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Cite as: [1912] ScotCS CSIH_2, 1912 2 SLT 90, 1912 SC 1097

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27 June 1912


Lord Salvesen.—In this case the Sheriff-substitute has found it possible to dispose, without inquiry, of all the conclusions of the action, with the exception of the demand for accounting made by the defender. As I am unable to reach the same result, I think it necessary to deal with the case in some detail.—[His Lordship then narrated the facts, and proceeded]—

As regards the first crave the Sheriff-substitute has repelled the defences as irrelevant, and ordained the defender to endorse and deliver the deposit-receipt referred to; as regards the second crave he also repelled the defences as irrelevant, and found the defender liable in payment of £58, 10s. in name of wages, although the agreement does not provide for the rate of wages in the event which has happened. He has further dismissed in toto the counter claim for £79, 5s. 2d., and also the counter claim for £250 except to the extent of £50 sterling. He has thus disposed of the whole cause with the exception of the defender's claim for an accounting with regard to which there is no dispute.

I am unable to agree with the Sheriff-substitute in any of his conclusions. The averments of negligence are, I think, quite relevant to be remitted to probation.—[His Lordship then dealt with the averments of mismanagement.]

There is more difficulty as to whether the pursuer is entitled to have the deposit-receipt endorsed and delivered to him. His counsel urged that this was a separable part of the agreement, and that the money having been consigned as security for the valuation price of the furniture, fittings, and stock in the hotel, now that he had resolved not to go on with the agreement or to take over these effects, the defender had no right to keep the pursuer out of his own money. It is true that the principle of compensation or set-off is not applicable to such a claim. But there is another principle equally well recognised which was expressed by Lord Justice-Clerk Moncreiff in Turnbull v. M'Lean as follows:—“I understand the law of Scotland, in regard to mutual contracts, to be quite clear—first, that the stipulations on either side are the counterparts and the consideration given for each other; second, that a failure to perform any material or substantial part of the contract on the part of one will prevent him from suing the other for performance; and third, that where one party has refused or failed to perform his part of the contract in any material respect, the other is entitled either to insist for implement, claiming damages for the breach, or to rescind the contract altogether—except so far as it has been performed.” The present case seems to me to fall within these rules. The pursuer has declined to perform his contract altogether, and he cannot therefore call upon the defender to fulfil his obligations until the latter has had an opportunity of constituting his claim of damages for the breach of the contract. As Lord Benholme said in Turnbull's case,—“In mutual contracts there is no ground for separating the parts of the contract into independent obligements, so that one party can refuse to perform his part of the contract, and yet insist upon the other performing his part. The unity of the contract must be respected.” I am therefore of opinion that the Sheriff-substitute has erred in granting a decree ordaining the defender de plano to endorse the deposit-receipt.

The remaining part of the judgment raises an interesting question of law about which there has been an apparent variety of judicial dicta. The last article in the mutual agreement between the parties is expressed in these terms:—“Fifth. Both parties hereto bind and oblige themselves to implement their part of this agreement under the penalty of fifty pounds, to be paid by the party failing to the party performing or willing to perform over and above performance.” The Sheriff-substitute has held that this sum of £50 represents the maximum to which the defender is entitled in respect of the admitted breach by the pursuer of his part of the agreement; and that as the pursuer is willing to allow this sum of £50 to be deducted from any claim which he may establish to wages, no inquiry need be led as to the loss the defender has actually or potentially suffered. He says: “Realising the speculative nature of the enterprise, the parties were careful in advance to translate the situation of a breach into a figure, and that is the figure for which the pursuer admits liability.” I understand the learned Sheriff to mean by this that the parties intended that the sum of £50 should represent the liquidate damages in case of a breach by either; and, if he were correct in so thinking, there is no fault to be found with his law. The intention, however, must be gathered from the words of the contract; and I confess that I do not find anything in the penalty clause to suggest that the sum of £50 there mentioned was an agreed-on pre-estimate of the damage which either might sustain by the failure of the other to perform his part of the contract. In the first place, the word used is “penalty” and not liquidate damages. I attach some importance to this, although the Courts have in special circumstances construed the word “penalty” as equivalent to liquidate damages, and conversely. A more important point is, however, that the penalty is to be “over and above performance.” Now, it is also true that these words will be implied where the Court is of opinion that the sum agreed on for breach of the agreement is so agreed on by way of penalty merely, and is not to be treated as liquidate damages; but I do not know of any case, and we were referred to none, where such words, when expressed, were held to be consistent with an intention of parties to fix the liquidate damages. An even more important consideration in determining whether the sum stipulated to be paid in the event of a breach of contract is liquidate damages or merely represents a penalty, is to ascertain whether the sum conditioned to be paid bears (in the words of Lord Justice-Clerk Inglis in Craig), “a clear proportion to the amount of loss sustained by the party entitled to claim it”; and very similar language was used by some of the noble Lords who decided the case of Elphinstone. The Lord Chancellor (Lord Herschell), in holding that the stipulated sum in that case represented liquidate damage, said: “The agreement does not provide for the payment of a lump sum upon the non-performance of any one of many obligations differing in importance. It has reference to a single obligation, and the sum to be paid bears a strict proportion to the extent to which that obligation is left unfulfilled.” In this case the very opposite holds good. The agreement imposes on the pursuer many obligations of an entirely different kind. There is first an undertaking that he shall duly lodge and follow forth an application for a transfer of the licence to himself. Then he is taken bound to take over at mutual valuation certain furniture, fittings, and stock.

Further, he undertakes to act as the defender's manager, and account to him for the whole drawings of the hotel—also week by week to consign the surplus of drawings over expenses in bank in name of the defender, and to conduct the hotel on a proper businesslike footing, and do nothing likely to prejudice the licence. For a breach of any of these obligations—some of them of a kind which might not involve actual loss, and others a loss that could certainly not be material, as, for instance, the failure to consign in a single week the surplus drawings—the same penalty is prescribed. But I need not pursue the subject, for I do not think the clause with which I am dealing could have been more clearly expressed as a penalty clause or one which is less calculated to indicate an intention of the parties to treat the stipulated sum as liquidate damages, whether in respect of a partial or entire breach of the obligations undertaken by the pursuer.

Even on the assumption, however, that this is a penalty clause, the pursuer argued that while it would be open to him to call upon the defender to prove his actual damage, the latter can never recover more than the stipulated penalty; although he (the pursuer) is not bound to pay more than the actual damage if it be less. This is a somewhat startling proposition, but it is not unsupported by authority. The earliest case to which we were referred on the subject is that of Johnstone's Trustees. In that case a property was exposed for sale under articles of roup which obliged the highest offerer within thirty days after the day of roup to grant a bond for the price offered by him to the satisfaction of the exposers, with a fifth part more than the price of liquidate penalty in case of failure; “and if any purchaser shall fail in granting the said bond, he shall, besides incurring a penalty of a fifth part more than the price, forfeit his interest in the purchase; and it shall be in the option of the exposers to compel the purchaser to implement his bargain or to hold the said lands and others themselves as being unsold, and of new to expose them to sale.” Dr Johnstone bought part of the lands at an upset price of £15,646, but having afterwards relinquished the purchase, the trustees brought an action against him concluding for a fifth of the purchase price, being the penalty incurred by his failure in implementing the conditions of the articles of roup, and also for £5000 damages. Lord Reston (Ordinary) found that the amount of the damage must be the difference between the sum of £15,646, the upset price at which the lands were purchased for behoof of Dr Johnstone, and the amount of the price which should be received by the pursuers when a sale of the whole lands had been effected, together with the difference between the interest on the price offered and on the actual proceeds of the lands. It is thus plain that he treated the clause on which the pursuers founded, not as one by which the damages were liquidated, but as a proper penalty, notwithstanding that it bore a certain relation to the price of the property. The report further bears that his Lordship afterwards found that the sum exigible from the defender could in no event exceed the penalty. A reclaiming petition was presented by the trustees, but the Court refused the petition, without answers. Unfortunately the report does not contain the opinions of the Judges in the Inner House.

This case was followed by Lord Wellwood in the Outer House in the case of Hyndman's Trustees; although his Lordship stated that, but for that case, his decision would have been the other way. His decision was not reclaimed against; but one main reason for not presenting a reclaiming note (as I happen to know, from having conducted the case in the Outer House) was that it was doubtful if even the sum decerned for could be recovered against the defender. It is further not to be left out of view that Mr Bell in his Principles (section 34) treats the case as authoritative; for he lays down as a proposition in relation to stipulated damages that “the obligation may be fortified by a penalty which is held to cover but not to assess the damage, to entitle the jury to find under it the true amount of damage not exceeding the penalty.” Lastly, Lord Fitzgerald's opinion in the case of Elphinstone contains the following passage: “We may take it, then, that by the law of Scotland the parties to any contract may fix the damages to result from a breach at a sum estimated as liquidated damages; or they may enforce the performance of the stipulations of the agreement by a penalty. In the first instance the pursuer is, in case of a breach, entitled to recover the estimated sum as pactional damages irrespective of the actual loss sustained. In the other, the penalty is to cover all the damages actually sustained, but it does not estimate them, and the amount of loss (not, however, exceeding the penalty) is to be ascertained in the ordinary way.” This latter dictum was not necessary for the decision of the case before the House, as the sum stipulated in the event of a breach was held to be liquidated damages; and none of the other learned Lords referred to it in their opinions.

It is to be noted that in Johnstone's case the pursuers concluded for the penalty although they had a separate and additional conclusion for damages. They were thus founding on the penalty clause, and it may be that in such circumstances they were not entitled to ask any more than the penalty. Possibly this may afford a key to the decision, and also to the dicta of Mr Bell and Lord Fitzgerald. If that is not the true view, I confess that I am quite unable to reconcile these authorities with the other principle which has been firmly fixed in our law by a series of decisions and which is thus stated by Mr Bell in his Principles (section 34), “that the stipulation of a penalty (unless when expressly so declared) is not alternative, and does not discharge the obligation on payment of the penalty.” I need only refer to one case as illustrating this principle, that of Gold. Suppose in the present case that, after the pursuer had obtained a transfer of the licence and had performed, or was willing to perform, all the obligations incumbent on him by the agreement, the defender proposed to let the hotel to some other person at a higher rent. According to the principle of the case last cited, would the pursuer not have been entitled to insist on specific implement, or could the defender have tendered him a sum of £50 sterling as in full of the damages claimable through his breach of contract 1 In my opinion he could plainly not do so. Or again, to take the decision in the case of Johnstone's Trustees, suppose the trustees had attempted to resile from their bargain, is it not plain that it would have been open to the purchaser to have obtained a decree ordaining them to execute a disposition on payment of the price, or in default of their doing so granting an adjudication in implement of the sale? To my mind it is obvious that this latter remedy would have been open to the purchaser. It is true that in the case of the purchaser who resiles from his contract the remedy of a decree ad factum prœstandum is not open, nor would it be available to the defender here. The only performance of the contract which can be obtained in such a case is full compensation for the breach. I cannot conceive any ground upon which it can be held consistently with principle that one of the parties should escape all the consequences of his breach on payment of a stipulated sum which is stated by way of penalty, when the other may be compelled to implement the contract in its entirety. That is to read a penalty clause, which ex hypothesi does not assess the damage, as nevertheless assessing it where the actual damage sustained is more than the stipulated sum.

I am fortified in this view by the circumstance that the rule has been fixed in England in a sense opposite to that indicated in the Scottish authorities I have quoted. In the case of Harrison v. Wright a charter-party had been entered into between the parties for a voyage from Sweden to Hull. It contained a clause, “penalty for non-performance, £1300.” The shipowner afterwards refused to allow the vessel to sail, and the charterers claimed £3000 damages for breach of contract. An arbiter awarded the plaintiffs £1860, though it was objected before him that not more than £1300, the amount of the penalty as liquidate damages, could be recovered. Lord Ellenborough, following a prior decision of Lord Mansfield in Winter v. Trimmer, held that the penalty was auxiliary to enforcing performance of the contract, and that the party aggrieved might either take the penalty as his debt at law and assign his breach under the statute of William III. cap. 11, section 8, or he might bring his action for damages upon the breach of the contract, and that the arbitrator was warranted in awarding the sum which he had given to the plaintiffs. That decision has been recognised ever since as a correct statement of the law of England, and in the ordinary text-books on shipping and contracts the matter is treated as no longer open. Thus Mr Carver in “Carriage by Sea,” section 722, says: “A clause such as ‘penalty for non-performance estimated amount of freight’ (or some fixed sum) is frequently found in charters, but practically it appears to have little effect. On the one hand, it does not limit the amount of damages which may be claimed; on the other hand, it does not entitle either party to claim the amount of the penalty for a partial breach of the contract.” The decision of the Privy Council in the case of Dimech v. Corlett is not really inconsistent with the law as thus stated, although it was there held that, in the case of an entire non-performance of a contract of affreightment, the party aggrieved was entitled to recover as damages the full amount of freight stipulated for in the instrument. In effect the Court there decided that the estimated amount of freight was to be dealt with as liquidate damages in the event of entire failure to perform the contract. In a later case, that of Godard v. Gray, Blackburn, J., quoted with approval the following passage in Abbott on Shipping: “Such a clause is not the absolute limit of damages on either side; the party may, if he thinks fit, ground his action upon the other clauses or convenants, and may, in such action, recover damages beyond the amount of the penalty, if in justice they shall be found to exceed it. On the other hand, if the party sue on such a penal clause he cannot, in effect, recover more than the damage actually sustained.” The decision in the case of Craig, to which I have already referred, is not, as I read it, in the least degree inconsistent with the principle thus stated, but is entirely on the same lines. I think all the authorities that appear to be to a contrary effect in Scotland may be explained by the passages being elliptical and omitting what is clearly stated in the passage from Abbott, that a stipulated amount of penalty is the maximum amount recoverable if the party aggrieved sues on the penalty clause. It cannot be maintained that a different principle of construction is to apply to a contract of affreightment—which is, after all, the lease of a vessel—from that applicable to the lease of a heritable subject.

I have come, therefore, in the end to be very clearly of opinion that the laws of England and Scotland are the same as regards the matter; and that the defender is entitled to recover whatever loss he is able to qualify in respect of the pursuer's breach of contract. We ought, therefore, to recall the interlocutor appealed against; to repel the 1st, 4th, and 5th pleas in law for the pursuer and the second alternative of plea 7; and remit the case to the Sheriff-substitute to allow parties a proof of their respective averments.

Since this case was argued counsel for the pursuer has directed our attention to the case of Webster v. Bosanquet . I have accordingly considered the decision of the Privy Council, with the result that I do not think it in any way aids the pursuer's argument. The clause of the contract on which action was there taken is in marked contrast with the one which occurs in the contract between the parties here. It provided for a specified amount to be paid in the event of breach “as liquidated damages and not as penalty.” The main value of the decision lies in this, that such a stipulation will be fairly construed; and that the stipulated sum of liquidate damages will not be due unless there has been a substantial breach of the contract; or, to put it another way, that the mere fact that on a literal construction of the clause it might be possible to say that it provided for payment of liquidate damages for any trifling breach was not to be held as converting it into a mere penalty clause, for the Courts must construe a contract according to the presumed intention of the contracting parties. The case lays down no new law but professedly follows the decision in the Clydebank Engineering Company, to which we were referred in the course of the argument. It does not support to any extent the view that when an action is laid on breach of contract the damages are to be held as limited to the amount stipulated in a proper penalty clause.

The Lord Justice-Clerk and Lord Guthrie concurred.

[1912] SC 1097

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