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Captain Hindsight, along with his sidekicks Should’a, Would’a and Could’a, is an excellent character on the hilariously offensive, if a little juvenile, American cartoon series South Park. He first appeared on episode 11 of season 14 to deal (in the fictional cartoon world) with the aftermath of the BP Deepwater Horizon oil spill in 2010; the joke being that it was very easy to identify with hindsight what had gone wrong and point to the failings (although BP were subsequently found to have actually been at fault). It was followed up by a brilliant caricature of Tony Hayward. You really have to see the episode.

Anyway, I often feel like Captain Hindsight as a litigation lawyer. Almost every case that comes in involves me advising the client what they could have done, what the other side should have done and how much of a better position everyone would have been in if only lawyers had handled things from the beginning. I often tell clients, for example, that it might have been a good idea to get insurance certificates before letting a sub-contractor on site so they know where to direct their claim, and other cases that the contractual position might have been better had it contained a formal liquidated damages clause, so that they can actually do something about delinquent sub-contractors.

I’m going to go off on a bit of a tangent at this stage and tell you that I recently went shopping at Aldi on the Heartsease Roundabout in Thorpe (humour me for a moment - this is going somewhere). They have a car park just outside for use by Aldi customers, and all customers have to do is to register their car inside the Aldi supermarket and they’re allowed to park for free (or at least that was the case when I went - obviously it may have changed, and you will need to check the current rules if you go). 

The trouble, for some people, is that there are some other businesses around the Aldi on the Heartsease roundabout which have limited or no parking. So some have, in the past, used the Aldi car park to nip across the road to some other business locally. Their difficulty is that the Aldi car park will register your car registration number, and send you an automatic fine if you haven’t registered your details. It’s something like £60 if you pay immediately or £100 if not. Quite a lot of money just to park.

Back in the good old days (about five years or so ago) our advice was that these kinds of fines were unenforceable. Our Head of Regulatory, Tim Cary, even went on Watchdog with Anne Robinson to give his formal legal advice (he turned the parking ticket into a paper aeroplane and threw it across the BBC studio). Our advice at the time was based on the inability of the parking company to identify the driver, coupled with a back-up argument that the parking fine was an unenforceable penalty (as per the old case that most law students learn in the first few weeks of their Contract Law module of Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915]). Unfortunately, the government withdrew the first part of that argument with the Protection of Freedoms Act 2012 (which, despite the name, took away a little bit of freedom to park in private car parks).

However, the penalty charge argument potentially remained (although most practitioners knew with some confidence the way the law was going on this), and it remained as a potential argument up until poor old Barry Beavis, a chip shop owner from Essex, woke up one morning and decided to change history through the legal system (his decision making process really wouldn’t have been so dramatic as all that, but let’s go with it anyway). Mr Beavis decided to take on the might and power of ParkingEye, a car park company, before the Supreme Court, consisting of seven Law Lords, some of the most fiercely intelligent people in the country (to be fair, Mr Beavis was represented by a QC, two junior barristers and a team of solicitors, along with another QC and team of solicitors instructed by an intervener, the Consumers’ Association. And the other parties had agreed not to claim costs against him so the pressure was off a bit, but still). Mr Beavis was convinced that he didn’t have to pay his parking fine, and although he had already lost his case at the High Court and the Court of Appeal, he was convinced that he could set a precedent in the highest court in the land to help motorists everywhere park with impunity on private land (though the government would probably have introduced legislation to the contrary had the court decided in his favour).

Mr Beavis’ case was heard at the same time as another classic underdog story. Mr Talal El Makdessi was an extraordinarily wealthy and influential Lebanese business leader who decided to take on a company (Cavendish Square Holdings BV) to whom shares in Y&R Holdings Hong Kong Limited had been transferred as part of a reasonably complex arrangement (ok, I take back the underdog element - this was not an underdog story). The gist of his issue (I am summarising, as this part of the case is quite detailed) was that following a breach, Mr Makdessi was obliged to sell all his shares to the company at a lower price and he didn’t get the final two payments under the sale agreement, which he felt was an unfair penalty.

I like to think that Mr Makdessi and Mr Beavis sat in a pub round the corner from the Supreme Court on the evening of the first day of the hearing sharing a toast to attempting to change history together, boldly taking on the powers that be, putting up the good fight and looking forward to victory…but it probably didn’t happen that way.

Anyway, regardless of the personal story of Mr Makdessi and Mr Beavis, they both lost to what they probably saw as the establishment, and the Supreme Court set down a new test for penalty clauses in November 2015. The test is no longer that a provision relating to the consequences of breach will be a penalty unless it is a genuine pre-estimate of loss, which was the old test (though quietly modified quite substantially over the years). The test is now two-fold. First, if the clause is a primary obligation (i.e. the subject matter of the contract) it will never be a penalty clause; only secondary obligations are capable of being a penalty clause.  If it is a secondary obligation, the second part of the test comes in, which is whether the provision 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.

Mr Makdessi fell at the first hurdle; his obligation was a primary obligation. Mr Beavis got a bit further, in that the provision he complained about was a secondary obligation. However, the court found that ParkingEye had a legitimate interest in running an effective car park, and the fines were proportionate to that interest.

The decision was affirmed by the High Court in a decision on 8 April 2016 involving mortgage-backed securitisations (which will be interesting to anyone who either works in technical finance or has seen the 2015 film The Big Short), Hayfin v Windermere. What I quite liked about this judgment was that the judgment contains the sentence “an innocent party cannot save a clause from being a penalty by claiming that even though it provides for payment of a wholly disproportionate amount to the interest which he (the innocent party) has in performance, the contract-breaker is so rich that he will not notice the difference”, which rather suggests that the court is used to submissions relating to how ridiculously rich one of the parties was that they just would not have noticed being penalised in contract. It speaks volumes as to the kinds of people who are able to get access to the higher courts these days (though that’s a political view, perhaps to be saved for a future blog post).

Though we can feel some pity for Mr Makdessi and Mr Beavis, this judgment has further implications for the construction industry. As I said at the beginning of this blog post (I told you the story of my trip to Aldi was going somewhere), I often advise employers and/or main contractors to ensure that they have a liquidated damages clause in their construction contracts. That way, if the sub-contractor delays or is at risk of delays in breach of the contract, there is a clear and enforceable remedy to that breach by deducting liquidated damages for interim or final payments.

In practice, the judgment in Cavendish v Makdessi is likely to make liquidated damages clauses more enforceable, and will almost certainly encourage employers and main contractors to increase the amount specified in the liquidated damages clause, on the basis that very high liquidated damages are supposedly necessary to enforce their legitimate interest in getting the project completed on time (whereas previously the counter-argument would have been that the amount was not a genuine pre-estimate of loss). 

That increase in liquidated damages will almost certainly, in turn, lead to an increase in the cost of construction projects. If I were a sub-contractor, I would want to ensure that there was enough money in the pot to be able to pay some of the (now perhaps much higher) liquidated damages if I delayed for any reason, and that cost will be passed on to the developer or employer. So in one fell swoop, the Supreme Court has increased the cost of major construction projects everywhere. Captain Hindsight would like to tell the Supreme Court that they should’a thought of that when changing the law on penalty clauses.