Talking Point: Liquidated damages - penalties revisited

The English Supreme Court has delivered a judgment which revisits the test of when a liquidated damages clause is a penalty. It expressed the view that a liquidated damages clause will only be a penalty when wholly disproportionate.

In its judgment in the combined cases of Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis the Supreme Court has revisited the test for determining if a clause is an enforceable liquidated damages clause or an unenforceable penalty clause.

Given that English judgments are persuasive in Hong Kong, this new test may find favour with the Hong Kong courts in future. The Hong Kong courts have historically favoured freedom of contract and this judgment strongly reinforces the continuing reluctance of the courts, in Hong Kong and the UK, to overturn such clauses.

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