ERPL-250116 241..254

Swedish Case Note on the Penalty Clause Decisions

by the UK Supreme Court

Christina RAMBERG

Abstract: The UK Supreme Court has recently decided two interesting cases on

harshremedies for breach of contract (the penalty doctrine). I will give approximate-

descriptions of the cases and compare the outcome in the UK Supreme Courtwith the

likely outcomes and reasonings as if the cases we re tried by the SwedishSupreme

Court. My conclusion is t hat the outcomes would be similar. The reasoningswould

differ slightly, but not much. The applicable types of sources of law, however, dif fer

considerably.

1. Introduction

The UK Supreme Court has recently decided two interesting cases on harsh

remedies for breach of contract (the penalty doctrine). I will give approximate

descriptions of the cases and compare the outcome in the UK Supreme Court

with the likely outcomes and reasonings as if the cases were tried by the Swedish

Supreme Court. My conclusion is t hat the outcomes would be similar. The reason-

ings would differ slightly, but not much. The applicable types of sources of law,

however, differ considerably.

In the following, I will make references to what the UK Supreme Court has

stated, without analysing which judge said what or to what extent the judges’

statements constitute binding authority in England.

2. The M&A-Case: Cavendish Square Holding BV v. Talal El

Makdessi [2015] UKSC 67

2.1. Description of the M&A Case

The M&A contract concerned the sale of a marketing company (‘the target com-

pany’). The sellers sold approximately 50 per cent of their shares in the target

company to the buyer. The value of the target company was to a large extent

dependent on goodwill, i.e. the value of future transactions with customers. The

personal relations between the sellers and the customers were important and t he

target company’s value was based on the sellers’ continued engagement and loyalty,

* Professor of Private Law, Stockholm University, Sweden, email: christina.ramberg@christinaram

berg.se.

241

which was explicitly explained in the contract. The target company’s value with

goodwill was 300 MUSD and without goodwill 70 MUSD.

The buyer was to pay the price in inst alments. First 65 MUSD in connection

with the signing and closing. Thereafter two additional instalments which were

dependent on the target company’s future performance. The buyer had an option to

buy the sellers’ remaining shares in the target company at a price determined by a

specified calculation. The contract, which was negotiated during six months,

stipulated that the sellers were obliged to engage in the target company and to

not compete. It was clear in the contract that the purpose of these obligations was

to secure the target company’s goodwill value.

The remedies for breach against the sellers’ obligations to eng age in the

target company and to not compete were:

(1) The buyer did not have to pay the additional instalments, and

(2) the buyer was entitled to acquire the breaching party’s remaining

shares at a reduced price, not including the goodwill value.

One of the sellers (Makdessi) breached his oblig ations to engage in the ta rget

company and to not compete by encouraging the target company’scustomersand

employees to move to competitors and by himself getting engag ed in comp etitors,

inter al ia as a CEO of a competing company. The bu yer invoked both remedies for

the breach, which entailed t hat Makdes si would lose payments of ap proximately

90 MUSD and would in tot al receive 40 MUSD for all his s hares, instead of 150

MUSD.

2.2. The UK Supreme Court’s Reasoning

The crucial question was whether the contractually agreed remedies constituted

a penalty, whi ch would entai l that the remedies were unenforceable. If the

contractual remedies were unenforceable, Makdessi would according to default

law be liable to compensate the buyer by damages amounting to the buyer’sreal

damage.

After very extensive reasonings, all seven judges in t he Supreme Court

upheld t he contractually agreed remedies and concluded that Makdessi was not

entitled to any a dditional payment and was obliged to sell all his remaining

shares to the buyer for the low price. The judges considered that the remedies

did not constitute a penalty and that they were not oppressive, exorb itant or

unconscionable, since t hey in essence only ent ailed a price reduction for the

target company’s potenti ally lower value. The effect of the contracted remedies

was th at the sellers earned t he consideration for their shares not only by

transferring them to the buyer, but also by observing their oblig ations to engage

and not to compete.

242

2.3. A Swedish Comparison

2.3.1. Generally About the Swedish Regulation of Penalizing Remedies

Swedish law upholds the principle of freedom of contract and pacta sunt servanda.

Consequently, parties are free to agree on the remedies in case of breach of

contract.

The Swedish default law on remedies – i.e. the law when the parties have not

agreed specifically on remedies for breach of contract – is favourable for the non-

breaching party. That party is entitled to his expectation interest (Positive

Vertragsintresse) which includes the right to damages so that the non-breaching

party is put in the same financial position as if the contractual obligations had been

performed. The Swedish default law does not entitle the non-breaching party to

become better off because of the breach.

Swedish legislation does not have any special provision on liquidated

damages or penalty clauses. Instead the very general provision in the Contract

Act Section 36 provides that a contract can be adjusted or set aside if it contains an

unconscionable term as determined at the time of conclusion of the contract or

later (ex ante and ex post). The preparatory work s (which have standing as a rat her

strong soft source of law in Sweden) give clauses on liquidated damages that aims

at penalizing a breaching party by excessive compensation as an example of uncon-

scionable contract terms.

The Swedish legislator refrained from stating casuistic prerequisites to

determine the unconscionableness in the Swedish Contract Act Section 36. The

reason for this is echoed by the UK Supreme Court: ‘it is impossible to lay down

abstract rules about what may or may not be “extravagant or unconscionable”,

because it depends on the particular facts and circumstances established in the

individual case.’

The Swedish assessment whether a contract is unconscionable mainly corre-

sponds to what is expressed by the UK Supreme Court:

‘The question whether it is enforceable should depend on whether the means by

which the contracting party’s conduct is to be influenced are “unconscionable” or

(which will usually amount to the same thing) “extravagant” by reference to some

norm.’‘Many, though not all of these are better addressed (i) by a realistic

appraisal of the substance of contractual provisions operating upon breach, and

(ii) by taking a more principled approach to the interests that may properly be

protected by the terms of the parties’ agreement.’‘the focus should be not on any

particular possible breach or its timing or consequences, but on the general interest

being protected, and the question whether the protection which the parties agreed

1 Proposition 1975/76, p 118 et seq.

243

can be condemned as unconscionable or manifestly excessive.’‘The rule against

penalties is a rule of contract law based on public policy … the public policy is

that the courts will not enforce a stipulation for punishment for breach of

contract.’‘When the court makes a value judgment on whether a provision is

exorbitant or unconscionable, it has regard to the legitimate interests, commercial

or otherwise, which the innocent party has sought to protect.’‘the correct test for a

penalty is whether the sum or remedy stipulated as a consequence of a breach of

contract is exorbitant or unconscionable when regard is had to the innocent

party’s interest in the performance of the contract. Where the test is to be applied

to a clause fixing the level of damages to be paid on breach, an extravagant

disproportion between the stipulated sum and the highest level of damages that

could possibly arise from the breach would amount to a penalty and thus be

unenforceable. In other circumst ances the contractual provision that applies on

breach is measured against the interest of the innocent party which is protected by

the contract and the court asks whether the remedy is exorbitant or

unconscionable.’

The provision in the Swedish Contract Act Section 36 mainly focuses on consumer

contracts and is very rarely applied in Business-to-Business (B2B) contracts. Also in

English law the bargaining position of the parties is relevant. In harmony wit h the

general impression of English law, the Swedish Supreme Court is less reluctant to

declare a Business-to-Consume (B2C) contract unconscionable than a B2B con-

tract. The Swedish Contract Act Section 36 on unconscionable contracts is applic-

able to any contract clause, irrespective of whether it provides for payment of a sum

of money or an obligation to transfer assets. This corresponds to English law.

Contractual remedy provisions with a purpose to penalize a party in breach

are not accepted in Swedish law. A contract term drafted with a purpose to provide

a non-breaching party with compensation exorbitantly exceeding the estimated

future damage, will be adjusted according to the Swedish Contract Act Section

36, also in B2B-contract.

There is no case-law from the Swedish Supreme Court regarding contracted

unconscionable remedies.

The Swedish Supreme Court has stated obiter dictum in

the case NJA 2012 s. 597 that when a compensation for damages excessively

2 See along the same lines the Scottish Law Commission in its Report on Penalty Clauses (Scottish

Law Commission No. 171) which recommended as the criterion for such control whether the

penalty was ‘manifestly excessive’ in all the circumstances when the contract was entered into.

3 ‘As Lord Hoffmann put it in addressing a similar issue “t he purpose of the law of contract is not to

punish wrongdoing but to satisfy the expectations of the party entitled to performance”:

Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 15.’

4 There is, however, case law on the opposite question whether a seller’s exemption of liability for

damage is unconscionable.

244

compensates the non-breaching party there could be reason to adapt the compensa-

tion in exceptional cases.

The courts in Denmark, having the same Contract Act

provision on unconscionable terms as Sweden, have adjusted clauses on liquidated

damages whereby the non-breaching party has been excessively compensated.

We see that both Swedish and English law are in harmony with the provi-

sions in UNIDROIT Principles Articles 7.4.13 and 7.1.6; Principles of European

Contract Law 9:509 and 8:109; and the Draft Common Frame of Reference DCFR

III.-3:712.

There are differences in the wordings between these instruments under

Swedish law and English law. There may also be some differences in the underlying

rationale. The material outcome is however the same; they all end up in a determi-

nation of what is ‘unconscionable’ or ‘reasonable’.

Swedish law differs from English law in one important respect. The legal

effect of a penalty clause in English law is that the clause is unenforceable and that

the breaching party shall compensate the non-breaching party for damages corre-

sponding to the non-breaching party’s actual loss. According to the Swedish Contract

Act Section 36 an unconscionable term has the effect that the term can be set aside

as a whole, that the contract as a whole can be set aside or that the term or other

terms in the contract can be adjusted in order to create a fair equilibrium between

the parties. As the remedies in the UK Supreme Court case were not unconscionable,

I will not analyse the consequences of unconscionableness in this case note.

2.3.2. The Purpose of Automatic Remedies

It is common in Swedish contracts to find terms providing ‘automatic’ remedies in case

ofbreach.Itisparticularlycommontofindprovisionson‘liquidated damages’ (Sw .

‘vitesklausuler’). The main purpose of such provisions is normally to limit the extensive

liability for breach that follow from the default law . Also when the parties wish to create a

strong incentive on a party not to breach the contract, clauses on liquidated damages

often limit the liability as compared to the default law. This article, however, will discuss

the legal effects of contracted remedies making the non-breaching party better off as

compared to the non-breaching party’s situation when there had been no breach.

5 The legal situation in Swedish law is, despite t he lack of case law, clear as Sweden treats

preparatory works as an important source of law. The preparatory works to the Swedish Contract

Act Section 36 (Proposition 1975/76 p 118 et seq.) give penalizing liquidated damages clauses as

an example of contracts that may be adjusted. Cases from the Swedish Supreme Court are cited

‘NJA’ which refers to the publication and the year of the decision and the page in the publication.

6 UfR 1974.583 V, UfR 1977.306 H; UfR 1979.931 Ö; UfR 1983. 157 H; UfR 1984.702 Ö; UfR

1994.898 H; UfR 1999.66 H; UfR 2004.2400 H; UfR 2007.1949 V; UfR 2009.2800 SH

(see B. G

OMARD & H.V.G. PEDERSEN & P.B. MADSEN, Almindelig kontraktsret (Copenhagen: Djøf

Forlag 2012), p 204 et seq.).

7 See also the UNCITRAL Texts on Liquidated Damages and Penalty Clauses.

245

2.3.3. Application of Swedish Law to the M&A Case

The purpose of the remedies in the M&A contract was not to penalize the sellers,

but to create an incentive on the sellers to preserve the target company’s goodwill

value and to make a pre-estimation of the price for the shares if the goodwill value

was harmed or endangered due to a seller’s competing activities and/or non-

engagement. For these reasons the case would likely entail the same outcome

according to Swedish law as in the UK Supreme Court case.

The Swedish Supreme Court would most likely be inclined to use the

following reasoning by the UK Supreme Court:

There is a perfectly respectable commercial case for saying that [the buyer] should

not be required to pay the value of goodwill in circumstances where the

Defaulting Shareholder’s efforts and connections are no longer available to the

[target company], and indeed are being deployed to the benefit of the [target

company’s] competitors, and where goodwill going forward would be attributa-

ble to the efforts and connections of others.

Price reduction is a generally available remedy in Swedish sales law. The Swedish

Sales Act applies also to the sale of shares and provides in sections 37 and 38 that

the buyer is entitled to a price reduction if the seller commits a breach.

Price

reduction is not the same type of remedy as damages and the distinction may

appear confusing to English lawyers. It is frequently stipulated in Swedish M&A

contracts that the seller’s breach entitles the buyer to a price reduction (often

capped). Even though Swedish law has a special price reduction remedy, the

Swedish Supreme Court would reason in the same way as the UK Supreme Court

did, and classify the remedy provision in this particular contract as a legitimate

method to establish the price of the shares for a situation when the goodwill value

was endangered.

I am concerned about some facts that are not discussed in t he UK Supreme

Court’s reasonings, namely how much the target company’s goodwill value was

lowered due to the seller’s breach. Did all customers disappear due to the breach?

Was only a small number of small customers leaving the target company? Or was

most of the goodwill value actually harmed? If the seller’s breach was very limited

and quickly corrected, would t he remedies still be enforced according to English

law? The Swedish Supreme Court would probably be interested in the actual effect

of the breach and take this matter into account in the determination of whether the

remedy is unconscionable. This factor would not be exclusively decisive but could

influence the overall assessment of whether the remedy is unconscionable. There

may be a difference between English and Swedish law in this respect. English law

8 See also CISG Art. 50. CISG is, however, not applicable to M&A-transactions.

246

appears to solely focus on how the contracted clause appeared at the point in time

when the contract was concluded. As stated by the UK Supreme Court:

It is a question of construction of the parties’ contract judged by reference to the

circumstances at the time of contracting.

However, it seems as if also the actual situation of the non-breaching party after t he

conclusion of the contract may be relevant in English law (see below on forfeiture

clauses: ‘looking at the position of the parties after the breach and the circumstances

in which the contract was broken’).

One UK Supreme Court judge noted that it is ‘difficult, if not impossible, to

predict’ the financial consequences for the target company of the seller’s breach.

Such evidentiary problems are relevant in the Swedish assessment of whether the

remedy is unconscionable and the threshold for adjusting the remedy becomes

higher due to evidentiary problems foreseen at the time of conclusion of the

contract.

Swedish law accepts oppressive contractual remedy provisions, including

clauses on liquidated damages that aims at acting as a strong deterrence. The

Swedish Supreme Court recently stated in a case concerning an interpretation of

a non-compete provision in a shareholder agreement (my translation):

the purpose of the damage liability was to keep the partners together and to

protect the business. The remedy is considered clearly burdensome for a partner

wishing to leave the cooperation. Its objective is, however, to function as a

deterrence and to protect [the business] and the shareholders from damage due

to loss of income … the liability for damage in the shareholders’ agreement was

drafted with the intention to be burdensome … It is, however, a contract where

each of the parties not only had an individual interest to avoid liability for

damage, but also had an overall common interest that their partners did not

leave the business to become competitors. Therefore, it is not possible to give

decisive weight to the fact that the contract provision is burdensome for the party

who has left the partnership.

According to the same line of reasoning as the Swedish Supreme Court, we find a

statement in the UK Supreme Court case that the buyer had a legitimate interest to

‘protecting its investment from the risk of either of the sellers acting against the

company’s interests’.

And to a similar point:

9 Swedish Supreme Court case NJA 2015 s. 741.

247

Clause 5.1 was not addressing the loss which [the buyer] might suffer from

breach of the restrictive covenant, whether an isolated and minor breach or

repeated and fundamental breaches. It was addressing the disloyalty of a seller

who was prepared in any way to attack the [target company’s] goodwill.

2.3.4. A Remark Concerning Shareholder Agreements

In shareholder agreements it is frequent to include terms giving rights to acquire a

defaulting party’s shares at a pre-determined reduced price. Sometimes the non-

breaching party is entitled to acquire the shares at 75 per cent or 50 per cent of the

market value (or an equivalent to the market value). Sometimes the non-breaching

party has a right to acquire the breaching party’s shares for no compensation at all.

Substantially reduced price in shareholder agreements for acquisition of

shares entails two effects according to Swedish law:

(1) The breach may not be deemed ‘fundamental’ (material) which is

often a prerequisite for the non-breaching party’s right to acquire

the breaching party’s shares. The more severe remedy, the less prob-

ability that the breach is deemed fundamental.

Examples of

breaches that may not be deemed fundamental due to the harsh

remedy are breach ag ainst confidentiality, minor breaches against

non-competition obligations and breaches regarding incorrect board

decisions that are quickly corrected.

(2) Another effect of contractual provisions stipulating substantial price

reductions, is that the price may be adjusted according to the Swedish

Contract Act Section 36 if the price for the shares become exorbi-

tantly low and thereby excessively compensates the non-breaching

party. In other words; the contracted price for the shares can be

adjusted when the low price ent ails penalizing (deterring, oppressive)

elements. As explained above, however, Swedish law accepts contrac-

tual provisions with strong deterring elements. Only exorbitant provi-

sions in B2B-contracts are adjusted according to the Swedish Contract

Act Section 36. This Swedish approach is in line with English law as

the UK Supreme Court states: ‘I accept that a forced transfer for no

consideration or for a consideration which does not reflect the value of

the asset transferred may constitute a penalty within the scope of the

penalty doctrine.’

10 C. RAMBERG, Aktieägaravtal i praktiken (Stockholm: Norstedts juridik 2011), Ch. 9; C. RAMBERG &

J. R

AMBERG, Allmän avtalsrätt (Stockholm: Wolters Kluwer 2016), p 232. See also UNIDROIT

Principles of International Commercial Contracts Art. 7.3.1(e).

248

2.3.5. A Remark Concerning High Interest Rates When Debtors Are in Default

The UK Supreme Court refers to cases concerning a common provision in loan

agreements for interest to be payable at a higher rate when the borrower is in

default.

In the most recent of these cases the provision was deemed valid because

its predominant purpose was not to deter default but to reflect the greater credit

risk associated with a borrower in default. According to English law, a provision for

the payment of money upon breach is not categorized as a penalty simply because it

was not a genuine pre-estimate of damages.

Swedish law is similar to English law with respect to high interest rates for

defaulting debtors. The creditor is allowed to charge high interest rates when the

debtor is in default in order to cover the increased risk.

The interest rate could be

adjusted if it is exorbitantly high, but there is no case law from the Swedish

Supreme Court where adjustment of high interest rates has been made.

2.3.6. A Remark Concerning Forfeiture and Withheld Performance

The UK Supreme Court explains that the relief against forfeiture clauses is the

origin of the rule on penalty clauses and points to the similarities:

There is no reason in principle why a contractual provision, which involves

forfeiture of sums otherwise due, should not be subjected to the rule against

penalties, if the forfeiture is wholly disproportionate either to the loss suffered

by the innocent party or to another justifiable commercial interest which that

party has sought to protect by the clause. If the forfeiture is not so exorbitant and

therefore is enforceable under the rule against penalties, the court can then

consider whether under English law it should grant equitable relief from forfei-

ture, looking at the position of the parties after the breach and the circumst ances

in which the contract was broken.

The UK Supreme Court referred to a number of cases on forfeiture clauses.

The

outcome would likely be the same according to Swedish law. The Swedish Contract

Act Section 37 expressly stipulates that a security agreement provision is invalid if

it states that the security is forfeited if the debtor is in default. For other types of

forfeiture clauses, the general provision in the Swedish Contract Act Section 36

regarding unconscionable contracts applies.

11 Lordsvale Finance plc v. Bank of Zambia [1996] QB 752; Lady Holles v. Wyse (1693) 2 Vern 289;

Strode v. Parker (1694) 2 Vern 316; Wallingford v. Mutual Society (1880) 5 App Cas 685, 702

(Lord Hatherley).

12 C. R

AMBERG &J.RAMBERG, Allmän avtalsrätt, p 128.

13 Jobson v. Johnson [1989] 1 WLR 1026; Public Works Comr v. Hills [1906] AC 368, 375–376;

Watson v. Noble (1885) 13 R 347; BICC plc v. Burndy Corpn [1985] Ch. 232.

249

The UK Supreme Court referred to a case regarding the right to withhold

performance due to the other party’s breach of contract.

In the M&A case the UK

Supreme Court stated:

I see no principled reason why the law on penalties should be confined to clauses

that require the contract-breaker to pay money in the event of breach and not

extend to clauses that in the same circumstance allow the innocent party to

withhold moneys which are otherwise due.

In Sweden there is a general right for a party to withhold performance when the

other party has breached its obligation (in Swedish ‘detentionsrätt’).

The with-

held performance must however be proportional to the breach. This general prin-

ciple in Swedish contract law is in harmony with CISG Article 71, Principles of

European Contract Law 9:201, UNIDROIT Principles of International Commercial

Contracts Article 7.1.3 and the Draft Common Frame of Reference III.-3:401. In

Swedish law the parties are free to contract about rights to withhold performance.

When such contracted withholding provisions are unconscionable, they can be

adjusted or set aside according to the Swedish Contract Act Section 36. Swedish

law is in harmony with the UK Supreme Court’s statement in the quotation above.

3. The Parking Agreement: ParkingEye Ltd v. Beavis [2015]

UKSC 67

3.1. Description of t he Parking Agreement and the Outcome in the UK

Supreme Court

ParkingEye managed a parking lot. The car driver Beavis concluded a contract with

ParkingEye by entering the parking premises. According to the contract terms

Beavis was allowed to park for free during two hours. If this time was exceeded,

Beavis had to pay a fee of GBP 85. ParkingEye had a contract with the owners of the

parking lot (a retail outlet). ParkingEye had undertaken to ensure t hat the cars

were parked for only two hours, as the owners wanted to ensure that cars were not

parked too long in order to attract customers to its shopping mall. ParkingEye’s

only remuneration from the owners consisted of the fees from car drivers staying

longer than two hours.

14 Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689.

15 Swedish Supreme Court case NJA 2008 s. 643.

16 ParkingEye could have had economic reasons for formulating the liability to pay GBP 85 as a

liability for breach, rather than as a consideration payable for parking for longer than two hours. As

a consideration, it would have attracted VAT and ParkingEye could furthermore have incurred

liability for rates as a person in beneficial occupation of the car park.

250

Hypothetically, ParkingEye did not lose any money due to Beavis’ breach of

contract, as it would not receive any payment from another car being parked there

if Beavis had left the parking lot earlier. The question was whether the fee

ParkingEye charged Beavis corresponded to a penalty clause and t herefore was

unenforceable.

Six of the seven judges in the UK Supreme Court upheld the provision for

the fee and Beavis had to pay GBP 85 to ParkingEye. The UK Supreme Court took

into account the owner’s interest in efficient use of the parking spaces by deterring

customers from staying more than two hours and ParkingEye’s interest in receiving

a profit from its services.

3.2. A Swedish Comparison

3.2.1. Generally About the Swedish Regulation of Parking Fees

Swedish law has a special act concerning parking fees, Lag (984:318) om kontrol-

lavgift vid olovlig parkering. According to this act, land owners and their sub-

contractors are entitled to charge a ‘control fee’ from owners of illegally parked

cars. The control fee may not be higher than SEK 1,000 (corresponding to roughly

GBP 85).

Due to the Swedish act ParkingEye would be allowed to charge a fee of

GBP 85. The case would therefore be easily solved according to Swedish law, without

resorting to contractual interpretation or assessing the unconscionableness.

In the following, I will not analyse this particular Swedish legislation on

parking fees, but instead take a general contract law perspective.

3.2.2. Application of Swedish Law to the Parking Agreement Case

The first question in Swedish law is whether Beavies committed any breach of

contract by parking his car for longer than two hours. In Sweden, this would

probably not amount to a breach. The terms stipulated that parking for more

than two hours costs GBP 85. In other words, the fee of GBP 85 was a term of

the contract and not a damage for breach. Therefore, the question of ParkingEye’s

right to damage exceeding its loss, would not come up.

The Swedish approach seem to be in line with the UK Supreme Court’s

reasoning about primary and secondary obligations:

But in most cases parties know and reflect in their contracts a real distinction,

legal and psychological, between what, on the one hand, a party can permissibly

do and what, on the other hand, constitutes a breach and may attract a liability

to damages for – or even to an injunction to restrain – the breach.

17 The act authorizes cities to introduce local regulation on maximum control fees. I will not describe

the act in detail here.

251

To my mind the distinction between primary and secondary obligations is not useful

– at least not from a Swedish perspective.

It may be that the distinction between

primary and secondary obligations is more relevant in English law, since the

Swedish Contract Act Section 36 concerns all types of unconscionable contract

terms, and not only clauses concerning contract remedies. The English ‘problem’

in this respect is mentioned by the UK Supreme Court:

This means that in some cases the application of the penalty rule may depend on

how the relevant obligation is framed in the instrument, ie whether as a condi-

tional primary obligation or a secondary obligation providing a contractual

alternative to damages at law.

Swedish law is in harmony with the statement by the UK Supreme Court:

The qualification and safeguard is that the agreed sum must not have been

extravagant, unconscionable or incommensurate with any possible interest in the

maintenance of the system, this being for the party in breach to show. … It is most

easily explained on the basis that the dichotomy between the compensatory and the

penal is not exclusive. There may be interests beyond the compensatory which

justify the imposition on a party in breach of an additional financial

burden. … What is necessary in each case is to consider, first, whether any (and

if so what) legitimate business interest is served and protected by the clause, and,

second, whether, assuming such an interest to exist, the provision made for the

interest is nevertheless in the circumstances extravagant, exorbitant or unconscion-

able. In judging what is extravagant, exorbitant or unconscionable, I consider

(despite contrary expressions of view) that the extent to which the parties were

negotiating at arm’s length on the basis of legal advice and had every opportunity

to appreciate what they were agreeing must at least be a relevant factor.

4. Conclusion

The two cases from the UK Supreme Court illustrate the trend that Swedish law and

English law are gradually becoming more similar. The Swedish Contract Act

Section 36 regarding unconscionable contracts, in practice by and large corre-

sponds to the reasonings in the UK Supreme Court on how to apply the English

penalty doctrine.

18 The Swedish Supreme Court judge Stefan Lindskog, however, seems to make a distinction between

main obligations and ancillary obligations, see Stefan L

INDSKOG, ‘Garantier och dokumentvillkor –

kommentarer med anledning av en avhandling’, Juridisk Tidskrif t (JT) 2014–2015, p 829 at 867;

and S. L

INDSKOG, Betalning (Stockholm: Wolters Kluwer 2015), Ch. 11.5.1.

252

Lawyers outside Sweden often criticize the Swedish Contract Act Section 36

for being too general and for not providing suff icient predictability. The reasonings

in the UK Supreme Court cases clearly demonstrate that English law has the same

level of unpredictability reg arding how to determine whether a remedy is exorbi-

tant, extravagant, excessive, unconscionable or disproportionate. A quotation from

the UK Supreme Court summarizes the difficulties in attaining predictability in

both England and Sweden:

... it is impossible to lay down abstract rules about what may or may not be

‘extravagant or unconscionable’, because it depends on the particular facts and

circumstances established in the individual case.

253