Joshua_Mirwis_phParties to a contract may agree in advance on the level of damages payable to compensate the innocent party in the event of breach without having to bring court proceedings. However, agreed damages clauses will be struck down by the court if they are deemed to be penalty clauses. A clause will be treated as a penalty clause if the sum fixed is not a genuine pre-estimate of loss (Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1). In the case of Murray v Leisureplay plc [2005] EWCA Civ 963, the Court of Appeal adopted the wider approach of ascertaining what the predominant function of the clause was. If the main function was to deter a party from breaching the contract it would be unenforceable as a penalty but if it was to compensate the innocent party for the breach it would be enforceable.

This case considers the effect of agreed damages clauses in the context of a sale and purchase agreement (“SPA”) that adjusted the price payable for the shares in the event that the seller breached certain restrictive covenants.  Continue reading »