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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1 (01 July 1914) URL: https://www.bailii.org/uk/cases/UKHL/1914/1.html Cite as: [1915] AC 79, [1914] UKHL 1 |
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HOUSE OF LORDS
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APPELLANTS |
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RESPONDENTS |
The House took time for consideration.
July 1.
The appellants, having discovered that the respondents had
sold covers
and tubes at under the current list price, raised action
and demanded damages. The case was tried and the breach in
fact held proved. An inquiry was directed before the Master as
to damages. The Master inquired, and assessed the damages at
250 l. , adding this explanation: "I find that it was left open
to me to decide whether the 5 l. fixed in the agreement was
penalty or liquidated damages. I find that it was liquidated
damages."
The respondents appealed to the Court
of Appeal, when the
majority of that
Court,
Vaughan
Williams and Swinfen Eady
L.JJ., held, Kennedy L.J. dissenting, that the said sum of 5 l. was
a penalty, and entered judgment for the plaintiffs for the sum of
2 l. as nominal damages. Appeal from that decision is now before
your Lordships' House.
My Lords, we had the benefit of a full and satisfactory
argument, and a citation of the very
numerous cases which
have been decided on this branch of the law. The matter has
been handled, and at no distant date, in the
Courts
of highest
resort. I particularly refer to the Clydebank Case(1) in your
Lordships' House and the cases of Public Works
Commissioner
v.
Hills(2) and Webster
v.
Bosanquet(3) in the Privy
Council.
In both of these cases many of the previous cases were
considered.
In
view
of that fact, and of the number of the authorities
available, I do not think it advisable to attempt any detailed
review of the
various
cases, but I shall
content
myself with
stating succinctly the
various
propositions which I think are
deducible from the decisions which rank as authoritative:-
1. Though the parties to a contract
who use the words
"penalty" or "liquidated damages" may prima facie be supposed
to mean what they say, yet the expression used is not
conclusive.
The
Court
must find out whether the payment stipulated is in
truth a penalty or liquidated damages. This doctrine may be
said to be found passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated
as in terrorem of the offending party; the essence of
liquidated damages is a genuine covenanted
pre-estimate of
damage (Clydebank Engineering and Shipbuilding
Co.
v.
Don
Jose Ramos Yzquierdo y Castaneda(1)).
3. The question whether a sum stipulated is penalty or
liquidated damages is a question of construction
to be decided
upon the terms and inherent circumstances of each particular
contract,
judged of as at the time of the making of the
contract,
not as at the time of the breach (Public Works
Commissioner
v.
Hills(1) and Webster
v.
Bosanquet(2)).
4. To assist this task of construction
various
tests have been
suggested, which if applicable to the case under
consideration
may prove helpful, or even
conclusive.
Such are:
( a ) It will be held to be penalty if the sum stipulated for is
extravagant and unconscionable in amount in comparison
with the greatest loss that
could
conceivably
be proved to have
followed from the breach. (Illustration given by Lord Halsbury
in Clydebank Case.(3)
( b ) It will be held to be a penalty if the breach consists
only
in not paying a sum of money, and the sum stipulated is a
sum greater than the sum which ought to have been paid (Kemble
v.
Farren(4)). This though one of the most ancient
instances is truly a
corollary
to the last test. Whether it had
its historical origin in the doctrine of the
common
law that when
A. promised to pay B. a sum of money on a certain day and
did not do so, B.
could
only recover the sum with, in certain
cases, interest, but
could
never recover further damages for
non-timeous payment, or whether it was a survival of the
time when equity reformed unconscionable bargains merely
because they were unconscionable, - a subject which much
exercised Jessel M.R. in Wallis
v.
Smith(5) - is probably more
interesting than material.
( c ) There is a presumption (but no more) that it is penalty
when "a single lump sum is made payable by way of compensation,
on the occurrence of one or more or all of several events,
some of which may occasion serious and others but trifling
damage" (Lord Watson in Lord Elphinstone
v.
Monkland Iron
and
Coal
Co.
SIZE=2
color="blue">(6)).
On the other hand:
( d ) It is no obstacle to the sum stipulated being a genuine pre-estimate
of damage, that the consequences
of the breach are such
as to make precise pre-estimation almost an impossibility. On
the contrary,
that is just the situation when it is probable that
pre-estimated damage was the true bargain between the parties
( Clydebank Case, Lord Halsbury(1); Webster
v.
Bosanquet, Lord
Mersey(2)).
Turning now to the facts of the case, it is evident that the
damage apprehended by the appellants owing to the breaking of
the agreement was an indirect and not a direct damage. So long
as they got their price from the respondents for each article sold,
it could
not matter to them directly what the respondents did
with it. Indirectly it did. Accordingly, the agreement is headed
"Price Maintenance Agreement," and the way in which the
appellants would be damaged if prices were cut is clearly explained
in evidence by Mr. Baisley, and no successful attempt is made to
controvert
that evidence. But though damage as a whole from
such a practice would be certain, yet damage from any one sale
would be impossible to forecast. It is just, therefore, one of
those cases where it seems quite reasonable for parties to
contract
that they should estimate that damage at a certain figure, and
provided that figure is not extravagant there would seem no
reason to suspect that it is not truly a bargain to assess damages,
but rather a penalty to be held in terrorem.
The argument of the respondents was really based on two
heads. They overpressed, in my judgment, the dictum of Lord
Watson in Lord Elphinstone's Case(3), reading it as if he had
said that the matter was conclusive,
instead of saying, as he did,
that it raised a presumption, and they relied strongly on the case
of Willson
v.
Love.(4)
Now, in the first place, I have considerable
doubt whether
the stipulated payment here can fairly be said to deal with
breaches, "some of which" - I am quoting Lord Watson's
words - "may occasion serious and others but trifling damage."
As a mere matter of
construction,
I doubt whether clause 5 applies
to anything but sales below price. But I will assume that it
does. None the less the mischief, as I have already pointed out,
is an indirect mischief, and I see no data on which, as a matter
of construction,
I
could
settle in my own mind that the indirect
damage from selling a
cover
would differ in magnitude from the
indirect damage from selling a tube; or that the indirect damage
from a cutting-price sale would differ from the indirect damage
from supply at a full price to a hostile, because prohibited, agent.
You cannot weigh such things in a chemical balance. The
character of the agricultural land which was ruined by slag heaps
in Elphinstone's Case(1) was not all the same, but no objection
was raised by Lord Watson to applying an overhead rate per acre,
the sum not being in itself unconscionable.
I think Elphinstone's Case(1), or rather the dicta in it, do go
this length, that if there are various
breaches to which one indiscriminate
sum to be paid in breach is applied, then the strength
of the chain must be taken at its weakest link. If you can clearly
see that the loss on one particular breach
could
never amount to
the stipulated sum, then you may
come
to the
conclusion
that
the sum is penalty. But further than this it does not go; so, for
the reasons already stated, I do not think the present case forms
an instance of what I have just expressed.
As regards Willson's Case(2), I do not think it material to
consider
whether it was well decided on the facts. For it was
decided on the
view
of the facts that the manurial
value
of straw
and of hay were known ascertainable quantities as at the time of
the bargain, and radically different, so that the damage resulting
from the want of one
could
never be the same as the damage
resulting from the want of the other.
Added to that, the parties there had said "penalty," and the
effort was to make out that that really meant liquidated damages;
and lastly, if my view
of the facts in the present case is
correct,
then Rigby L.J. would have agreed with me, for the last words
of his judgment are as follows: "On the other hand it is stated
that, when the damages caused by a breach of
contract
are
incapable of being ascertained, the sum made by the
contract
payable on such a breach is to be regarded as liquidated damages.
The question arises, What is meant in this statement by the
expression 'incapable of being ascertained'? In their proper
sense the words appear to refer to a case where no rule or measure
of damages is available for the guidance of a jury as to the amount of the damages, and a judge would have to tell them they must fix the amount as best they can." To arrive at the indirect damage in this case, supposing no sum had been stipulated, that is just what a judge would, in my opinion, have had to do.
On the whole matter, therefore, I go with the opinion of
Kennedy L.J., and I move your Lordships that the appeal be
allowed, and judgment given for the sum as brought out by the
Master, the appellants to have their costs
in this House and in
the
Courts
below.
contract
entered into between
the appellants, through the agency of Messrs. Pellant, Limited,
and the respondents, claiming, amongst other things, to recover
a sum of 5 l. in respect of each of the breaches of this
contract
complained
of. The sole question for decision on this appeal is
whether this sum of 5 l. is a penalty or liquidated damages.
The appellants are extensive and well-known manufacturers of
motor
tyres,
covers,
and tubes, a trade in which there is keen
competition.
They have no patents protecting their manufacture.
Success over their
competitors
depends on the reputation
acquired for their products, and largely upon the efficiency of
the organization of their business. Ninety-nine per cent. of their
output in this class of goods is sold through what Mr. Baisley,
one of their managers who was examined as a witness, described
as their distributing organization. It
consists
in this, that they
sell to
motor
car manufacturers, persons called factors who resell
to retail agents, and retail agents themselves, and that all these
latter sell to the public, the users of the goods.
The appellants produce price lists of these goods of theirs
varying
from time to time. They invariably sell at these prices
to the members of their distributing organization under agreements
similar to that sued upon, giving, however, discount and
rebates at
varying
rates. These agreements are styled price
maintenance agreements, and their main purpose, obviously, is
to prevent the sale to the public, the users, either directly or indirectly, of the goods the appellants manufacture at prices less
than those named in their price lists. The result of this is that,
competition
having reduced these prices to the lowest remunerative
scale, the agent secures his remuneration by selling at the
prices at which he buys. If he sells at lower prices than these
the loss
comes
out of his discount and rebates, his own profits.
Mr. Baisley, in his evidence (Appendix, pp. 111 - 116), explains
elaborately the dislocation of the distributing organization of
the appellants, and the injury to their trade which would ensue
from the sale by one or more of their agents or factors of their
goods at prices less than those named in these lists. He
pointed out that if the business of one of their agents in any
particular place was undercut by such sales, the agent would,
owing to the diminution of his remuneration, most probably
throw up his agency and become the agent of a
competitor,
thus leaving the field open to the rivals of the appellants; that
it was essential for their trade that their wares should be obtainable
all over the
country
at as many places as possible, and that
though the
consequential
injury to their trade by this undercutting
would, or might, be
very
serious, it would be
very
difficult
to prove in evidence the precise amount of their loss in money;
that
considering
all these things, the appellant
company
fixed
5 l. , the sum mentioned in the agreement, as a fair and reasonable
sum for liquidated damages in respect of the breaches specified.
This evidence was uncontradicted.
In a good deal of the argument which has been addressed to
your Lordships on behalf of the respondents, the true object of
this price maintenance agreement, and the nature of the consequential
injury to the plaintiffs' trade flowing from the breaches
of it, have been somewhat lost sight of. It has been urged that
as the sum of 5 l. becomes payable on the sale of even one tube at
a shilling less than the listed price, and as it was impossible that
the appellant
company
should lose that sum on such a transaction,
the sum fixed must be a penalty. In the sense of direct and
immediate loss the appellants lose nothing by such a sale. It is
the agent or dealer who loses by selling at a price less than that
at which he buys, but the appellants have to look at their trade in
globo, and to prevent the setting up, in reference to all their goods anywhere and everywhere, a system of injurious undercutting.
The object of the appellants in making this agreement, if the
substance and reality of the thing and the real nature of the
transaction be looked at, would appear to be a single one,
namely, to prevent the disorganization of their trading system
and the consequent
injury to their trade in many directions. The
means of effecting this is by keeping up their price to the public
to the level of their price list, this last being secured by
contracting
that a sum of 5 l. shall be paid for every one of the three
classes of articles named sold or offered for sale at prices below
those named on the list. The
very
fact that this sum is to
be paid if a
tyre
cover
or tube be merely offered for sale,
though not sold, shows that it was the
consequential
injury to
their trade due to undercutting that they had in
view.
They
had an obvious interest to prevent this undercutting, and on the
evidence it would appear to me impossible to say that that
interest was incommensurate with the sum agreed to be paid.
Their object is akin in some respects to that which a trader
has in binding a former employee not to set up, or carry on, a
rival business within a certain area. The trader's object is to
prevent competition,
and especially to prevent his old customers
whom the employee knows from being enticed away from
him. If one takes for example the case of a plumber, the
carrying on of the trade of a plumber may mean anything from
mending gas pipes for a few pence apiece up to doing all the
plumbing work of a big hotel. If the employee should mend one
hundred of such pipes for twenty old customers at 6 d. apiece,
for which the employer would charge 1 s. apiece,
could
it possibly
be
contended
that the trader's loss was only one hundred
sixpences, 2 l. 10 s. ? It is, I think, quite misleading to
concentrate
one's attention upon the particular act or acts by which, in such
cases as this, the rivalry in trade is set up, and the repute
acquired by the former employee that he works cheaper and
charges less than his old master, and to lose sight of the risk to
the latter that old customers, once tempted to leave him, may
never return to deal with him, or that business that might
otherwise have
come
to him may be captured by his rival. The
consequential
injuries to the trader's business arising from each
breach by the employee of his
covenant
cannot be measured by
the direct loss in a monetary point of
view
on the particular
transaction
constituting
the breach. An old customer may be as
effectively enticed away from him through the medium of a 10 s.
job done at a cheap rate as by a 50 l. job done at a cheap rate, or
a reputation for cheap workmanship may be acquired possibly as
effectively in one case as in the other.
In many cases a person may contract
to do or abstain from
doing an act which is a
composite
act, the product or result of
almost numberless other acts. For instance, if one should
contract
with a builder to build a house of the best materials and
with the most skilled workmanship, and to hand over possession
of the same
completed
on a certain day for 1000 l. , 500 l. to be
paid if the agreement was not performed; every fire grate set
which on
completion
would be found to be of bad material, every
door which would be found to have been defectively hung,
every cubic foot of masonry which would be found to have been
badly and improperly built, would involve a breach of the agreement,
but it would be quite illegitimate to thus disintegrate the
obligation to do what the parties regarded as a single whole into
a number of obligations to do a number of things of
varying
importance, and treat the 500 l. as prima facie a penalty, because
these individual breaches of the agreement did not cause, in
many instances, any injury
commensurate
with that sum. This
is the
very
ground, or one of the grounds, upon which Lord
Herschell rests his judgment in Lord Elphinstone
v.
Monkland
Iron and
Coal
Co.
SIZE=2
color="blue">(1)
He 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 the present case the agreement of the parties, in effect, though possibly not in form, did little, if anything, more than impose a single obligation, namely, to sell and endeavour to sell the goods of the appellants at the prices named in their lists,
though, of course,
as they sold different kinds of goods, this
single obligation might be
violated
in many ways. Much reliance
was placed by the respondents on the well-known passage in the
judgment of Lord Watson in the last-mentioned case, to the
effect that "when a single lump sum is made payable, by way of
compensation,
on the occurrence of one or more or all of several
events, some of which may occasion serious and others but trifling
damage, the presumption is that the parties intended the sum to
be penal, and subject to modification." It is quite true that, as
mentioned by Swinfen Eady L.J., Lord Esher, in Willson
v.
Love(1), said that he thought this passage meant the same thing
as if it ran "some of which may occasion serious and others less
serious damage." With all respect, this alteration would mean
that the damage resulting from each event should be almost
uniform in amount, a
construction
which would mean that the
stipulated
compensation
must presumably be a penalty in almost
every
conceivable
case. Moreover, Lord Watson's statement of
the law as it stands was approved by Lord Davey in Clydebank
Engineering and Shipbuilding
Co.
v.
Don Jose Ramos Yzquierdo
y Castaneda(2) and in Webster
v.
Bosanquet(3) without any
qualification of that kind.
In this last-mentioned case, as in the present, the contract
provided that the amount specified should be paid as "liquidated
damages and not as a penalty." The
covenant
upon which the
matter in
controversy
turned was
contained
in a deed made on
the dissolution of a partnership between two partners, the
plaintiff and defendant, and it provided that the defendant should
not during a certain period be at liberty to sell the whole or part
of the tea crops of two estates named to any person other than
the plaintiff without first offering to him the option of buying
the same, and further provided that on breach of this
covenant
by the defendant he should pay to the petitioner the sum of 500 l.
as "liquidated damages and not as a penalty."
Now, it will be observed that this covenant
would be
violated
by the sale of any appreciable part, in a business point of
view,
of the crops of either of these estates, no matter how relatively
small that part might be compared
with the entire crop of
either. It is also clear that the object of the parties when they
executed the deed was to secure to the plaintiff the option of
buying the entire crops of both estates, and that when they
fixed this sum of 500 l. they were thinking of the loss the plaintiff
might sustain by the loss of that option. The amount of tea
sold by the defendant in breach of the
covenant
was
considerable
- nearly 54,000 lbs. It was laid down that in determining
whether a sum
contracted
to be paid is liquidated damages or a
penalty, one is to
consider
whether the
contract,
whatever its
language, would, at the time it was entered into, have been
unconscionable and extravagant, and one which no
Court
ought
to allow to be enforced if this sum were to be treated as
liquidated damages, having regard to any possible amount of
damage likely to have been in the
contemplation
of the parties
when they made the
contract.
At p. 398, Lord Mersey, in delivering
the judgment of the Judicial
Committee,
said: "When making
the
contract
it was impossible to foresee the extent of the injury
which might be sustained by the plaintiff if sales of the tea were
made to third parties without his
consent.
That such sales
might seriously affect his business was obvious, and the
very
uncertainty of the loss likely to arise made it most reasonable
for the parties to agree beforehand as to what the damages
should be. And, furthermore, it is well known that damages of
this kind, though
very
real, may be difficult of proof, and that
the proof may entail
considerable
expense." Those remarks are,
having regard to the evidence in the present case, particularly
applicable to it.
In Kemble v.
Farren(1) Tindal C.J. said: "We see nothing
illegal or unreasonable in the parties, by their mutual agreement,
settling the amount of damages, uncertain in their
nature, at any sum upon which they may agree. In many
cases, such an agreement fixes that which is almost impossible
to be accurately ascertained; and in all cases, it saves the expense
and difficulty of bringing witnesses to that point."
Therefore, although it may be true, as laid down by Lord Watson, that a presumption is raised in favour of a penalty
where a single lump sum is to be paid by way of compensation
in respect of many different events, some occasioning serious,
some trifling damage, it seems to me that that presumption
is rebutted by the
very
fact that the damage caused by each and
every one of those events, however
varying
in importance, may
be of such an uncertain nature that it cannot be accurately
ascertained. The damage has been proved to be of that
nature in the present case, and the
very
fact that it is so
renders it all the more probable that the sum of 5 l. was not
stipulated for merely in terrorem, but was really and genuinely
a pre-estimate of the appellants' probable or possible interest in
the due performance of the
contract.
Swinfen Eady L.J. holds that clause No. 5 of the agreement
applies to the first part of clause 3, the supplying of these goods
to persons on the appellants' black list, as it was styled. I
confess
that seems to me a
very,
very
doubtful
construction.
What is prohibited by the second clause is "the sale or offering
for sale of
motor
tyres,
covers,
or tubes at prices less than those
in the price list." What is dealt with in clause 5 is a sale or
offering for sale of these particular kinds of goods in breach of
the agreement. What is dealt with in the first part of clause 3
is the supply without
consent
of any such goods to these blacklisted
agents at any price whatever; but even if Swinfen
Eady L.J. should be right in this it would not lead me to a
conclusion
different from that to which I have
come.
The appellants, like the respondents, are most probably good
business men. Neither of them contemplated,
presumably, the
black-listing of these agents without adequate trade reasons.
Nothing was more natural than that the appellants should seek
to prevent the supply of their goods indirectly to persons to
whom they would not supply them directly.
Considerable
injury to their trade interests might obviously be done by
putting such persons in a position to undercut their prices, and
derange their supply organization, and nothing
conceivable
could
be more difficult than to prove by evidence, or to estimate
precisely in money, the exact amount of damages which might be
caused by such an injury. The passage in the judgment of
Tindal C.J., above quoted, applies directly to such state of things.
I entirely concur
with Kennedy L.J. in his criticism of the
agreement to be found at p. 134 of the appendix. I agree with
him that on the face of it, on this point of liquidated damages,
it
contains
nothing unreasonable, unconscionable, or extravagant.
And I further think that the same may be said of the real
transaction between the parties if its substance be reasonably
regarded.
For these reasons I think that the judgment of Kennedy L.J.
was right, that the judgment appealed from was wrong and
should be reversed, and the judgment of Phillimore J. be restored,
and the appeal allowed with costs.
contract
are in
their nature uncertain, the law permits the parties to agree
beforehand the amount to be paid on such breach. Whether
the parties have so agreed or whether the sum agreed to
be paid on the breach is really a penalty must depend on
the circumstances of each particular case. There are, however,
certain general
considerations
which have to be borne
in mind in determining the question. If, for example, the sum
agreed to be paid is in excess of any actual damage which can
possibly, or even probably, arise from the breach, the possibility
of the parties having made a bona fide pre-estimate of damage
has always been held to be excluded, and it is the same if they
have stipulated for the payment of a larger sum in the event of
breach of an agreement for the payment of a smaller sum.
The really difficult cases are those in which the Court
has to
consider
what presumptions or inferences arise from the number
or nature of the stipulations on breach of which the sum in
question is agreed to be paid. In the case of a single stipulation,
which, if broken at all, can be broken once only, and in one way
only, such as a
covenant
not to reveal a trade secret to a rival
trader, there can be no inference or presumption that the sum
payable on breach is not in the nature of agreed damages, and if
the parties have referred to it as agreed or liquidated damages,
no reason why the
Court
should not treat it as such. The
question is more complicated
when the stipulation, though still
a single stipulation, is capable of being broken more than once,
and in more ways than one, such as a stipulation not to solicit
the customers of a firm. A solicitation which is unsuccessful
can give rise to only nominal damages, and even if it be successful,
the actual damage may
vary
greatly according to the
value
of
the custom which is thereby directly or indirectly lost to the
firm. Still, whatever damage there is must be the same in kind
for every possible breach, and the fact that it may
vary
in amount
for each particular breach has never been held to raise any
presumption or inference that the sum agreed to be paid is a
penalty, at any rate in cases where the parties have referred to
it as agreed or liquidated damages.
The question becomes still more complicated
where a single
sum is agreed to be paid on the breach of a number of stipulations
of
varying
importance. It is said that in such a case there
arises an inference or presumption against the sum in question
being in the nature of agreed damages, even though the parties
have referred to it as such. My Lords, in this respect I
think a distinction should be drawn between cases in which
the damage likely to accrue from each stipulation is the same
in kind and cases in which the damage likely to accrue
varies
in kind with each stipulation. Cases of the former
class seem to me to be
completely
analogous to those of a
single stipulation, which can be broken in
various
ways and
with
varying
damage; but probably it would be difficult for the
Court
to hold that the parties had pre-estimated the damage if
they have referred to the sum payable as a penalty.
In cases, however, of the latter class, I am inclined to think
that the prima facie presumption or inference is against the
parties having pre-estimated the damage, even though the sum
payable is referred to as agreed or liquidated damages. The
damage likely to accrue from breaches of the various
stipulations
being in kind different, a separate pre-estimate in the case of
each stipulation would be necessary, and it would not be
very
likely that the same result would be arrived at in respect of each
kind of damage. In my opinion, however, any such presumption
or inference would be prima facie only and capable of being displaced by other
considerations.
Supposing it were recited in
the agreement that the parties had estimated the probable
damage from a breach of one stipulation at from 5 l. to 15 l. , and
the probable damage from a breach of another stipulation at
from 2 l. to 12 l. , and had agreed on a sum of 8 l. as a reasonable
sum to be paid on the breach of either stipulation, I cannot
think that the
Court
would refuse to give effect to the bargain
between the parties.
My Lords, in the present case, even accepting the construction
of the
contract
which makes clause 5 apply not only to a sale or
offer
contrary
to the provisions of clause 2, but also to one
contrary
to the provisions of clause 3, I think it is reasonably clear that the
damage likely to accrue from the breach of every stipulation to
which clause 5 applies is the same in kind. Such damage will
in every case
consist
in the disturbance or derangement of the
system of distribution by means of which the appellants' goods
reach the ultimate
consumer.
The parties by their
contract
agree
that the sum payable on breach of any such stipulation is to be
paid by way of damages and not by way of penalty, and I can
see nothing to justify the
Court
in refusing to give effect to this
bargain.
construction
of this agreement.
In the fifth clause the respondents agreed to pay to the
appellants "the sum of 5 l. for each and every tyre,
cover,
or
tube sold or offered in breach of this agreement, as and by way
of liquidated damages, and not as a penalty." There has been
difference of opinion whether the sum of 5 l. is applicable only to
a breach of the
conditions
contained
in paragraph 2 of the agreement
or extends to a breach of other
conditions
not
contained
in this paragraph.
Paragraph 2 contains
an undertaking by the respondents that
they "will not sell or offer any
Dunlop
motor
tyres,
covers,
or
tubes to any private customers or to any
co-operative
society at
prices below those mentioned in the price list current at the time of sale, nor give to any such customer or society any cash or
other discounts, or advantages reducing the same, and will not
sell or offer any
Dunlop
motor
tyres,
covers,
or tubes to any other
person, firm, or
company
at prices less than those mentioned in
the said price list." I agree with the opinion of Kennedy L.J.
that under the terms of the
contract
the sum of 5 l. is only payable
in respect of a breach of the undertaking in paragraph 2 of
the
contract,
and does not extend to other breaches. I further
agree with the opinion expressed by the Lord Justice, that,
within this limitation, clause 5 of the
contract
does apply to
more than one
contingency,
and that the case must be
considered
on this basis.
It was held by the Court
of Appeal that although the sum of
5 l. was agreed between the parties to be by way of liquidated
damages and not as a penalty, yet it must be regarded as a
penalty; that the appellants
could
not recover any greater
damages for breach of the agreement in the sale or offering of
any
tyre,
cover,
or tube than such damage as they
could
prove
that they had sustained; since they
could
not prove that they
had sustained actual damage, they were not entitled to more than
nominal damages. It is against this decision that the appeal is
brought to your Lordships' House.
My Lords, there is no question as to the competency
of parties
to agree beforehand the amount of damages, uncertain in their
nature, payable on the breach of a
contract.
There are cases,
however, in which the
Courts
have interfered with the free right
of
contract,
although the parties have specified the definite sum
agreed on by them to be in the nature of liquidated damages,
and not of a penalty. If the
Court,
after looking at the language
of the
contract,
the character of the transaction, and the circumstances
under which it was entered into,
comes
to the
conclusion
that the parties have made a mistake in calling the agreed sum
liquidated damages, and that such sum is not really a pactional
pre-estimate of loss within the
contemplation
of the parties at
the time when the arrangement was made, but a penal sum
inserted as a punishment on the defaulter irrespective of the
amount of any loss which
could
at the time have been in
contemplation
of the parties, then such sum is a penalty, and the defaulter is only liable in respect of damages which can be proved
against him. It is too late to question whether such interference
with the language of a
contract
can be justified on any rational
principle.
There are two instances in which the Court
has interfered
when the agreed sum is referable to the breach of a single
stipulation. It is important that the principle of interference
should not be extended. The agreed sum, though described in
the
contract
as liquidated damages, is held to be a penalty if it
is extravagant or unconscionable in relation to any possible
amount of damages that
could
have been within the
contemplation
of the parties at the time when the
contract
was made.
No abstract rule can be laid down without reference to the special
facts of the particular case, but when
competent
parties by free
contract
are purporting to agree a sum as liquidated damages
there is no reason for refusing a wide limit of discretion. To
justify interference there must be an extravagant disproportion
between the agreed sum and the amount of any damage
capable of pre-estimate. In the case of Clydebank Engineering
and Shipbuilding
Co.
v.
Don Jose Ramos Yzquierdo y Castaneda(1)Lord Halsbury gives an apt illustration of what would
probably render a sum agreed by the parties unconscionable, and
therefore a penalty: "For instance, if you agreed to build a
house in a year, and agreed that if you did not build the house
for 50 l. you were to pay a million of money as a penalty, the
extravagance of that would be at once apparent."
In the present case the definite sum agreed by the parties is 5 l. ,
and this cannot be said to be extravagant or extortionate, having
regard to the nature of the contract.
The second instance in which the Courts
have sanctioned
interference is in the case of a
covenant
for a fixed sum, or for a
sum definitely ascertainable, and where a larger sum is inserted by
arrangement between the parties, payable as liquidated damages
in default of payment. Since the damage for the breach of
covenant
is in such cases by English law capable of exact definition,
the substitution of a larger sum as liquidated damages is
regarded, not as a pre-estimate of damage, but as a penalty in the
nature of a penal payment. In the present case this limitation
has no application. It cannot be said that the sum of 5 l. is being
substituted for the payment of a smaller fixed or ascertainable
sum, since from the nature of this contract
any accurate pre-estimate
of damage would be practically impossible. The words
of Tindal C.J. in the case of Kemble
v.
Farren(1) are directly
applicable: "We see nothing illegal or unreasonable in the
parties, by their mutual agreement, settling the amount of
damages, uncertain in their nature, at any sum upon which they
may agree. In many cases, such an agreement fixes that which
is almost impossible to be accurately ascertained; and in all cases,
it saves the expense and difficulty of bringing witnesses to that
point."
My Lords, the point on which the majority of the Court
of
Appeal decided this case against the appellants is that, where a
contract
contains
varying
stipulations, and the evidence shows
that these stipulations are of
varying
degrees of importance, the
Court
exercises a wider power of interference, and a single sum
made payable by the occurrence of the breach of one or more, or
all of such stipulations, is prima facie a penalty and not liquidated
damages. If this statement of the law is accurate without limitation,
the agreed sum of 5 l. in the present case would be in the
nature of a penalty, since that sum is fixed irrespective of the
varying
degrees of importance of the stipulations. I agree with
Kennedy L.J., that though the fact that the agreed sum
covers
more than one event is an element in the case, or may
constitute
a presumption that it is a penalty, it is in no sense
conclusive
against such sum being treated as liquidated damages. There
may be a greater risk of infringing the principle against extortion,
or against the substitution of a larger for a smaller payment, in
applying the same figure to a number of different breaches of
varying
importance, more especially if some occasion serious and
others but trifling damage, than when it is applied to one breach;
but if these tests are
complied
with the parties may reasonably
be allowed to make their own agreement. No doubt if the agreed
sum is not applied distributively, but equally to stipulations of
varying
importance, and in reference to any of the stipulations it
is a penalty, it is a penalty for the purpose of the whole contract,
since it
could
not in the same
contract
be
construed
both as a
penalty and as liquidated damages.
If the same agreed sum, separately allocated in different
agreements to breaches of varying
importance,
could
be properly
construed
as a pre-estimate of damage, it seems illogical to regard
such sum as a penal payment because for
convenience
or economy
the whole transaction is included in one agreement. The present
case is an illustration in point. Having regard to the character
of the
contract,
it would have been possible to have a series of
contracts
applicable to the
various
stipulations, and to have
inserted in each of them a sum of 5 l. as liquidated damages to
compensate
a loss uncertain, and practically incapable of ascertainment,
at the time when the
contract
was made. I can see no
reason why the parties should not be allowed to
contract
in one
document instead of several, or that in such a case the law should
interfere with freedom of
contract.
Swinfen Eady L.J. in the Court
of Appeal largely bases his
judgment on the case of Willson
v.
Love.(1) In that case there
was a
covenant
by the lessees of a farm not to sell hay or straw
off the premises during the last twelve months of the term, and a
provision that an additional rent of 3 l. per ton should be payable
by way of penalty for every ton of hay or straw so sold. There
was a substantial difference between the manurial
value
of hay
and that of straw, and it was held that the sum so made payable
was a penalty and not liquidated damages.
It is noticeable in this case that the parties expressed the sum
to be a penalty, and not liquidated damages, but in giving judgment
A. L. Smith L.J. says: "Where a sum is made payable by
a contract
to secure the performance of several stipulations, the
damages for the breach of which respectively must be substantially
different, or, in other words, the performance of stipulations
of
varying
degrees of importance, that sum is prima facie to be
regarded as a penalty and not as liquidated damages." If the
words "prima facie" only apply to a presumption which can be
displaced, then I agree with Kennedy L.J. that the presumption
is displaced in the present case, which belongs to a class in which
it is practically impossible to make an accurate pre-estimate of
damage, and there is no question of extortion or of substituting a
larger for a smaller sum. But if the words "prima facie" imply
that the sum will be regarded as a penalty unless there are some
special circumstances which could
justify an opposite
conclusion
the statement appears to be expressed in too general terms.
In the case of Wallis v.
Smith(1), tried before Fry J., and taken
to the
Court
of Appeal, it was necessary to decide whether when
a
contract
contained
a
condition
for payment of a sum of money
as liquidated damages for the breach of stipulations of
varied
importance, none of which is for payment of an ascertained sum
of money, the sum named should be treated as liquidated damages
or as a penalty. All the previous cases were examined in the
Court
of Appeal, and the
Court
unanimously
confirmed
the judgment
of Fry J., that the agreed sum was not a penalty but
liquidated damages. Lindley L.J. says(2): "When I
come
to
look at the cases I cannot find a single case in which the larger
sum has been treated as penalty where there has been no smaller
sum ascertainable as the amount of damages."
Cotton
L.J. says(3): "There are a number of
covenants
to
which clause 25 applies, and in respect of the breach of which it
is said that 5000 l. shall be liquidated damages. Now in what
cases have the
Courts
said that in those circumstances you shall
construe
the words 'liquidated damages,' not as what they mean -
as a sum assessed between the parties - but only as a penal sum,
leaving the real damages to be ascertained? Undoubtedly the
authorities do say this, that when a stipulation applies to a breach
of a number of
covenants,
and one of those is a
covenant
for the
payment of a sum of money where the damage for the breach of
it is according to English law capable of being actually defined,
then where a sum is said to be liquidated damages the stipulation
applies, not distributively to the different
covenants
but
equally to all, and you must hold that the sum cannot be
damages assessed by the parties as in the case of a particular
covenant
with respect to which the damages are incapable of
being ascertained and are by law fixed in a different way; but
you must look upon it as a mere penalty, and ascertain when the breach occurs what is the damage sustained in respect of the particular breach."
In the present case there is no question of extortion or of
giving a larger sum as liquidated damages for a fixed or ascertainable
sum, in reference to any of the stipulations to which the
agreed figure is applicable, and no ground for altering the terms
of the contract
as arranged by the parties. The parties adopted
a wise and prudent
course,
having regard to the nature of the
contract
and the practical impossibility of an accurate ascertainment
of damages.
My Lords, in my opinion this appeal should be allowed with
costs.
The permission for BAILII to publish the text of this judgment
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