The Commencement Date was 1/1/14 and the Time for Completion was 18 months.

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1 Scenario for Edinburgh Working Weekend WorldTech is a multinational IT corporation. It entered into a contract with ConstructIT for the construction of a key next-generation datacentre facility in North Cyprus. The contract is the FIDIC Yellow Book with minimal amendment. The law clause said:- Owing to WorldTech s anti-national world view, the applicable law will be the best features of the civil, common law and other legal systems so as to reflect the intentions of the parties and achieve justice between them. The Commencement Date was 1/1/14 and the Time for Completion was 18 months. The following events occurred:- 1 ConstructIT had problems with an insolvent subcontractor (SubmIT) and work on the principal building halted for a period of 5 months from 15 June to 15 November 2014 while a new subcontractor (NepIT) was found and mobilised. Work then resumed. 2 Global Specification update #1 was issued in month 16 and added 5 months work to subsidiary buildings which were originally non-critical and programmed to finish in month Completion of the facilities was achieved on the last day of month Connection of the buildings to WorldTech s Haptic WorldWeb could not take place until month 24 due to delays in its development by WorldTech. 5 ConstructIT claimed four months EOT and prolongation cost in accordance with the Contract. The Engineer s determination refused any EOT or cost. 6 WorldTech claimed five months delay damages, specified at 0.2% per day. They also claimed the removal of the 10% cap because SubmIT s administrator has filed papers showing that they could have returned to work within a month of the insolvency under re-structuring plans but ContractIT elected to negotiate a new subcontract with NepIT, a company belonging to the son of the ContractIT MD. 7 ConstructIT have produced an internal WorldTech document from tender stage which shows that no profits were anticipated until 2017; further that WorldTech had secured deals whereby rent on the facility site only became payable once they were connected. The parties agreed that their disputes should be resolved by arbitration in front of a panel of arbitrators from multiple jurisdictions. At the arbitration hearing, there is no dispute as to facts. The Arbitrators have issued directions for the hearing as follows:- 1 Evidence will be heard from programming experts on the EOT question and practice around the world. 2 Counsel will then address the following questions What EOT is due, if any? Should the 10% cap on delay damages be removed? The argument that there is no loss and no or reduced delay damages payable. 1

2 Month As-Planned Schedule Path A Datacentre 0 months float Contract completion date Activity Critical Activity As-Built Owner Delay Contractor Delay Path B Subsidiary Building +1 month float Schedule Update Month 16 ConstructIT insolvent subcontractor Path A Datacentre -5 months float Path B Subsidiary Building WorldTechadds 5 months of work to Subsidiary Building -4 months float As-Built Schedule 5 months Path A Datacentre Path B Subsidiary Building 2

3 Extracts from FIDIC Yellow Book Extension of Time for Completion 8.4 The Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor s Claims] to an extension of the Time for Completion if and to the extent that completion for the purposes of Sub-Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes: (a) a Variation (unless an adjustment to the Time for Completion has been agreed under Sub-Clause 13.3 [Variation Procedure]), (b) a cause of delay giving an entitlement to extension of time under a Sub- Clause of these Conditions, (c) exceptionally adverse climatic conditions, (d) Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions, or (e) any delay, impediment or prevention caused by or attributable to the Employer, the Employer s Personnel, or the Employer s other contractors on the Site. If the Contractor considers himself to be entitled to an extension of the Time for Completion, the Contractor shall give notice to the Engineer in accordance with Sub-Clause 20.1 [Contractor s Claims]. When determining each extension of time under Sub-Clause 20.1, the Engineer shall review previous determinations and may increase, but shall not decrease, the total extension of time. Delay Damages 8.7 If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer s Claims] pay delay damages to the Employer for this default. These delay damages shall be the sum stated in the Appendix to Tender, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate. However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Appendix to Tender. These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works. These damages shall not relieve the Contractor from his obligation to complete the Works, or from any other duties, obligations or responsibilities which he may have under the Contract. 3

4 Limitation of Liability 17.6 Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 16.4 [Payment on Termination] and Sub-Clause 17.1 [Indemnities]. The total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub-Clause 4.19 [Electricity, Water and Gas], Sub- Clause 4.20 [Employer s Equipment and Free-Issue Material], Sub-Clause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights], shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount. This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party. 4

5 Brazilian Civil Code, Art. 409 A penalty clause that is stipulated with an obligation, or in a later act, may refer to the complete non-performance of the obligation, to a specific clause or to a mere delay in performance. Brazilian Civil Code, Art. 410 A penalty clause that is established in case of total default on an obligation will give the non-breaching party an option to claim performance of the obligation or payment of the amount stipulated in the penalty clause. Brazilian Civil Code, Art. 411 When the penalty clause is established in case of delay, or in special security of another specific clause, the innocent party has the discretion to demand the fulfillment of the penalty imposed, together with the performance of the primary obligation. Brazilian Civil Code, Art. 412 The amount of the penalty imposed in the penalty clause may not exceed the amount of the primary obligation. Brazilian Civil Code, Art. 413 The penalty shall be equitably reduced by the court if the primary obligation has been partially fulfilled or if the amount of the penalty is manifestly excessive, in view of the nature and purpose of the transaction. Brazilian Civil Code, Art. 416 An innocent party is not required to proof any loss to claim a contractual penalty. Brazilian Civil Code, Art. 416, Sole Paragraph Even if the damage exceeds what was provided for in the penalty clause, the innocent party may not claim additional indemnity if it has not been contracted so. If it has been contracted, the penalty remains as minimum indemnity, and the innocent party is responsible for proving further damage. Brazilian Civil Code, Art. 945 If the innocent party has, by its own fault, concurrent caused the damages incurred by it, its indemnification shall be calculated considering the level/severity of its fault in comparison with the fault of the non-innocent party. 5

6 UAE Civil Code Article 290:- It shall be permissible for the judge to reduce the level by which an act has to be made good or to order that it need not be made good if the person suffering harm participated by his own act in bringing about or aggravating the damages. Article 386:- If it is impossible for an obligor to give specific performance of an obligation, he shall be ordered to pay compensation for non-performance of his obligation, unless it is proved that the impossibility of performance arose out of an external cause in which (the obligor) played no part. The same shall apply in the event that the obligor defaults in the performance of his obligation. Article 389:- If the amount of compensation is not fixed by law or by the contract, the judge shall assess it in an amount equivalent to the damage in fact suffered at the time of the occurrence thereof Article 390:- (1) The contracting parties may fix the amount of compensation in advance by making a provision therefor in the contract or in a subsequent agreement, subject to the provisions of the law. (2) The judge may in all cases, upon the application of either of the parties, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void. Under the UAE law, in order for liquidated damages to be awarded, the following requirements must be satisfied (failing which, no liquidated damages would be awarded): A) A breach committed by the party who agreed to pay the liquidated damages; B) Actual damage sustained by the party who invokes the liquidated damages clause ; and C) A causative link between the fault and the damage suffered. (The UAE high courts have confirmed, in several occasions, that this tripartite test must be satisfied. The Dubai Court of Cassation held that the inclusion of a liquidated damages clause into a contract does not supersede this tripartite test for awarding damages. The Federal Supreme Court has also concluded that the liquidated damages are subject to this tripartite test). Article 246: a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith". Decisions of the Dubai Court of Cassation have ruled that a bad faith action of the other contracting party may provide a cause of action in itself for the other. The effect of good faith on the terms of a contract is, therefore, wide reaching and may have a significant impact on the outcome of a dispute. (Article 246 duty of good faith is has been interpreted by courts to have wide reaching implications and not limited to obligations expressly contained in the contract between the parties, but also extends to obligations connected to such contracts by virtue of law, custom and the nature of the transaction. In general terms it means that the parties must not seek unfair advantage or exploit the other, must cooperate, and if possible, avoid conflicts). 1 6

7 Article 472:- The right shall expire if the obligor proves that the performance of it has become impossible for him for an extraneous cause in which he played no part. 2 7

8 PRESS SUMMARY 4 November 2015 Cavendish Square Holding BV (Appellant) v Talal El Makdessi (Respondent); ParkingEye Limited (Respondent) v Beavis (Appellant) [2015] UKSC 67 On appeal from [2012] EWCA Civ 3852 Comm, [2013] EWCA Civ 1539 and [2015] EWCA Civ 402 JUSTICES: Lord Neuberger (President), Lord Mance, Lord Clarke, Lord Sumption, Lord Carnwath, Lord Toulson and Lord Hodge BACKGROUND TO THE APPEALS Cavendish v El Makdessi By an agreement, Mr Makdessi agreed to sell to Cavendish a controlling stake in the holding company of the largest advertising and marketing communications group in the Middle East. The contract provided that if he was in breach of certain restrictive covenants against competing activities, Mr Makdessi would not be entitled to receive the final two instalments of the price paid by Cavendish (clause 5.1) and could be required to sell his remaining shares to Cavendish, at a price excluding the value of the goodwill of the business (clause 5.6). Mr Makdessi subsequently breached these covenants. Mr Makdessi argued that clauses 5.1 and 5.6 were unenforceable penalty clauses. The Court of Appeal, overturning Burton J at first instance, held that the clauses were unenforceable penalties under the penalty rule as traditionally understood. ParkingEye v Beavis ParkingEye Ltd agreed with the owners of the Riverside Retail Park to manage the car park at the site. ParkingEye displayed numerous notices throughout the car park, saying that a failure to comply with a two hour time limit would result in a Parking Charge of 85. On 15 April 2013, Mr Beavis parked in the car park, but overstayed the two hour limit by almost an hour. ParkingEye demanded payment of the 85 charge. Mr Beavis argued that the 85 charge was unenforceable at common law as a penalty, and/or that it was unfair and unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations The Court of Appeal upheld the first instance decision rejecting those arguments. JUDGMENT The Supreme Court allows the appeal in Cavendish v El Makdessi and dismisses the appeal in ParkingEye v Beavis, thus upholding the validity of the disputed clauses in both cases. Lord Neuberger and Lord Sumption give a joint judgment, with which Lord Clarke and Lord Carnwath agree. Lord Mance and Lord Hodge write concurring judgments. Lord Toulson agrees that the appeal in Cavendish v El Makdessi should be allowed but dissents in ParkingEye v Beavis. REASONS FOR THE JUDGMENT The Legal Principles The penalty rule is an ancient, haphazardly constructed edifice which has not weathered well [3]. However, it is of long standing and a similar rule exists in all other developed systems of law. It also covers types of contract which are not regulated in any other way. It should not therefore be abolished, but neither should it be extended [36-40]. The fundamental principle is that the penalty rule regulates only the contractual remedy available for the breach of primary contractual obligations, and not the fairness of those primary obligations The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: /1887 F:

9 themselves [13]. The relevant contractual remedy typically stipulates payment of money, but it equally applies to obligations to transfer assets, or clauses where one party forfeits a deposit following its own breach of contract [14-18]. What makes a contractual provision penal? Lord Dunedin s tests in Dunlop Pneumatic Tyre Company Ltd. v New Garage and Motor Company Ltd. [1915] AC 79 have too often been treated as a code. The speeches of the rest of the Appellate Committee, particularly Lord Atkinson, are at least as important. The validity of a clause providing for the consequences of a breach of contract depends on whether the innocent party can be said to have a legitimate interest in the enforcement of the clause. There is a legitimate interest in the recovery of a sum constituting a reasonable pre-estimate of damages, but the innocent party may have a legitimate interest in performance which extends beyond the recovery of pecuniary compensation. The law will not generally uphold a contractual remedy where the adverse impact of that remedy significantly exceeds the innocent party s legitimate interest [18-30]. The concepts of deterrence and genuine pre-estimate of loss are unhelpful. The true 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 [32]. Lord Mance agrees with that test. The first step is to consider whether any (and if so what) legitimate business interest is served and protected by the clause, and if so and secondly, whether the provision made for that interest is extravagant, exorbitant or unconscionable [152]. The penalty doctrine has been applied to clauses withholding payments, and transfers of moneys worth [ ], and may be considered alongside relief against forfeiture [161]. It should not be abolished or restricted: its existence is justified by its longstanding invocation and endorsement in the United Kingdom, Europe and across common law jurisdictions [ ]. Lord Hodge concurs, reviewing the authorities from England and Scotland and the historical development of the doctrine in Scots law. The doctrine only applies to secondary obligations arising out of a breach of contract, but is not confined to cases requiring the payment of money on breach. It applies to clauses withholding payments on breach, clauses requiring the party in breach to transfer property, and clauses requiring payment of a non-refundable deposit if that deposit is not reasonable as earnest money (particularly where such a clause exceeds the percentage set by long-established practice) [ ]. The test is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party s interest in the performance of the contract. A clause fixing a level of damages payable on breach will be a penalty if there is an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach [255]. Lord Toulson agrees with Lord Hodge s formulation of the test above, and with Lord Mance and Lord Hodge on the relationship between penalty and forfeiture clauses [294]. Application to Cavendish v El Makdessi The court concludes that neither clause 5.1 nor clause 5.6 are unenforceable penalty clauses, and accordingly allows the appeal. Clause 5.1 is a price adjustment clause. It is not a secondary provision but a primary obligation. The Sellers earn consideration for their shares by (amongst other things) observing the restrictive covenants. Whilst clause 5.1 has no relationship with the measure of loss attributable to the breach, Cavendish also had a legitimate interest in the observance of the restrictive covenants, in order to protect the goodwill of the Group generally. The goodwill of the business was critical to Cavendish and the loyalty of Mr Makdessi was critical to the goodwill. The court cannot assess the precise value of that obligation or determine how much less Cavendish would have paid for the business without the benefit of the restrictive covenants. The parties were the best judges of how it should be reflected in their agreement [73-75]. The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: /1887 F:

10 A very similar analysis applies to clause 5.6. It is also a primary obligation, and it could not be treated as invalid without rewriting the contract [83-88]. It was said to be penal because the formula excluded goodwill from the calculation of the payment price. It did not represent the estimated loss attributable to the breach. But it reflected the reduced consideration which Cavendish would have been prepared to pay for the acquisition of the business on the hypothesis that they could not count on the loyalty of Mr Makdessi [79-83]. Lord Mance, Lord Hodge and Lord Toulson concur on both clause 5.1 and clause 5.6 [ ; ; 292]. Application to ParkingEye v Beavis The court dismisses the appeal by a majority of six to one, and declares that the charge does not contravene the penalty rule, or the Unfair Terms in Consumer Contracts Regulations Mr Beavis had a contractual licence to park in the car park on the terms of the notice posted at the entrance, including the two hour limit. The 85 was a charge for contravening the terms of the contractual licence. This is a common scheme, subject to indirect regulation by statute and the British Parking Association s Code of Practice. The charge had two main objects: (i) the management of the efficient use of parking space in the interests of the retail outlets and their users by deterring long-stay or commuter traffic, and (ii) the generation of income in order to run the scheme [94-98]. Unlike in Cavendish v El Makdessi, the penalty rule is engaged. However, the 85 charge is not a penalty. Both ParkingEye and the landowners had a legitimate interest in charging overstaying motorists, which extended beyond the recovery of any loss. The interest of the landowners was the provision and efficient management of customer parking for the retail outlets. The interest of ParkingEye was in income from the charge, which met the running costs of a legitimate scheme plus a profit margin [99]. Further, the charge was neither extravagant nor unconscionable, having regard to practice around the United Kingdom, and taking into account the use of this particular car park and the clear wording of the notices [ ]. The result is the same under the 1999 Regulations. Although the charge may fall under the description of potentially unfair terms at para. 1(e) of Schedule 2, it did not come within the basic test for unfairness in Regulations 5 and 6(1), as that test has been recently interpreted by the Court of Justice in Luxembourg [ ]. Any imbalance in the parties rights did not arise contrary to the requirements of good faith, because ParkingEye and the owners had a legitimate interest in inducing Mr Beavis not to overstay in order to efficiently manage the car park for the benefit of the generality of users of the retail outlets. The charge was no higher than was necessary to achieve that objective. Objectively, the reasonable motorist would have, and often did, agree to the charge [ ]. Lord Mance and Lord Hodge both concur [ ; ]. Lord Toulson (dissenting) would have allowed the appeal, on the grounds that the clause infringes the 1999 Regulations, which reflect the special protection afforded to consumers under the European Directive on unfair terms in consumer contracts. The burden is on the supplier to show that the consumer would have agreed to the terms in individual negotiations on level terms. It is not reasonable to make that assumption in this case, and in any event ParkingEye had not produced sufficient evidence to that effect [ ]. References in square brackets are to paragraphs in the judgment NOTE This summary is provided to assist in understanding the Court s decision. It does not form part of the reasons for the decision. The full judgment of the Court is the only authoritative document. Judgments are public documents and are available at: 10 The Supreme Court of the United Kingdom Parliament Square London SW1P 3BD T: /1887 F: