08 February 2013 #Dispute Resolution
Although it is a general principle under English law that parties should be free to negotiate their own contract terms, the Court may decide that a clause is “unenforceable” in certain circumstances, even where both parties have signed up to it.
However, the recent case of Cavendish Square Holdings BV & Another -v- Makdessi  EHWC 3582 (Comm) demonstrates that the Court will exercise that power rarely.
The proceedings related to a multi-million dollar share purchase agreement, under which Cavendish agreed to buy part of the Defendant’s interest in an advertising and marketing communications group.
Cavendish subsequently brought a claim against the Defendant alleging that he was in breach of contract. In particular, it alleged that the Defendant was in breach of a restriction preventing him from competing with the group and that, under the terms of the agreement, the Defendant was therefore: (i) not entitled to the full purchase price specified in the contract for his shares; and (ii) obliged to sell his remaining interest in the group to Cavendish at a reduced price.
The Defendant admitted that he had no factual defence to Cavendish’s claim, but raised a number of legal arguments as to why the relevant contract terms should not apply. Amongst other matters, the Defendant argued that the clauses which reduced the purchase price and required him to sell his remaining shares were “unenforceable penalty clauses”. Under English law, the Court may strike down a clause as a penalty if, for example, it does not reflect a genuine pre-estimate of a party’s loss or its predominant purpose is to deter a breach of the contract. The Defendant also argued that the non-compete clause was unenforceable on the grounds that it was an “unreasonable restraint of trade”.
At the hearing, the Court upheld Cavendish’s claim. With regard to the Defendant’s obligation to transfer his remaining shares, the Court held that the purpose of the clause was not to act as a deterrent against breach of contract by the Defendant, but rather “to decouple the parties on a speedy and conventional basis”. It noted the clause was “in any event the subject of thorough negotiation”. The Court was also satisfied that there was a commercial purpose for reducing the purchase price in the event of the seller’s default, and that the “existence of detailed negotiations by experienced solicitors” meant it was not oppressive. Consequently, both clauses were enforceable.
The Court also rejected the Defendant’s arguments in relation to the non-compete clause. It decided that the restriction was “simply an effective protection of the goodwill” in the group against competition by the Defendant. In reaching its decision, the Court again noted that the clause had been “fully negotiated on a level playing field”.
The case is noteworthy as it demonstrates the Court’s reluctance to strike down clauses in commercial contracts, particularly those which have been negotiated at arm’s-length by parties of comparable bargaining power.