Chapter 14: Specific and Agreed Remedies

14.2.1.3 Defendant-sided considerations

p. 553 on (v) Impossibility and Hardship, add to end of section-

 

The Court may deal with hardship by making adjustments to the specific performance order. In Airport Industrial GP Ltd v Heathrow Airport Ltd (2015), where a specific performance order would likely make the defendant insolvent, the Court awarded a 2 year delay (in the context of a 999 year lease) in performance to allow the defendant to explore more advantageous methods of implementation: ‘It would be disproportionate to punish AP16 for its fault by taking from it any prospect of it being able to make some profitable use of its land’ (at [135]). This came with the safeguards that damages would be paid to the claimant to compensate for the delay and that, if the defendant failed to meet any milestones specified in the court order, it would be required to implement the contract as originally agreed (at [133]).

 

14.3.2.1 The penalty rule
p. 567, add to end of section-

In Vivienne Westwood Ltd v Conduit Street Development Ltd [2017] EWHC 350 (Ch), the judge restated the main principles based on Cavendish Square Holding BV v Makdessi [2016] UKSC 67; [2016] A.C. 1172:

1. Whether or not a contractual provision is a penalty is a question of interpretation of the contract, and the real question is whether it is penal or punitive in nature.

ii) In English law, a penalty clause can only exist where a secondary obligation is imposed upon a breach of a primary obligation owed by one party to the other. It is to be distinguished from a conditional primary obligation, which depends on events that are not breaches of contract.
iii) Whether a clause imposes a secondary liability upon a breach of contract is a question of substance and not of form.
iv) A provision that in substance imposes a secondary liability for breach of a primary obligation is penal if it imposes on the party in default a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation, or (using traditional language) which is exorbitant, extravagant or unconscionable in comparison with the value of that legitimate interest.
v) The onus lies on the party alleging that a clause is a penalty to show that the secondary liability is exorbitant, extravagant or unconscionable.
vi) Since the penalty rule is an interference with freedom of contract, it is not lightly to be concluded that a term in a contract negotiated by properly advised parties of comparable bargaining power is a penalty.’
In this case, the landlord granted a rent concession to a tenant in a side letter to the lease. A clause provided that if the tenant breached the terms of the side letter or lease it would need to pay the higher rent contained in the lease, with retrospective effect. The issue was whether this provision was enforceable.
Fancourt QC set out the approach at [41]:

1. ‘is the stipulation in substance a secondary obligation engaged upon a breach of a primary contractual obligation’? if so,
2. ‘identify the extent and nature of the legitimate interest of the promisee in having the primary obligation performed, and’
3. ‘determine whether or not, having regard to the legitimate interest, the secondary obligation is exorbitant or unconscionable in amount or in its effect’

He concluded that the clause was penal and unenforceable on the approach above, notwithstanding the equal bargaining power ‘between two well-advised parties’, because:

1. The primary obligation to pay rent at the lower rate only changed if one of the conditions of the side letter was no longer satisfied or in the event of a breach of contract by the tenant, so (i) above is satisfied. The landlord could impose a greater obligation upon the happening of any breach of any obligation in the lease, therefore the secondary obligation was capable of being a penalty.
2. The reduction in rent was a substantial term of the bargain which the tenant struck with the landlord in consideration of its taking the lease. The landlord could not therefore argue that it had a legitimate interest in seeing the rent revert to the open market level.
3. Under the side letter, the same substantial financial adjustment applied whether a breach was one-off, minor, serious or repeated, and without regard to the nature of the obligation broken or any actual or likely consequences for the landlord. That had long been recognised as one of the hallmarks of a penalty. If the terms of the side letter were to have any sensible commercial effect, it was necessary to exclude a de minimis breach of covenant from triggering the landlord's right to terminate the side letter. … It was also clear from the wording of the side letter that its termination had retrospective effect, meaning that upon termination, the tenant would have to pay additional rent for all the preceding years of the term that had passed, as well as paying it for the future. The obligation to pay rent at a higher rate as from the rent commencement date of the lease, regardless of the nature and consequences of the breach, was penal in nature. It might give rise to a very substantial and disproportionate financial detriment. The extra financial detriment to the tenant seemed exorbitant and unconscionable in comparison with any legitimate interest in full performance. The termination provision would also be penal in nature even if it had only prospective effect.