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Helpful English court rulings on contract law and privilege

Three decisions at the end of 2015 are of direct relevant to finance parties. All were favourable to finance parties.

New test for whether a provision is penal and therefore unenforceable

The UK Supreme Court has provided a new test for whether a provision is penal and therefore unenforceable. The rule against penalties most obviously arises in the context of liquidated damages provisions but its impact is wider than that. The new test is whether "the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation." We are producing a briefing on the practical impact of this lengthy and nuanced judgment. The two key points are that the new test is more flexible and, in a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption will be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. Liquidated damages are clearly secondary provisions under the new test. In practice a party's legitimate interest will rarely extend beyond compensation for the breach. In this sense, arguably nothing has changed and the old question of whether there has been a genuine pre-estimate of loss will be a sufficient justification for a liquidated damages provision. However, the change from the previous position is that a party may, in certain circumstances, be able to point to a legitimate interest other than compensation to justify a provision. (Cavendish v Makdessi; ParkingEye v Beavis [2015] UKSC 67).1

Implied terms – a reminder of how difficult they are to imply

The UK Supreme Court has reemphasised the stringent nature of the legal test which must be met before a term will be implied into a contract. The test is one of necessity. A more helpful way of putting it is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence. Fairness or reasonableness alone will not be sufficient, even if, as claimed unsuccessfully here, the result can be harsh. This case will undoubtedly be the starting point, in place of Lord Hoffmann's test in the Belize case, when thinking about whether a term may be implied. One the one hand, this gives greater power to those who pay close attention to drafting their contracts, since the message from the Supreme Court in this case (as well as Makdessi above, and Arnold v Britton) points to upholding party autonomy and away from interfering with what the parties have said. On the other, this case means if a party does not have the benefit of an express term on a particular point of dispute it will be an uphill struggle to persuade the court to intervene on the basis of an implied term. (Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & anr [2015] UKSC 72. Allen & Overy acted for the successful landlords in this case, the BNP Paribas companies as trustees for Britel Fund Trustees Ltd and WELPUT.)2

Backdrop of regulatory investigation enough for privilege claim

In this LIBOR follow-on case (Property Alliance Group Ltd v The Royal Bank of Scotland plc [2015] EWHC 3187 (Ch)), the defendant was able to claim legal advice privilege over confidential briefing memos produced by the bank's external lawyers for the bank on the progress and issues in the regulatory investigations (including factual summaries of matters which would not otherwise be privileged) and which were to form the basis of discussions between them on strategy and legal advice. The backdrop of the active regulatory investigations was sufficient legal context to found a claim for privilege. While not exclusively containing legal advice, the documents were part of the "continuum" of communications between lawyer and client, the object of which was the giving of legal advice as and when appropriate. The documents were therefore privileged in their entirety. The decision provides useful and timely clarification on the extent of legal advice privilege in the context of regulatory investigations: an area sure to be the subject of on-going interest in coming years. The key message is that a claim to legal advice privilege depends on the relevance and purpose of the information contained in the broader context of the lawyers' advisory role. 


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Legal and Regulatory Risk Note
United Kingdom