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THE “LEGITIMATE INTEREST IN PERFORMANCE” IN THE LAW ON PENALTIES

  • Solène Rowan
Abstract

The article focuses on the “legitimate interest in performance” requirement which is now at the heart of the new test on penalty clauses but which has been left undefined by the Supreme Court in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis [2016]. It seeks to bring clarity to what is meant by “legitimate interest in performance” by examining other areas of the law of remedies for breach of contract where concepts of legitimate interest have featured in the court’s reasoning. It also makes suggestions as to what considerations are or might be relevant in determining whether a contracting party has a legitimate interest in performance, in particular a legitimate interest that goes beyond compensation.

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Address for Correspondence: Department of Law, London School of Economics, Houghton Street, London, WC2A 2AE, UK. Email: s.rowan@lse.ac.uk.
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*

Associate Professor, London School of Economics.

My thanks are owed to Gregg Rowan, Essie Dyer, and the editor and the anonymous referees of the Cambridge Law Journal for their comments on earlier drafts of this article. I am also grateful to Nick McBride for providing me with materials on the “legitimate interest” requirement in other contexts than remedies for breach of contract and to Charlotte Thomas of Brick Court Chambers for sharing her Bachelor of Civil Law (BCL) dissertation, “Reconceptualising White and Carter”.

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1 [2016] A.C. 172. For ease of reference, the conjoined appeals will be referred to in this article simply as Makdessi.

2 Or another type of clause that falls within the scope of the penalty rule.

3 At [32], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance; at [255], per Lord Hodge.

4 At [32], per Lord Neuberger and Lord Sumption; at [243], per Lord Hodge.

5 At [32], per Lord Neuberger and Lord Sumption; at [255], per Lord Hodge.

6 At [28]–[32], [99], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance; at [255], per Lord Hodge.

7 Ibid.

8 The exceptions are Beale, H. (ed.), Chitty on Contracts, 32nd ed. (London 2015), [26–198]–[21–210], which contains a short but excellent section that seeks to identify some of the situations in which an injured party is likely to have a legitimate interest in performance that goes beyond compensation and the Scottish Law Commission's Discussion Paper on Penalty Clauses No. 162 (2016), at paras. 3.23–3.26, 3.49, 3.51, 3.55–3.59, 3.62, 5.38–5.61; and Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach of Contract, and Penalty Clauses No. 252 (2018), at paras. 20.20–20.26, which contain very useful materials on the “legitimate interest” requirement. The topic is however fertile ground for further analysis and this paper elaborates upon, adds to and also diverges from the conclusions of Chitty and the Scottish Law Commission. The aim of the article is to explore the requirement in depth rather than to criticise it and suggest more fitting solutions. It has already been the subject of extensive criticism in the literature, see Summers, A., “Unresolved Issues in the Law on Penalty” [2017] L.M.C.L.Q. 95; Dawson, F., “Determining Penalties as a Matter of Construction” [2016] L.M.C.L.Q. 207; Morgan, J., “The Penalty Clause Doctrine: Unlovable but Untouchable” [2016] C.L.J. 11; Conte, C., “The Penalty Rule Revisited” (2016) 132 L.Q.R. 382; Fisher, J., “Rearticulating the Rule Against Penalty Clauses” [2016] L.M.C.L.Q. 169.

9 [2016] A.C. 172, at [29]–[30], per Lord Neuberger and Lord Sumption.

10 The article focuses on the role of “legitimate interest in performance” in the context of remedies for breach of contract as this is most relevant to damages clauses. “Legitimate interest” also has a role in the law of restraint of trade (Countrywide Assured Financial Services Ltd. v Smart [2004] EWHC 1214 (Ch.)), the assignment of a right to sue for damages in tort (Simpson v Norfolk and Norwich University Hospital NHS Trust [2012] Q.B. 640), and the law of conspiracy (Crofter Hand Woven Harris Tweed & Co. Ltd. v Veitch [1942] A.C. 453).

11 At [32], per Lord Neuberger and Lord Sumption; at [255], per Lord Hodge.

12 At [28]–[32], [99], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance; at [255], per Lord Hodge.

13 At [32], per Lord Neuberger and Lord Sumption; at [255], per Lord Hodge.

14 At [255], per Lord Hodge.

15 Burrows, A., “Damages for Breach of Contract: A Developing Hierarchy?” (2003) 35 Bracton L.J. 28, at 43.

16 At [28]–[32], [99], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance; at [255], per Lord Hodge.

17 Ibid.

18 Ruxley Electronics and Construction Ltd. v Forsyth [1996] A.C. 344 (HL); Farley v Skinner [2002] 2 A.C. 732 (HL); Harris, D., Ogus, A. and Phillips, J., “Contract Remedies and the Consumer Surplus” (1979) 95 L.Q.R. 581.

19 Alfred McAlpine Construction Ltd. v Panatown Ltd. [2001] 1 A.C. 518 (HL), per Lord Goff and Lord Millett.

20 On the efficacy of the remedial system in protecting the performance interest, see McKendrick, E., “Breach of Contract and the Meaning of Loss” (1999) 52 C.L.P. 37; Rowan, S., Remedies for Breach of Contract, A Comparative Analysis of the Protection of Performance (Oxford 2012).

21 Ruxley Electronics and Construction Ltd. [1996] A.C. 344 (HL); Watts v Morrow [1991] 1 W.L.R. 1421; Farley [2002] 2 A.C. 732 (HL).

22 Alfred McAlpine Construction Ltd. [2001] 1 A.C. 518 (HL), per Lord Goff and Lord Millett.

23 A.G. v Blake [2001] 1 A.C. 268 (HL) and see also the use of “negotiating damages”, also known as Wrotham Park damages.

24 White and Carter (Councils) Ltd. v McGregor [1962] A.C. 413 (HL Sc).

25 At [29], [30], per Lord Neuberger and Lord Sumption.

26 White and Carter (Councils) Ltd. [1962] A.C. 413 (HL Sc).

27 At [29], per Lord Neuberger and Lord Sumption.

28 See note 26 above.

29 Ibid., at p. 431.

30 Most recently, see MSC Mediterranean Shipping Co. S.A. v Cottonex Anstalt [2017] 2 All E.R. (Comm) (CA), at [40], per Moore-Bick L.J.: “it may well be that the implications of Lord Reid's observations in White & Carter and the principles of law which underpin it have yet to be fully identified.” See also the excellent article by Liu, Q., “The White & Carter Principle: A Restatement” (2011) 74 M.L.R. 171.

31 Isabella Shipowner S.A. v Shagang Shipping Co. Ltd. (The “Aquafaith”) [2012] 1 C.L.C. 899. See also Gator Shipping Corporation v Trans-Asiatic Oil Ltd. (The “Odenfeld”) [1978] 2 Lloyd's Rep 357 (QB); and Ocean Marine Navigation Ltd. v Koch Carbon Inc (The “Dynamic”) [2003] EWHC 1936 (Comm.).

32 Ibid., at para. [44].

33 The “Aquafaith” [2012] 1 C.L.C. 899.

34 Ibid., at para. [46]. White and Carter being a Scottish case, it is worth noting that it was followed by the First Division of the Court of Session in Salaried Staff London Co. v Swears & Wells 1985 S.C. 185. However, it has never been applied so as to prevent the injured party from keeping the contract alive, as illustrated by AMA New Town Ltd. v Law 2013 S.C. 608.

35 Ibid., at para. [42]. See also Reichman v Beveridge [2007] Bus. L.R. 412 (CA).

36 Ibid.

37 Attica Sea Carriers Corp. v Ferrostaal Poseid on Bulk Reederei GmbH (The “Puerto Buitrago”) [1976] 1 Lloyd's Rep. 250 (CA).

38 Ibid., at p. 255, per Lord Denning M.R.

39 MSC Mediterranean Shipping Co. S.A. [2017] 2 All E.R. (Comm).

40 Ibid., at para. [43], although Moore-Bick L.J. thought that this was not a case in which White and Carter applied since it was not open to the carrier to affirm the contract once the commercial purpose of the contract had become frustrated. He added however that, had this not been the case, “this is a classic case in which it would have been wholly unreasonable for the carrier to insist on further performance”.

41 Burrows, A., Remedies for Torts and Breach of Contract, 3rd ed. (Oxford 2004), 440; Stoljar, S., “Some Problems of Anticipatory Breach” (1974) 9 Melb.U.L.Rev. 355.

42 Carter, J.W., “White and Carter v McGregor – How Unreasonable?” (2012) 128 L.Q.R. 490, at p. 491.

43 Ibid.

44 Liu, “The White & Carter Principle”, p. 171.

45 Ibid.

46 O'Sullivan, J., “Repudiation: Keeping the Contract Alive” in Virgo, G. and Worthington, S. (eds.), Commercial Remedies: Resolving Controversies (Cambridge 2017), 51, who argues that the injured party should always be permitted to honour and perform to obtain the promised consideration subject to the policy concern to avoid stalemate and perpetual obligations. Morgan, J., “Smuggling Mitigation into White & Carter v McGregor: Time to Come Clean?” [2015] 4 L.M.C.L.Q. 575 argues in favour of a general mitigation qualification on the right to elect to maintain performance. See however Gergen, M.P., “The Right to Perform after Repudiation and Recover the Contract Price in Anglo-American Law” in DiMatteo, L.A. and Hogg, M. (eds.), Comparative Contract Law: British and American Perspectives (Oxford 2015), 314, who is supportive of the legitimate interest test and seeks to articulate its objectives, in particular the avoidance of possible uncompensated loss for the injured party. The Scottish Law Commission in its Report on Review of Contract Law No. 250 (2018), ch. 12, made no recommendation on direct reform of the law in this area and instead encouraged the Scottish courts to develop the legitimate interest test when the opportunity arises.

47 [2016] A.C. 172, at [32], per Lord Neuberger and Lord Sumption; at [241], per Lord Hodge.

48 It is however addressed in Liu, “The White & Carter Principle”; Whittaker, S., “Performance of Another's Obligation: French and English Law Contrasted” in Johnston, D. and Zimmerman, R. (eds.), Unjustified Unrichment: Key Issues in Comparative Perspective (Cambridge 2001), 433; and Rowan, Remedies for Breach of Contract.

49 The “Aquafaith” [2012] 1 C.L.C. 899, at [48]–[50], per Cooke J.

50 At [32], per Lord Neuberger and Lord Sumption.

51 Liu, “The White & Carter Principle”.

52 MSC Mediterranean Shipping Co. S.A. [2017] 2 All E.R. (Comm) (CA), at [40], per Moore-Bick L.J.

53 At [29], [30].

54 Harris, D., “Incentives to Perform or Break Contracts” (1992) 45 C.L.P. 29, at 30.

55 Treitel, G., Remedies for Breach of Contract: A Comparative Account (Oxford 1976), [63]ff.

56 Co-operative Insurance Society Ltd. v Argyll Stores (Holdings) Ltd. [1998] A.C. 1 (HL) 11, per Lord Hoffmann.

57 At [29], [30].

58 Beale, Chitty on Contracts, at [26–201].

59 De Francesco v Barnum (1890) 45 Ch.D. 430; R. v Incorporated Froebel Educational Institute, ex parte L [1999] E.L.R. 488 (QB).

60 E.g. Flint v Brandon (1803) 8 Ves. 159.

61 Beale, Chitty on Contracts, at [26–201].

62 A.G. [2001] 1 A.C. 268 (HL).

63 Ibid., at pp. 282, 285.

64 Burrows, Remedies for Torts and Breach of Contract, p. 403.

65 Ibid; Campbell, D. and Wylie, P., “Ain't No Telling (Which Circumstances Are Exceptional)” [2003] C.L.J. 605; Ahdar, R., “Contract Doctrine, Predictability and the Nebulous Exception” [2014] C.L.J. 39.

66 A.G. [2001] 1 A.C. 268 (HL), 285, per Lord Nicholls.

67 Ibid., at p. 291, per Lord Steyn.

68 Esso Petroleum Co. Ltd. v Niad Ltd. [2001] All E.R. (D) 324 (Ch).

69 Ibid., at para. [63], per Morritt V.C.

70 This term was preferred by the Supreme Court to “Wrotham Park damages” in Morris Garner v One Step (Support) Ltd. [2018] UKSC 20.

71 Experience Hendrix LLC v PPX Enterprises Inc. [2003] EWCA Civ 323 (CA).

72 Morris Garner [2018] UKSC 20.

73 Ibid., at para. [91], per Lord Reed.

74 Ibid., at paras. [90], [97], per Lord Reed.

75 See Section I(B) of this issue.

76 Edelman, J., “Profits and Gains from Breach of Contract” [2001] L.M.C.L.Q. 9.

77 At [99].

78 At [9], [87], per Lord Neuberger and Lord Sumption; at [243], [281], per Lord Hodge; at [294], per Lord Toulson.

79 At [273]–[274], per Lord Hodge.

80 At [75], per Lord Neuberger and Lord Sumption.

81 At [180]–[181], per Lord Mance.

82 Dunlop Pneumatic Tyre Co. Ltd. v New Garage & Motor Co. Ltd. [1915] A.C. 847.

83 Ibid.

84 At [22]–[23], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance; at [221], per Lord Hope.

85 Gray v Braid Group (Holdings) Ltd. [2016] CSIH 68 (Court of Session Scotland).

86 Ibid., at para. [125].

87 Vivienne Westwood Ltd. v Conduit Street Development Ltd. [2017] EWHC 350 (Ch.).

88 At [50]–[53], [60].

89 Howard Perry Ltd. v British Railways Board [1980] 1 W.L.R. 1375 (Ch.).

90 Ibid., at p. 1383.

91 Sky Petroleum Ltd. v VIP Petroleum Ltd. [1974] 1 W.L.R. 576 (Ch.).

92 A.G. [2001] 1 A.C. 268 (HL), 287, per Lord Nicholls.

93 Ibid., at p. 286, per Lord Nicholls.

94 Esso Petroleum Co. Ltd. [2001] All E.R. (D) 324 (Ch.)

95 At [99], per Lord Neuberger and Lord Sumption; at [193], per Lord Mance; at [286], per Lord Hodge.

96 Linden Gardens Trust Ltd. v Lenesta Sludge Disposals Ltd. (consolidated with St. Martins Property Corp Ltd. v Sir Robert McAlpine Ltd.) [1994] 1 A.C. 85 (HL); Alfred McAlpine Construction Ltd. [2001] 1 A.C. 518 (HL).

97 Otherwise known as the problem of “transferred loss”.

98 On this point, see the Scottish Law Commission's Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach of Contract, and Penalty Clauses No. 252 (2018), at paras. 20–21.

99 Beswick v Beswick [1966] A.C. 58 (HL).

100 Anglo-African Shipping Co. v Mortner [1962] 1 Lloyd's Rep 81 (QB).

101 The “Odenfeld” [1978] 2 Lloyd's Rep 357 (QB).

102 Ibid., at p. 374.

103 At [98]; see also Lordsvale Finance plc. v Bank of Zambia [1996] Q.B. 752, in which Colman J. referred to the “great disservice to international banking” if the clause was not enforced.

104 Summers, “Unresolved Issues”, pp. 217–18.

105 Beale, Chitty on Contracts, at [16–106].

106 Beale, Chitty on Contracts, at [16–085].

107 Schroeder Music Publishing Co. v Macaulay [1974] 1 W.L.R. 1308, 1313, per Lord Reid.

108 Wrotham Park Estate Co. Ltd. v Parkside Homes Ltd. [1974] 1 W.L.R. 798 (Ch).

109 Ibid., at p. 811.

110 Co-operative Insurance Society Ltd. [1998] A.C. 1 (HL).

111 Ibid., at p. 15, per Lord Hoffmann.

112 A.G. [2001] 1 A.C. 268 (HL).

113 An example of a case in which an over-compensatory damages clauses was upheld even though the injured party had suffered no financial loss is Clydebank Engineering Co. v Castaneda [1905] A.C. 6.

114 Addis v Gramophone [1909] A.C. 48 (HL).

115 Farley v Skinner [2000] P.L.N.R. 441 (CA), 454, per Mummery L.J.

116 A.G. [2001] 1 A.C. 268 (HL).

117 Ibid., at pp. 284, 287, per Lord Nicholls; at p. 292, per Lord Steyn.

118 Ministry of Sound (Ireland) Ltd. v World Online Ltd. [2003] 2 All E.R. 823.

119 Ibid., at para. [47].

120 Gray [2016] CSIH 68 (Court of Session Scotland).

121 At [35], per Lord Neuberger and Lord Sumption; at [152], per Lord Mance.

122 At [82], per Lord Neuberger and Lord Sumption; at [181], per Lord Mance.

123 See the post-Makdessi case, BHL v Leumi ABL Ltd. [2017] EWHC 1871 (QB) in which this consideration was relevant.

124 Summers, “Unresolved Issues”, pp. 217–18.

125 Philips Hong Kong Ltd. v The AG of Hong Kong (1993) 61 B.L.R. 41 (PC), 5–9, per Lord Woolf; Tullett Prebon Group Ltd. v El-Hajjali [2008] EWHC 1924 (QB), at [32]–[34], per Nelson J.; Azimut-Benetti SpA v Healey [2011] 1 Lloyd's Rep. 473 (QB).

126 Lordsvale Finance plc. [1996] Q.B. 752, 763–64, per Colman J.; Murray v Leisureplay plc. [2005] EWCA Civ 963 (CA).

127 Murray [2005] EWCA Civ 963 (CA), at [106], per Clarke J.; Alfred McAlpine Capital Projects Ltd. v Tilebox Ltd. [2005] B.L.R. 271 (QB) 48, per Jackson J.; Tullett Prebon Group Ltd. [2008] EWHC 1924 (QB), at [38], per Nelson J.

128 Makdessi, at [33], per Lord Neuberger and Lord Sumption.

129 PLC, Practical Law Commercial, Standard Clause 5-378-7443 (2017).

130 Richard v IP Solutions Group Ltd. [2016] EWHC 1835 (Ch.); Hayfin Opal Luxco 3 S.A.R.L., Hayfin Topaz 3 S.C.A. v Windermere VII CMBS plc., U.S. Bank Trustees Ltd., Elavon Financial Services Ltd. [2016] EWHC 782 (Ch.); BHL [2017] EWHC 1871 (QB).

131 First Personnel Services Ltd. v Halfords Ltd. [2016] EWHC 3220 (Ch.); Hayfin Opal Luxco 3 S.A.R.L., Hayfin Topaz 3 S.C.A. [2016] EWHC 782 (Ch.).

* Associate Professor, London School of Economics.

My thanks are owed to Gregg Rowan, Essie Dyer, and the editor and the anonymous referees of the Cambridge Law Journal for their comments on earlier drafts of this article. I am also grateful to Nick McBride for providing me with materials on the “legitimate interest” requirement in other contexts than remedies for breach of contract and to Charlotte Thomas of Brick Court Chambers for sharing her Bachelor of Civil Law (BCL) dissertation, “Reconceptualising White and Carter”.

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