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The unprecedented outbreak of COVID-19 has changed the way litigation proceedings operate in a number of ways. The recent changes include the closure of the Supreme Court, hearings being conducted remotely via video link, increased electronic pre-trial preparation, and many more procedural matters being dealt with on paper. Courts will be transferring to remote hearings where possible, which will give rise to significant change in working practices for everyone involved.

Changes to the Civil Court system

On 23 March 2020, the UK government issued instructions for everyone to stay at home, save for very limited purposes, as supported by the Coronavirus Act 2020 and related regulations. The Coronavirus Act makes a specific provision implying that the civil court should continue with remote hearings, with the aid of technology which has been supported by guidance subsequently produced by the senior judiciary.

The new legislation will inevitably require a number of adjustments to be made to the civil courts as we know them, which will require co-operation and planning from the courts and the parties involved. Such planning will need to accommodate litigants and witnesses and ensure adequate video and audio quality so that all parties can be heard clearly and documents can be displayed visibly and quickly. While use of technology had already started to be applied and trialled across various courts in England & Wales, the current regime represents the most widespread use of technology in trials so far. Judges will have broad discretion as to how to proceed with cases and will make decisions on whether remote trials will be suitable on a case-by-case basis.

Blackfriars Ltd [2020] EWHC 845 (Ch)

The fact that a case may comprise significant sums, a lengthy trial time and multiple witnesses will not necessarily prevent the court deciding to hold the trial remotely. In One Blackfriars Ltd [2020] EWHC 845 (Ch), during a pre-trial review, the High Court rejected an application to adjourn the five-week hearing until June 2021. This trial is set to involve four live witnesses of fact and 13 expert witnesses. Placing importance on the overriding objective, John Kimbell QC rejected the submission that there was a real risk of unfairness in conducting a remote trial for this claim. It was held that the challenges and upsides of proceeding with a remote trial would apply to both sides equally. In this case, the court placed importance on the fact that there were no allegations of dishonesty or fraud and that the proceedings contained a large number of contemporaneous documents, where most of the relevant matters were likely to be set out.

The trial judge acknowledged the health and safety risks posed by conducting the trial in-person and pointed out that it was not “a case in which it can be said that it is essential to have the witness, the cross-examiner and the judge and the other participants in the same physical space”. It is clear that the court are trying to strike a balance between protecting the health and safety of those involved in litigation and ensuring the course of justice will ensue, with a demonstrable focus on avoiding undue delay.

Is it a just approach?

It has been acknowledged by the courts that they do not have the technological capabilities to offer a full remote service, and have indicated that HMCTS are working urgently to expand the technology available. In the meantime, courts will conduct hearings via Skype, telephone and other available video facilities. One of the issues with this is that many participants may not have the technological knowledge for hearings to progress smoothly, which could cause delays, especially in the early months. Parties are encouraged to be cooperative, especially in cases involving litigants in person, to try and ensure some fairness during the process and the courts have indicated that they would take a more relaxed approach than usual to compliance with certain aspects of the Civil Procedure Rules. For example, if court proceedings were not received due to self-isolation restrictions or office closures a request for relief from sanctions for late service would be expected to be looked upon sympathetically. It is important for the courts and both parties to be flexible in this regard and prioritise cooperation between the parties to ensure justice is not obstructed for the sake of a tactical advantage over one party.

Some would undoubtedly think, such as the parties involved in the Blackfriars Ltd [2020] matter, that it would be more practical to postpone hearings until normality is resumed. Whilst this may seem sensible for some cases, the majority of cases are financially sensitive and adjournments may cause hardship for those involved. This may be particularly distressing whilst we are in a time of financial turmoil due to the current circumstances and not something that one party should be allowed to take advantage of.

Could this change the future of the courts?

The rules in the civil courts are flexible enough to allow the processes to be adapted quickly to ensure that proceedings fall in line with new coronavirus legislation. Some have seen the step towards a new ‘virtual’ court as a blueprint for the future of modern justice, for certain proceedings that can be easily managed without the need of physical attendance by the parties. Virtual hearings are far less costly for both parties and may be more time efficient, for example if both parties have to undergo preparation beforehand to ensure that all of those involved have in their possession the correct documents. While it remains unlikely that procedures will remain so drastically changed once the pandemic subsides, this will at least offer the most widespread trial of digital services the English court system has ever seen and will undoubtedly offer a great many lessons to learn in the making of future reforms.  

Cases are financially sensitive and adjournments may cause financial difficulty for those involved. This may be particularly distressing whilst we are in a time of financial hardship due to the current circumstances and not something that one party should be allowed to take advantage of.

Could this change the future of the courts?

The rules in the civil courts are flexible enough to allow the processes to be adapted quickly to ensure that proceedings fall in line with new coronavirus legislation. With many arguing that traditional courts are far behind in terms of their upkeep of the modern world, the step towards a new ‘virtual’ court may be the future for certain proceedings that can be easily managed without the need of physical presence. Once these hearings are being progressed without a hitch, it may become more sustainable to work this way going forward. Virtual hearings are far less costly for both parties and may be more time efficient, for example if both parties have to undergo preparation beforehand to ensure that all of those involved have in their possession the correct documents. Of course, it is unlikely that procedures will change so drastically once normality returns, however it may be the change the legislature needs as a step in the right direction towards a more modern court system.  

Eldwick Law have a team of expert solicitors who are able to assist you with any litigation during these unprecedented times.

COVID-19 advice and guidance

The new Money Laundering and Terrorist Finance Amendments Regulations 2019 (“The Regulations”) comes into effect from 10 January 2020 and will directly impact the art sector.

It’s a surprising move on the part of the UK Government but, many would argue, overdue given the art sector has been long regarded as an ideal playground for money laundering activities.

WHO DOES THIS AFFECT?

Essentially, most people or organisations that deal in art – including, but not limited to:

• Art dealers;
• Auction houses;
• Galleries;
• Any firm or sole trader.

SO, WHAT’S NEW?

The European Union’s Fifth Money Laundering Directive (“5AMLD”) has now been implement in the form The Regulations and targets, amongst other sectors, “art market participants”.

So, from 10 January 2020, the UK art market will be designated as a “regulated” market for compliance purposes.

WHAT DOES THIS MEAN?

In short, there will be a major overhaul in practices within the art market.

Art market “participants”, which include owners and senior members, will now need to undertake proper checks on customers and take a “risk-based approach” to compliance. Previously, this only extended to those identified as “high value dealers”, but it now applies across the board.

Art market participants who are establishing a business relationship or involved in a transaction (or linked series of transactions) worth €10,000 or more must now complete a process of “Client Due Diligence” (“CDD”) before business dealings or handling monies. These are similar checks that are carried out by banks, law firms etc, and includes the obtaining of documents such as photographic ID and proof of address.

Of note is that the €10,000 threshold is not limited to payment type – it applies to any payments in cash, cheque, bank transfer or any other payment methods.

Importantly, there is also a registration requirement: art participants will now need to register with HM Revenue & Customs (“HMRC”), the UK’s Supervising Authority, within one year.

Further requirements include the need to appoint a Money Laundering Compliance Officer (“MLRO”) to supervise compliance, report suspicious activities, review staff compliance training and so forth.

There is therefore a requirement to commit significant financial resources and time to ensuring compliance, and with the threat of potentially severe consequences for failures to comply  not least to one’s reputation.

NON-COMPLIANCE

Failure to comply can lead to fines or a prosecution against institutions, their directors and senior management – and so it is essential for any person or business to take immediate steps to ensure they do not fall foul!

FURTHER GUIDANCE

There is currently little in the way of industry guidance available, but The British Art Market Federation (“BAMF”) will be issuing guidance shortly – so watch this space.

HOW CAN WE HELP?

Establishing a compliance system to meet the obligations imposed by The Regulations may be daunting, so any affected person or entity is best advised to seek expert advice sooner rather than later – as with anything else, prevention is better than a cure.

If you would like to discuss the implementation of an effective compliance programme or have been made subject of a regulatory/criminal investigation, we offer expert advice, assistance and representation.

Should you have any queries with regard to this article, please do not hesitate to contact us via email: mail@eldwicklaw.com, or telephone: +44(0)203 972 8469.

Abbas Nawrozzadeh is a Senior Solicitor specialising in Regulatory Law and White-Collar Crime at Eldwick Law.

Our Commercial Litigation solicitors comment on this ever changing and important area of litigation law: application for relief from sanctions.

The 2013 Jackson reforms brought changes to the Civil Procedure Rules (CPR) relating to, inter alia, applications for relief from sanctions; in essence, the courts were less tolerant of breaches of the Rules and unjustified delays. The court’s approach was then updated to allow Judges to have further discretion in applications for relief. However, despite the reforms, the court’s approach to Litigants in Person remains stringent. With the reduction in Legal Aid and Conditional Fee Agreements, there is an increase in the number of individuals acting without legal assistance. Whilst the court is required to treat both represented and unrepresented parties on a level playing field, should the court be more flexible with Litigants in Person?

A stringent approach to application for relief from sanctions

The court interpreted the test in Mitchell v Newsgroup Newspapers [2013] EWCA Civ 1537 and took a ‘no nonsense’ approach towards applications for relief from sanctions. In circumstances where the breach was ‘trivial’, the party seeking relief was usually granted relief provided that an application was made promptly. On the other hand, if the breach could not be characterised as ‘trivial’, then the burden is on the defaulting party to persuade the court to grant relief. Essentially, this case made it clear that if there was a very good reason for the breach or failure to comply, then relief will usually be granted. This sled to an increase in satellite litigation.

A more flexible approach

However, the Court of Appeal in Denton v TH White Ltd [2004] EWCA Civ 906 considered Mitchell to be misunderstood and clarified the points made by adopting a more tempered three stage test for applications. The court also warned of the substantial costs that could be imposed on those parties who were unreasonably trying to take tactical advantage of an opponent’s breach and implemented further factors to consider. In Denton it was ruled that in every case, the court must consider all of the circumstances. The test requires:

1. the court to identify and assess the seriousness and significance of the failure to comply with any rule, practice direction or court order;
2. the court should consider why the default occurred;
3. the court should evaluate all circumstances of the case, so as to enable it to deal justly with the application.

Therefore, if there is a serious or significant breach and there is no good reason for the breach, then an application for relief from sanctions will not automatically fail as it had done in the past. The courts no longer focus on the triviality of the breach, unless it is used to decide whether the breach was serious or significant.

Litigants in person

Despite Denton allowing the court further discretion, it took a strict line approach in Barton Wright Hassall LLP [2018] UKSC 12. The Supreme Court held that Litigants in Person will not receive special consideration if they have failed to comply with the CPR.

This case concerned the service of a professional negligence claim upon the defendant’s former solicitors. The claimant served his claim form by way of email, without checking whether the defendant would accept service in this way. When the claimant informed the defendant that he was effecting service, the firm refused to acknowledge service via email, despite the expiry of the limitation period the following day. The claimant’s application to extend service of the claim form was rejected at first instance and later in two appeals. Lord Sumption commented that whilst the status of a Litigant in Person permits a “lower standard of compliance with rules or orders of the court”, the claimant had still had a duty to follow the provisions of the CPR, and it failed to do so in this case.

The Judge went on to comment that the Rules are available to lay persons online, and are therefore readily accessible to Litigants in Person. However, what makes this quite a contradictory approach is that on the one hand the court advocates the use of the internet for lay people to search for the Rules, yet the Rules themselves still allow firms to deny service via email. Email communication has become the most used communication methods between firms, their clients, and other businesses professionals. If a lay person is encouraged to search for these Rules online, then it should follow that the CPR be updated to allow service by email. The Business and Property courts themselves have introduced ‘legal tech’ such as CE file into their systems to allow for a smoother operation of the court process. In fact, Lord Briggs in his dissent of Barton stated:

“Now that issue and filing is required to be carried out online, by legally represented parties in the Business and Property Courts in London, as the first stage in eventually extending this as the mandatory method for all civil proceedings, it may be questioned for how long these constraints upon service upon solicitors by email will continue to serve a useful purpose, but any relaxation of them is of course a matter for the Civil Procedure Rule Committee.”

The court clearly realises the expansion in technology and law that seems to make the Rules outdated and it appears that those not familiar with what some describe as the outdated legal world may be penalised – those people are inevitably Litigants in Person. In Barton, the claimant had already served via email, and so had the Rules allowed him to do so without permission from the other party, he would have served on time. The outdated Rules almost obstruct the court from adopting a more flexible approach and subsequently the court has almost gone full circle by tolerating less breaches for those litigating themselves. Perhaps it is no longer a question of the court’s discretion, but a necessity to update the CPR to reflect the changes in the way we are communicating with one another.

If you have any questions in relation to this article, then please contact our commercial litigation solicitors.

Eldwick Law sets out guidance on what personal guarantees are and the grounds upon which you can challenge them.

Personal guarantees and the law

A personal guarantee is an agreement whereby an individual (the guarantor) agrees to satisfy the contractual obligations of another party, in the event that contracting party fails to do so. Generally the guarantee is given in favour of a creditor (such as a bank) and the contractual obligation is the repayment of a sum of money by a particular date.  For example, if an individual signs a personal guarantee on behalf of a business when taking out a loan, the individual is agreeing to become personally responsible for the financial obligations of the business to the bank, in the event the business fails to make its loan repayments.

How far does a guarantor’s liability extend?

The extent to which a guarantor is liable will either be limited to a certain amount or the entirety of an amount borrowed. However, even in circumstances where a guarantee is limited to a certain amount, a guarantor may be liable for enforcements costs and the interest on the outstanding debt, which is likely to accrue, over and above the principal amount.

If the creditor calls upon the personal guarantee and the guarantor defaults, the creditor would be in a position to institute court proceedings for breach of contract or institute bankruptcy proceedings, thereby putting the guarantor’s personal assets at risk.

Setting aside a personal guarantee

There are several circumstances that can lead to a personal guarantee being set aside, which include:

1. Duress

Where a party’s consent to a contract is induced by duress, the contract is voidable by the aggrieved party. The threat can be actual or threatened violence or unlawful restraint to the person or to property; or it can be economic duress, such as a threat to terminate a contract. In order to prove economic duress, a party must demonstrate that the economic pressure being applied was illegitimate and that the party would not have entered into the contract but for the illegitimate economic pressure.

2. Misrepresentation

A party who has been a victim of misrepresentation (including an innocent misrepresentation) may rescind a contract, if that party was induced to enter into it by the statement made.  This remedy is usually only actionable where the other party to the contract has made the misrepresentation relied on.

3. Undue Influence

Undue influence applies when one party is able to exert influence over another, to the extent of preventing them from exercising independent judgment, and uses this influence to force them entering into a contract. The undue influence can be an actual (express) influence; and it can be an influence, which is presumed from the special relationship between the parties.

4. Breach of Duty to Disclose

Generally, the beneficiary of  personal guarantees is not under a duty to disclose material facts to the guarantor and the guarantor is under an obligation to inquire into and determine all the relevant facts. However, it has been established that a beneficiary under a guarantee may sometimes be under a duty to disclose unusual facts, not known, to a prospective guarantor and that if it fails to do so, the guarantee will be void.

What do our solicitors say about personal guarantee laws and liabilities?

Eager to secure funding, many individuals and especially new business owners, sign personal guarantees without fully understanding its implications and the real risk it may pose to their personal assets. It is imperative that, prior to signing a personal guarantee, you seek legal advice from an independent solicitor in order to ensure that you fully understand the legal ramifications.

If a creditor is threatening to or has instituted legal proceedings against you based on personal guarantee, you should immediately seek legal advice. Proceedings such as those instituting bankruptcy proceedings are subject to strict time periods.

Eldwick law has a team of experienced solicitors, who can assist at any stage, be it the provision of initial advice or assistance in bringing/defending legal proceedings.

Penalty clause disputes commonly arise in settlement agreements, shareholder agreements, restrictive covenants, deferred consideration clauses, commercial supply agreements, financing arrangements, and wider breach of contract claims.

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When Will a Penalty Clause Be Unenforceable?

A contractual clause may be unenforceable as a penalty where it is triggered by breach and imposes a consequence that is disproportionate to the innocent party’s legitimate interest in performance of the contract.

The penalty rule does not apply to every harsh or commercially unfavourable clause. English courts generally respect freedom of contract, particularly where sophisticated commercial parties have negotiated the agreement. However, a clause may still be vulnerable if it operates mainly to punish the defaulting party rather than protect a genuine commercial interest.

The Supreme Court Test in Makdessi

In Cavendish Square Holding BV v Talal El Makdessi, the Supreme Court restated the law on penalty clauses. A clause will generally be penal if:

1. it is a secondary obligation triggered by breach of a primary obligation; and
2. it imposes a detriment on the defaulting party that is out of all proportion to any legitimate interest of the innocent party in enforcing the primary obligation.

This replaced the older and narrower focus on whether the clause was a “genuine pre-estimate of loss”. While that concept may still be relevant in straightforward damages clauses, the modern test is broader and allows the court to consider legitimate commercial interests beyond simple compensation.

Primary Obligations and Secondary Obligations

A primary obligation is a core contractual promise. For example, a party may agree to pay a purchase price, comply with a restrictive covenant, deliver goods, provide services, or refrain from competing with a business after a sale.

A secondary obligation is a consequence that arises if a primary obligation is breached. This may include an obligation to pay a specified sum, forfeit a payment, transfer shares, accelerate a debt, or lose a contractual benefit.

The distinction matters because the penalty rule usually applies only to secondary obligations. If the clause is properly characterised as part of the primary bargain between the parties, it may fall outside the penalty rule altogether.

Legitimate Commercial Interest Explained

The innocent party may have a legitimate interest in enforcing performance that goes beyond recovering financial loss. In commercial contracts, this may include protecting goodwill, preserving the value of a business, maintaining confidentiality, preventing unfair competition, securing payment discipline, or protecting the commercial structure of a transaction.

However, the innocent party cannot rely on a clause whose main purpose is simply to punish the defaulting party. The court will consider whether the consequence is commercially justifiable or whether it is excessive when compared with the interest being protected.

Penalty Clauses in Settlement Agreements

Penalty clause issues often arise in settlement agreements where a party agrees to pay a reduced sum by instalments, but the agreement states that the full original amount becomes payable if there is a default.

These clauses require careful drafting. A creditor may have a legitimate interest in ensuring prompt payment and avoiding further enforcement costs. However, if a minor default exposes the debtor to a vastly greater liability, the clause may be open to challenge as a penalty, depending on the facts and commercial context.

Parties entering into settlement agreements should consider whether default provisions are proportionate, clearly drafted, and commercially defensible. This is particularly important where there is unequal bargaining power or where the default consequence is significantly greater than the missed payment.

Penalty Clauses in Shareholder and M&A Transactions

Penalty clause disputes may also arise in shareholder agreements, business sale agreements, and M&A transactions. Common examples include deferred consideration clauses, share transfer provisions, earn-out mechanisms, non-compete covenants, and clauses that remove or reduce payment rights following breach.

In Makdessi, the Supreme Court held that the relevant provisions were not unenforceable penalties. The clauses formed part of the commercial structure of the transaction and protected the buyer’s legitimate interest in preserving the goodwill of the business.

This does not mean that all similar clauses will be enforceable. Each case depends on the wording of the contract, the commercial background, the nature of the breach, and the proportionality of the consequence imposed.

Liquidated Damages vs Penalty Clauses

A liquidated damages clause sets out an agreed sum payable following breach. These clauses can be enforceable where they are commercially justified and not out of proportion to the innocent party’s legitimate interest.

A penalty clause, by contrast, is vulnerable because it imposes a punitive or excessive consequence. The fact that a clause requires payment of a fixed sum does not automatically make it a penalty. The key question is whether the clause protects a legitimate interest or whether it imposes an excessive detriment on the defaulting party.

Can You Challenge an Unfair Contractual Clause?

A party facing enforcement of a severe contractual clause may be able to challenge it if the clause operates as a penalty under English law. This may arise where the amount claimed is far greater than the loss suffered, where a minor breach triggers a severe financial consequence, or where the clause appears designed to punish rather than protect a legitimate commercial interest.

Before challenging a clause, it is important to review the full contract, the circumstances in which it was agreed, the commercial purpose of the clause, the nature of the breach, and the financial consequences of enforcement.

Penalty Clause Case Study

We recently acted for a client who had been ordered to pay the entire sum due under a settlement agreement.

The client’s liability under the settlement agreement represented approximately 5% of the total settlement sum, but he was jointly and severally liable. When he failed to make payment, the creditor obtained judgment ordering him to pay the entire sum due under the settlement agreement, less any payment already made.

In practical terms, the client became exposed to a sum almost ten times greater than the amount he was originally liable to pay. We appealed, arguing that the provision imposed a secondary obligation and operated as an unenforceable penalty.

Permission to appeal was obtained. Shortly before the hearing, the matter settled on favourable terms.

This example shows why default provisions in settlement agreements and commercial contracts should be reviewed carefully before enforcement action is taken or before liability is accepted.

Commercial Litigation Over Penalty Clauses

Penalty clause arguments often arise as part of wider commercial litigation. They may be relevant where a party is seeking to enforce a settlement agreement, recover liquidated damages, accelerate a debt, enforce restrictive covenants, or impose severe financial consequences following breach.

For businesses, the practical question is not only whether the clause is enforceable, but also how it affects negotiation strategy, settlement leverage, litigation risk, and the prospects of defending or reducing the claim.

Our commercial litigation solicitors advise on contractual disputes, settlement agreements, shareholder disputes, enforcement issues, and cross-border commercial claims. We also advise on disputes involving parties and assets across multiple jurisdictions. You can learn more about our international disputes work on our jurisdictions page.

Frequently Asked Questions

What is a penalty clause under English law?

A penalty clause is a contractual provision that imposes a disproportionate consequence on a party following breach of contract. Under English law, a clause may be unenforceable if it operates mainly as a punishment rather than protecting a legitimate commercial interest.

What is the test for whether a clause is a penalty?

The modern test comes from Cavendish Square Holding BV v Talal El Makdessi [2016] AC 1172. The court considers whether the clause is a secondary obligation triggered by breach and whether it imposes a detriment that is out of proportion to the innocent party’s legitimate interest in enforcing the contract.

What is the difference between a primary obligation and a secondary obligation?

A primary obligation is a core promise under the contract, such as an obligation to pay, deliver goods, provide services, or comply with a restrictive covenant. A secondary obligation arises when a primary obligation is breached and imposes a consequence, such as payment of a specified sum, forfeiture, or accelerated liability.

Are liquidated damages clauses enforceable?

Liquidated damages clauses can be enforceable if they protect a legitimate commercial interest and are not disproportionate. A fixed payment clause is not automatically a penalty, but it may be challenged if the amount or consequence is excessive in the commercial context.

Can a settlement agreement default clause be challenged as a penalty?

Yes. A default clause in a settlement agreement may be challenged if a missed or late payment triggers a financial consequence that is disproportionate to the creditor’s legitimate interest in securing payment and enforcement.

Do penalty clauses arise in shareholder or business sale disputes?

Yes. Penalty clause arguments can arise in shareholder agreements, business sale agreements, deferred consideration clauses, earn-out provisions, restrictive covenants, and other commercial arrangements where breach triggers a severe contractual consequence.

Can a business challenge an unfair contractual penalty after judgment has been entered?

In some circumstances, a party may be able to appeal or challenge the enforcement of a contractual provision if there are proper legal grounds. The available options will depend on the wording of the agreement, the procedural history, the timing of the challenge, and the nature of the order or judgment.

Why should businesses review penalty clauses before signing a contract?

Businesses should review penalty clauses carefully because default provisions can create significant financial exposure. Proper drafting and early legal advice can reduce the risk of later disputes over enforceability, proportionality, and commercial justification.

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