• Liquidated damage clause: guess or estimate at what the potential loss will be if a breach occurs and are legal. This provides an exception to the general rule against penalties (see Penalty Clauses below), as well as where there is a commercial justification for the penalty. The test was established in: Dunlop Pneumatic Tyre v New Garage. Here the amount charged was disproportionate to all possible consequences of the breach. The amount should be the same regardless of the nature and extent of damage. The test was recently modified IN THE UK by Cavendish v El Makdessi, which replaced Dunlop with a modern test that reflects the fact that in some circumstances, parties have a legitimate commercial interest in enforcing the performance of contractual obligations which go above and beyond compensation for any identifiable commercial losses they may suffer as a result of the breach, or the deterrence of a breach of contract. In the construction context, this new test requires a consideration of the commercial justification for the liquidated damages clause at the time the contract was entered into, and whether it is out of all proportion to the employer’s legitimate commercial interest in the works completing on time. ParkingEye v Beavis dwelled on Cavendish facts i.e. provisions in the agreements protected the buyer’s legitimate interest in enforcing the non-compete restrictions so that goodwill was protected and this was critical to its value. Here, UK SC was unanimous that the doctrine of penalties should not be abolished, but rejected the traditional test set down in Dunlop that a clause will be a penalty if it is not a genuine pre-estimate of loss and is extravagant or unconscionable, or if its purpose is to deter a breach of contract. It was held that the correct approach in commercial cases was to have regard to the nature and extent of the innocent party’s (e.g. the employer’s) interest in the performance of the obligation that was breached as a matter of construction of the contract. The test is that a penalty clause whose purpose is to punish the contract breaker is likely to be an unenforceable penalty clause. On the other hand, a clause that is intended to deter a breach of contract is less likely to be a penalty clause, even if it does not represent a genuine pre-estimate of loss. In order to determine whether or not a clause is a penalty, the key is to consider whether the liquidated damages clause is out of all proportion to the employer’s legitimate interest in enforcing the contractor’s obligations under the contract. If it is, it will be penal and unenforceable. ParkingEye involved an 85 pound charge which was perceived as a deterrent for overstaying the 2 hour parking limit. There was however a clear legitimate interest in imposing this charge e.g. preserving traffic management system and efficient use of the parking space in the surrounding outlets and their users by deterring long stays. The charge was not out of proportion and therefore not penal.