27 November 2015
Parties to Joint Operating Agreements ("JOAs") have long been concerned about the risk that the default provisions might prove unenforceable, on the basis that they constitute penalty clauses. Those drafting JOA default provisions have struggled to balance a desire for strong remedies against defaulting parties, with the need to ensure provisions are enforceable. As a consequence, model form JOAs have increasingly included more nuanced default provisions, including call options (at an undervalue) and withering provisions. These have generally come to be regarded as less likely to fall foul of the rule against penalty clauses than simple forfeiture clauses. The recent Supreme Court decision in Cavendish Square Holdings B.V. v. Makdessi  UKSC 67 has recast the test for penalties in such a way as to reduce this anxiety and to increase the latitude of parties to agree remedies for default. Risks on enforceability remain, but, in general, JOA default provisions may now be less likely to be deemed unenforceable on grounds that they are a penalty.