Losing on penalties: Blu-Sky Solutions Limited v Be Caring Limited  EWHC 2619 (Comm)
04 Oct 2021
30 September 2021
 EWHC 2619 (Comm)
The High Court of Justice, Commercial Court (QBD)
His Honour Judge Stephen Davies, sitting as a High Court Judge
James McKean, instructed by Weightmans LLP, represented the successful Defendant in Blu-Sky Solutions Limited v Be Caring Limited  EWHC 2619 (Comm).
The Claimant sought to enforce a cancellation fee of £180,000 plus VAT arising under a telecoms contract. The Court found that (i) this so-called ‘administration charge’ was onerous, and was not fairly and reasonably brought to the Defendant’s attention, and (ii) that it was an unenforceable penalty clause.
This judgment touches on a number of interesting points of law arising from the well-known principles applicable to onerous / unusual and penalty clauses.
- (i) Signed contracts with onerous / unusual clauses
The onerous / unusual rule is a rule of incorporation. It looks to whether an offending clause is fairly and reasonably brought to a party’s attention.
This question normally does not arise where a contract is signed – typically, a person who signs a contract is bound by its terms, whether or not they have been read.
But what of the position where a contract is signed, but its terms are found in a separate document? Here, there is something of a conflict between authorities. Do-Buy 925 Ltd v National Westminster Bank plc  EWHC 2862 (QB) implies that the signature ousts the rules of incorporation. But in Bates v Post Office (No 3)  EWHC 606 (QB), Fraser J found that the rules of incorporation applied, and so too did the onerous / unusual rule.
The approach of Fraser J in Bates was affirmed. His Honour Judge Stephen Davies said at paragraph 99:
‘In my judgment, and with great respect, I conclude that the approach of Fraser J is to be preferred. If the principle is all about the incorporation and the adequacy of notice, then it is reasonably straightforward to understand why a term included in a signed contract will have been adequately brought to the signing party’s notice in all but extreme cases. Where, however, the signed contract simply incorporates by reference T&Cs, one of which is unduly onerous, it is difficult to see why as a matter of principle the same extremely restrictive approach should follow, unless the signed contract itself drew attention to the unduly onerous clause.’
Interestingly, in paragraph 100, the Judge suggested a ‘sliding scale’ approach:
‘Even if I was wrong about this, I consider that, with the same great respect, saying that it must be an extreme case to apply the principle leads to a false binary classification. In my view it would be preferable for me simply to have due regard, when making my decision, that the fact that the defendant was prepared to sign a contractual document must always be a powerful factor against a conclusion that terms expressly incorporated into it were not sufficiently brought to its attention. I would suggest that the weight to be given to that factor in an individual case will be fact-sensitive and that adopting the sliding scale approach may also be useful. It is likely to be very strong if there is a short form signed contract which refers to the term itself, and likely to be relatively weak if the order form is signed but the term is “buried away” in detailed T&Cs, which are incorporated as a matter of law but which are neither found in the signed contract nor provided with the signed contract.’
This suggests that, even within a contract consisting of a single, signed document, the law of incorporation may still have a role to play.
- (ii) Composite penalty clauses
A clause found to be a penalty is unenforceable. But some clauses are composite – consisting of multiple obligations, some punitive, others not. Should the entire clause be struck out? Or can the Court sever the penalties while leaving the rest of the clause enforceable?
Timothy Fancourt QC, sitting as a Deputy High Court Judge, in Vivienne Westwood Ltd v Conduit Street Development Ltd  EWHC 350 (Ch) took the latter approach. This was criticised by the editors of Chitty on Contracts (33rd edition) at paragraph [26-242].
The Judge followed Vivienne Westwood Ltd, saying at paragraph 118:
‘Notwithstanding the doubts expressed by the learned editors of Chitty on Contracts (33rd edition) at [26-242] in my view the views expressed by Mr Fancourt QC are right and should be followed so far as this case is concerned. Clause 4.6 seeks to impose a liability for the same administration charge in four different factual situations. It could quite easily be broken down into four separate sub-clauses, each dealing with the different factual situation (cancellation, disconnection, downwards migration and upgrading) without difficulty. It follows that it would make no sense for the court to ask whether the clause as a whole is penal, as opposed to asking whether the clause as it applies to each specified situation is penal, since if it is then it can be severed from the remainder of the clause.’
The full judgment is to be found at: https://www.bailii.org/ew/cases/EWHC/Comm/2021/2619.html
With thanks to Matthew Fox and Robert Jones of Weightmans LLP