The rule against contractual penalties in Great Britain and Ireland

A contractual clause may provide that a party to the contract, on failing to perform an obligation under the contract, must pay a specified amount of money to the other party to the contract. All jurisdictions in Great Britain and Ireland have a common law rule which provides that such a clause cannot be enforced if it constitutes a penalty. Before 2015, all those jurisdictions applied the same test in determining whether an agreed sum constitutes a penalty. In 2015, in Cavendish Square Holding BV v Makdessi, the Supreme Court of the United Kingdom altered the test for the law of England and Wales. The new test has been adopted by the Scottish courts, but not so far by the courts in the Republic of Ireland. This article traces the development of the penalty doctrine in England and Wales, Scotland and the Republic of Ireland. It also provides a brief comparison between the common law rule against contractual penalties and the regulation of agreed sums in Continental Europe and transnational instruments