The pattern that survives
The post-Cavendish case law points to a consistent recipe for enforceability: calibrate the consequence to the severity of the breach, document a commercial rationale for the figure, use a graduated or tiered structure rather than one blunt sum, and recite the legitimate interest the clause protects. Keep a contemporaneous record, separate from the contract, of how the LD figure was derived - it is the best defence against a penalty challenge.
The single most common failure is a blunt instrument: one consequence applying identically to trivial and serious breaches (the Vivienne Westwood problem). Avoid it everywhere.
SaaS service credits
In SaaS contracts the key question is whether service credits are liquidated damages or price adjustments. Framed as price adjustments (the fee flexing with measured performance), the penalty rule may not apply because there is no breach - but the customer then loses the right to claim general damages or terminate unless the contract preserves those remedies. The workable structure is tiered: graduated credits between a target and a minimum service level as the sole financial remedy in that band, with performance below the minimum triggering termination and general damages.
Calibrate carefully. In Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200, trivial failures (an out-of-date chocolate mousse, fluff on a notice board) accrued tens of thousands of pounds in service credits through a points system - exactly the disproportionate, blunt outcome that invites a Vivienne Westwood challenge. Graduate the credits and cap them.
Take-or-pay and volume commitments
Take-or-pay clauses are best framed as alternative primary obligations - take and pay, or just pay - rather than secondary obligations triggered by breach; on that analysis the penalty doctrine does not apply (and Cavendish described such clauses as contingent primary obligations). But it is not guaranteed: in M&J Polymers v Imerys Minerals [2008] 1 All ER (Comm) 893, the court held a take-or-pay clause could attract penalty scrutiny, though on the facts it was commercially justifiable and enforceable.
Draft defensively: frame the clause as a genuine alternative obligation, set the take-or-pay price at a discount reflecting saved delivery and variable costs, include make-up rights letting the buyer reclaim volume later, and document the seller's investment in reserved capacity as the justification. A clause demanding 100% of the price for goods never delivered is much harder to defend.
Licensing and development
Cavendish is a gift to licensors: a brand owner's interest in exclusivity, brand integrity, and channel discipline is a legitimate interest beyond quantifiable loss. Frame minimum royalties as consideration for the grant of exclusivity (a primary obligation) rather than damages for failure to sell, and recite that exclusivity-breach LDs protect against brand dilution and loss of goodwill - that recital maps directly onto the Cavendish framework.
For development contracts, Triple Point Technology v PTT [2021] UKSC 29 is the touchstone: structure delay LDs as a daily rate per milestone, capped per milestone and in aggregate, and use time-based triggers (not acceptance-based ones) so LDs accrue up to completion or termination. A graduated acceptance-testing remedy works well - remediation, then enhanced remediation plus delay LDs, then a termination right with general damages. The JCT Design and Build 2024 form (clause 2.29.5) now reflects Triple Point expressly.
Seven rules
Pulling it together: (1) record the rationale contemporaneously; (2) never use one blunt LD for fundamentally different breaches - graduate it; (3) specify whether LDs are exclusive or cumulative, with a fallback if they fail; (4) recalibrate quantum every time you amend the price or scope (Unaoil); (5) make the liability architecture internally consistent (see the architecture guide); (6) draft for the enforcement jurisdiction, not just the governing law; and (7) confirm insurance - standard professional-indemnity and liability policies usually exclude contractual LD obligations.
None of these is difficult, and together they convert an LD clause from a litigation risk into a reliable remedy.
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Practical checklist
- Document the rationale for the LD figure contemporaneously, separately from the contract.
- Graduate LDs to breach severity - never one blunt sum for trivial and serious breaches.
- For SaaS, tier service credits between target and minimum SLAs and cap them (Mid Essex v Compass [2013] EWCA Civ 200).
- Frame take-or-pay as an alternative primary obligation with make-up rights and a discounted price (M&J Polymers [2008] 1 All ER (Comm) 893).
- For development, use time-based, capped milestone LDs accruing to completion or termination (Triple Point [2021] UKSC 29).
- Recalibrate quantum on every amendment, and confirm insurance does not exclude the LD exposure.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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