Cavendish Square Holding v Makdessi

Allegations & issues

After breaching restrictive covenants in a business sale, Mr Makdessi argued that clauses removing deferred consideration and requiring a sale of his remaining shares were unenforceable penalties. [2, Background]

Key rulings & findings

The provisions protected legitimate commercial interests in the goodwill and loyalty associated with the business sale. The Court rejected the penalty challenge. [1; 2]

Admissions

The recorded background includes breach of the covenants. The appeal concerned the enforceability of its contractual consequences. [2, Background]

Disposition

Cavendish’s appeal allowed; validity of the disputed clauses upheld. [2, Judgment]

Penalties, damages & redress

This concerned contractual price and share-transfer consequences, not a fine imposed by a regulator or criminal court. [1; 2]

Restrictions & obligations

The proceedings concerned restrictive covenants in this business-sale agreement. They did not impose a general professional ban. [1; 2]

The commercial interest behind the clauses

Cavendish bought a controlling stake in an advertising and communications business. The agreement connected part of the price to the seller’s observance of covenants against competing activities. The goodwill being acquired depended substantially on that continuing loyalty. [1; 2, Background and Application]

The Court’s analysis treated the payment clause as a price adjustment and examined the share-transfer clause in the context of the same bargain. A clause did not become invalid simply because its financial consequences were not a precise estimate of provable damages. [1; 2, Application]

The penalty rule was retained, with a wider commercial test

The Court declined to abolish the penalty rule. Its analysis distinguished primary contractual obligations from secondary consequences of breach and asked whether a challenged secondary obligation was disproportionate to the innocent party’s legitimate interest in performance. [1; 2, Legal principles]

That interest could extend beyond compensation for a measurable financial loss. The result nevertheless depended on the bargain and interests in this transaction; the Court did not give contracting parties unlimited freedom to impose disproportionate consequences merely by choosing a particular label. [1; 2]

THE UNDERLYING RECORD

Primary sources

Read the full documents for their precise wording and context. Regulator summaries are identified separately from court records.