Faculty: Bide our time on penalty clauses

Penalty clauses are under scrutiny by the Scottish Law Commission (SLC) as part of its review of contract law.

In a discussion paper, the SLC presented three alternatives: leaving the law to develop in light of the Cavendish/ParkingEye decision of the Supreme Court, abolishing the present common law on penalty clauses altogether, and abolishing the present common law against penalties and replacing it with a new regime.

In a response, the Faculty said it was of the view that the decision in Cavendish/ParkingEye should be allowed to “bed in” with the further development of the law being kept under review, but no specific law reform being recommended at this point.

“As the discussion paper notes, Lord Hodge’s judgment addressed Scots Law directly…he was persuaded that the rule against penalties should remain part of the law of Scotland…he referred specifically to the fact that the Scottish Law Commission itself had in 1999 recommended the retention of judicial control over penalties,” said the Faculty.

“The Faculty’s view is that specific law reform is not recommended at this time but rather that developments in the law, post Cavendish supra, ought to be kept under active review for a reasonable period of time.”

The Faculty went on, nonetheless, to offer views on a number of questions posed in the discussion paper, and said that, were the common law rule against penalties to be abolished, the “most careful and robust” consideration would require to be given to any draft legislation.

“The legislature would be interfering with a valid and enforceable contract and limiting the ability of parties to enter into bargains on terms they see fit,” added the Faculty.