A software licence obliges the licensee to pay £50,000 if it breaches a non-disclosure clause. The licensor's business depends on the confidentiality of its source code. Under the modern test in Cavendish Square Holding v Makdessi, how will the court decide whether the clause is an unenforceable penalty?

Correct answer: D) By asking whether the clause imposes a detriment out of all proportion to any legitimate interest of the licensor in having the obligation performed

Explanation

The Supreme Court in Cavendish v Makdessi held that the test is whether the clause is a secondary obligation that imposes a detriment out of all proportion to the innocent party's legitimate interest in performance. A genuine pre-estimate of loss will usually be enforceable, but it is no longer the only test. A party may have a legitimate interest beyond compensation, such as protecting confidential code. Legal advice and the size of the actual loss are relevant facts but are not the test.