It’s all in the small print – the devil’s in the detail….
It’s a source of constant amazement that so many small to medium enterprises are happy to risk their future success either with no terms and conditions of trade at all or, more often, work with something they’ve pinched off a competitor (who probably got theirs the same way in the first place!).
It’s only when things go wrong that the painful discovery is made that the terms and conditions don’t work for one reason or another and, by then, it’s too late.
But the recent Supreme Court decision in Cavendish Square Holdings ~v~ Talal El Makdessi shows that even where the terms and conditions are negotiated by respected and experienced specialist lawyers, it didn’t stop one of the parties “taking a view” on the enforceability of the contract and the resulting disagreement was fought all the way through to the Supreme Court where their lordships took the opportunity to make a much needed review of so-called “penalty clauses” in contracts.
Take almost any contract out of your drawer and you’ll find a clause in it that that tells you what “damages” you will pay if you don’t do what you have contracted to. Going back as far as 1801, the courts have held that it’s OK to provide for recovery of a reasonable pre-estimate of damages in a contract but if the “estimate” is more properly considered a penalty, it will be unenforceable.
Over the years since 1801, our judges have wrestled with the issue as successive attempts have been made to get around what some contractors have obviously found to be an inconvenient restriction on their wish to make it either unattractive to let them down or, if that happens, to make a good profit out of it.
You can well imagine someone coming to such a provision in his “nicked” T&C and saying: “Let’s double that” without understanding the trouble he’s storing up for the future…
Mr Makdessi was the founder of the largest advertising and marketing communications group in the Middle East which operated through a network of around 20 companies with more than 30 offices in over 15 countries. Over 6 months of legal negotiation he and his business partner agreed to sell their shares to a company in the WPP Group, the world’s largest market communications services organisation.
The price was to be paid in instalments, the last two of which would be calculated according to the performance of the business against projected profits and, as you might expect, the purchaser wanted to protect the millions of dollars it was spending by restraining Mr Makdessi and his partner from competing with the business after completion of the sale. They gave restrictive covenants accordingly but the time came when the purchaser took the view that the sellers were in breach of these covenants and court proceedings ensued. Mr Makdessi argued that the relevant clauses in the contract were unenforceable as being penalties.
The case wended its way through various appeals and came to the Supreme Court where their lordships carried out a long awaited review of the law concerning penalty clauses and held in favour of the purchaser. Many had hoped that the existing rule against penalties would be held to be anachronistic in the context of modern commercial practice (it’s gone that way in other mature legal jurisdictions) but their lordships held that neither of the clauses was penal in fact.
In doing so, they have perhaps confirmed that a broader view will be taken as to whether such a clause represents a genuine pre-estimate of damages. But, be warned, they placed much reliance upon the fact that the clauses in question were the result of months of legal negotiation between two leading and highly respected solicitors’ firms and you won’t be so fortunate if you just adopt someone else’s T&C, think of a number for such a clause and double it!