• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
  • Kemp Little specialises in the technology and digital media sectors and provides a range of legal services that are crucial to fast-moving, innovative businesses.Our blend of sector awareness, technical excellence and responsiveness, means we are regularly ranked as a leading firm by directories such as Legal 500, Chambers and PLC Which Lawyer. Our practice areas cover a wide range of legal issues and advice.
  • Our Commercial Technology team has established itself as one of the strongest in the UK. We are ranked in Legal 500, Chambers & Partners and PLC Which Lawyer, with four of our partners recommended.
  • Our team provides practical and commercial advice founded on years of experience and technical know-how to technology and digital media companies that need to be alert to the rules and regulations of competition law.
  • Our Corporate Practice has a reputation for delivering sound legal advice, backed up with extensive industry experience and credentials, to get the best results from technology and digital media transactions.
  • In the fast-changing world of employment law our clients need practical, commercial and cost-effective advice. They get this from our team of employment law professionals.
  • Our team of leading IP advisors deliver cost-effective, strategic and commercial advice to ensure that your IP assets are protected and leveraged to add real value to your business.
  • Our litigation practice advises on all aspects of dispute resolution, with a particular focus on ownership, exploitation and infringement of intellectual property rights and commercial disputes in the technology sector.
  • We have an industry-leading reputation for our outsourcing expertise. Our professionals deliver credible legal advice to providers and acquirers of IT and business process outsourcing (BPO) services.
  • We work alongside companies, many with disruptive technologies, that seek funding, as well as with the venture capital firms, institutional investors and corporate ventures that want to invest in exciting business opportunities.
  • Our regulatory specialists work alongside Kemp Little’s corporate and commercial professionals to help meet their compliance obligations.
  • With a service that is commercial and responsive to our clients’ needs, you will find our tax advice easy to understand, cost-effective and geared towards maximising your tax benefits.
  • At Kemp Little, we advise clients in diverse sectors where technology is fundamental to the ongoing success of their businesses.They include companies that provide technology as a service and businesses where the use of technology is key to their business model, enabling them to bring their product or service to market.
  • We bring our commercial understanding of digital business models, our legal expertise and our reputation for delivering high quality, cost-effective services to this dynamic sector.
  • Acting for market leaders and market changers within the media industry, we combine in-depth knowledge of the structural technology that underpins content delivery and the impact of digitisation on the rights of producers and consumers.
  • We understand the risks facing this sector and work with our clients to conquer those challenges. Testimony to our success is the continued growth in our team of professionals and the clients we serve.
  • We advise at the forefront of the technological intersection between life sciences and healthcare. We advise leading technology and data analytics providers, healthcare institutions as well as manufacturers of medical devices, pharmaceuticals and biotechnological products.
  • For clients operating in the online sector, our teams are structured to meet their commercial, financing, M&A, competition and regulatory, employment and intellectual property legal needs.
  • Our focus on technology makes us especially well positioned to give advice on the legal aspects of digital marketing. We advise on high-profile, multi-channel, cross-border cases and on highly complex campaigns.
  • The mobile and telecoms sector is fast changing and hugely dependent on technology advances. We help mobile and wireless and fixed telecoms clients to tackle the legal challenges that this evolving sector presents.
  • Whether ERP, Linux or Windows; software or infrastructure as a service in the cloud, in a virtualised environment, or as a mobile or service-oriented architecture, we have the experience to resolve legal issues across the spectrum of commercial computer platforms.
  • Our clients trust us to apply our solutions and know-how to help them make the best use of technology in structuring deals, mitigating key risks to their businesses and in achieving their commercial objectives.
  • We have extensive experience of advising customers and suppliers in the retail sector on technology development, licensing and supply projects, and in advising on all aspects of procurement and online operations.
  • Our legal professionals work alongside social media providers and users in relation to the commercial, privacy, data, advertising, intellectual property, employment and corporate issues that arise in this dynamic sector.
  • Our years of working alongside diverse software clients have given us an in-depth understanding of the dynamics of the software marketplace, market practice and alternative negotiating strategies.
  • Working with direct providers of travel services, including aggregators, facilitators and suppliers of transport and technology, our team has developed a unique specialist knowledge of the sector
  • Your life as an entrepreneur is full of daily challenges as you seek to grow your business. One of the key strengths of our firm is that we understand these challenges.
  • Kemp Little is trusted by some of the world’s leading luxury brands and some of the most innovative e-commerce retailers changing the face of the industry.
  • HR Bytes is an exclusive, comprehensive, online service that will provide you with a wide range of practical, insightful and current employment law information. HR Bytes members get priority booking for events, key insight and a range of employment materials for free.
  • FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. We provide a free pack of all the things no-one tells you and things they don’t give away to get you started.

Penalty clauses on a breach of contract

The recent Court of Appeal decision in El Makdessi v Cavendish Square Holdings BV [2013] and another serves as a helpful reminder as to the issues arising when inserting a forfeiture clause into a contract.

It is a well-established rule that penalty clauses in contracts are unenforceable. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] sets out the classic tests as to whether a particular provision is a penalty:

  • Is the effect of the provision punitive? Even a provision not using the word “penalty” could still be a penalty.
     
  • A provision that is intended to deter a breach, rather than compensate the innocent party in the case of a breach, is likely to be a penalty (more recently confirmed in Lordsvale Finance plc v Bank of Zambia [1996] and Cine Bes Filmcilik ve Yapimcilik v United International Pictures [2003]). Another particularly useful case is Jobson v Johnson [1998] which confirms that penalties do not have to be for money and in that case concerned the obligatory transfer of shares).
     
  • Liquidated damages are therefore not necessarily a penalty if the quantum of such damages is a genuine pre-estimate by the parties of the loss that the innocent party would suffer, bearing in mind the specific details of the matter in hand. A level of liquidated damages beyond that which “could be conceivably be proved to have followed from the breach” would be deemed extravagant and a penalty and therefore unenforceable.

However, recent cases such as Azimut-Benetti Spa (Benetti Division) v Healey [2010] and El Makdessi suggest that a fourth principle has been established:

  • Even if a provision is not a genuine pre-estimate of loss or if it is at risk of being seen as unreasonable or extravagant, it may not be a penalty if it can be shown to be “commercially justifiable”.

The facts of the El Makdessi case will be familiar to those who are regularly involved in corporate transactions: the El Makdessi agreement provided for the forfeiture of Mr Makdessi’s right to a deferred payment (the “Forfeiture Clause”) and for a forced transfer of his minority shareholding in the target company at an undervalue (the “Compulsory Transfer Clause”) if Mr Makdessi breached his restrictive covenants. When Mr Makdessi breached his restrictive covenants and Cavendish Holdings tried to enforce the relevant provisions, he argued that they were penal and therefore unenforceable.

The Court of Appeal determined that the relevant provisions were not a reasonable pre-estimate of Cavendish Holdings’ loss and that they were extravagant and unreasonable. The court also noted that they lacked commercial justification because the sum Mr Makdessi stood to lose on the occurrence of his breach was disproportionately high compared to Cavendish Holdings’ loss arising out of such breach and were a deterrent rather than compensation, and therefore an unenforceable penalty. The determination that the arrangement was not commercially justifiable was largely based on the fact there were a very wide range of possible outcomes on the occurrence of a breach by Mr Makdessi and that the level of damages was fixed regardless of how immaterial or minor Mr Makdessi’s breach could have been.

Interestingly, in the previous instance, the High Court’s opinion was that either the Forfeiture Clause or the Compulsory Transfer Clause alone would have been a commercially justifiable reflection of the possible loss of goodwill arising from Mr Makdessi’s breach but, taken together, brought the contract’s forfeiture provisions within the territory of being a deterrent to breach rather than mere damages.

The El Makdessi case and the court’s references to provisions for breach being “commercially justifiable” reminds us that each contract should to be considered on a case by case basis. Whilst it does not provide much certainty as to what is “commercially justifiable” actually means, it does suggest that the most important test is in fact whether the provision in question is intended to be a deterrent rather than a compensatory mechanism.

The three key points to take away from the El Makdessi case are that:

  • In the same way as non-compete/non-solicit restrictions must be tailored in a contract to ensure enforceability, the contractual repercussions of any breach should be measured and commercially justifiable; otherwise, they may be struck out in their entirety and the non-breaching party will (subject to the remaining terms of the contract) be left with only the possibility of making a general damages claim.  
     
  • In order to assist with the rebuttal of any future challenges as to enforceability, one should retain records of negotiations leading up to the agreement of the forfeiture clause.  
     
  • As acknowledged by Clarke LJ in the El Makdessi case, it may be possible to draft a contract so that, instead of there being a forfeiture event, there is a contractual upside (for example a further payment) if certain conditions are fulfilled. Whilst the mechanism is quite different the effect could be quite similar.

For further information, please contact James Wilkinson - Corporate associate