efficient use of the car park, by deterring motorists occupying spaces for long periods, and providing an income stream to enable the parking company to meet the costs of the scheme and make a profit from its services

Both objectives were perfectly reasonable, and the imposition of a charge to deter over stayers was a reasonable mode of achieving them

Charge of £85 was not out of all proportion to parking company's interest in imposing the charge, and so it was not penal

Lord Hodge: Charge of £85 was not excessive as it was in line with the prevailing authorised practices in the Country

Charge in question was also not unconscionable since motorists entering the car park were given ample warning of both the time limit of their licence and the amount of the charge.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesCommon law rule that contractual penalty clauses were not enforceable ("penalty rule")

Types of clauses in a contract to which penalty rule was applicable stated.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesEnforceability

Test for determining whether a provision in a contract was a "penalty clause", and hence unenforceable, stated.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesRule that contractual penalty clauses were not enforceable ("rule against penalties")ApplicabilityRule against penalties applied only in the context of a breach of contract

Rule against penalties applied only in relation to secondary obligations i.e. penal remedies for breach of contract.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesEnforceability

Clause in agreement providing that party in breach would be forced to transfer (asset) to other party for no consideration or for a consideration which did not reflect the value of the asset transferred

Such a clause may constitute a penalty within the scope of the penalty doctrine, and thus would be unenforceable.

2016 SCMR 296 SUPREME-COURT-OF-UK Judicial Precedent

Penalty clausesShare purchase and shareholders' agreement ("the agreement")Restrictive trade covenant/non-competition clausesPrice adjustment clauseCall option

Clauses in share purchase agreement providing that if seller (of shares) breached non-competition restrictions stipulated in the agreement, he lost his entitlement to two deferred installments that would otherwise be payable, and that buyer could trigger a call option i.e. require seller to sell his remaining shares to the buyer at a price which did not include goodwill

Both said clauses were not penalty clauses, instead they related to primary obligations of the seller and the legitimate interest of the buyer in the observance of the restrictive covenants in order to protect the goodwill of the business he had brought from the buyer

Both parties, in the present case, who were commercially experienced and bargained on equal terms over a long period with expert legal advice, were the best judges of how their proper commercial interests should be reflected in the agreement

Lord Mance: When considering whether certain clauses were penalty clause, the focus should be on the overall picture and the general interest being protected, not on the individual breaches or their timing or consequences

Both clauses in question, in the present case could not be regarded as extravagant, exorbitant or unconscionable

Lord Hodge: Seller was selling shares of a company, which operated in a region of the world where personal relationships were very important

Success of the company's business depended on the personal relationships which the sellers had built up with their key clients

In such background the share purchase agreement was structured to protect the goodwill of the company, once its shares were brought by the buyer

Buyer thus had a very substantial legitimate interest to protect by making the deferred installments depended upon the continued loyalty of the sellers

Clause relating to call option which require seller to sell his remaining shares against his will in case of breach at a price not including goodwill was harsh but not exorbitant; it was a legitimate means of encouraging the sellers to comply with their non-competition obligations which were critical to buyer's investment.