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World Cup Puts Penalty Clauses on The Spot

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As has been widely reported over the last few weeks, increasingly tense relations between the UK and Russia have led to calls for England to withdraw from the upcoming FIFA Football World Cup which kicks off on June 14 in Moscow.

penalty kickUnder FIFA World Cup Regulations, any country that withdraws 30 days before the final competition starts would be fined at least 250,000 (£185,000) Swiss francs. Those who pull out less than 30 days before the competition - or during the final competition itself - will incur fines of at least 500,000 (£371,000) Swiss francs.

Whilst the sums might not be significant given the huge amount of money generated by the FIFA World Cup (it was reported that FIFA generated $4.8 billion in revenue compared to $2.2 billion in expenses at the 2014 event, it’s a timely reminder of how the law works in relation to liquidated damages and penalty clauses.

A liquidated damages clause is a clause where the parties agree when they are drawing up the contract for a fixed amount to be paid by the defaulting party to the innocent party in the event of a breach.

It had previously been considered that liquidated damages clauses were only enforceable if they represented a 'genuine pre-estimate of loss‘.

However, this test was revisited by the recent case of ParkingEye, which examined whether parking fines represented penalty clauses and resulted in an outcome, which decided that, even where a clause does not represent a genuine pre-estimate of loss, this does not necessarily mean that it is unenforceable. The court will consider factors such as legitimate interest and whether the clause is ‘extravagant, exorbitant or unconscionable’.

If, however, the agreed sum is more in the nature of a penalty intended to discourage breach and safeguard performance of the contract, it is not recoverable. In such a situation, the innocent party would have to prove its loss in the usual way.

The rule against penalties is absolute and, as a result, will only be invoked sparingly by the court as it is an exception to the general freedom of contract principle.

In light of the above, the new flexible approach so as to enable an assessment of each situation on its particular circumstances requires consideration of the following:

  1. Is the penalty rule engaged at all?
  2. Is there a legitimate interest served and protected by the clause?
  3. If so, is the provision providing to serve that interest out of proportion (by being extravagant, exorbitant or unconscionable)?

If the answer to the above questions is yes, then the provision in question is likely to be unenforceable as a penalty.

As the clock ticks down to June 14, although it seems unlikely that the England football team will actually follow through with a threat to withdraw, if it does it is possible that it will be counting the monetary - and wider costs - of boycotting the 21st FIFA World Cup.

For more information, contact Andrew Broadbent on 0114 252 1416 or andrewbroadbent@hlwkeeblehawson.co.uk

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