Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
[1915] AC 79
Ratio Decidendi
A contractual clause fixing a sum payable on breach is enforceable as liquidated damages if it is a genuine pre-estimate of the loss likely to be suffered. If the sum is extravagant and unconscionable, it is a penalty and unenforceable.
Facts
Dunlop supplied tyres to New Garage under an agreement that the garage would not sell them below list price. For each breach, the garage would pay £5 per tyre. New Garage sold tyres below list price.
Judgment Summary
Lord Dunedin set out guidelines for distinguishing liquidated damages from penalties. The £5 per tyre was held to be a genuine pre-estimate of loss, not a penalty, and was therefore enforceable.
Key Quotes
"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."
— Lord Dunedin
Subsequent Treatment
The Supreme Court in Cavendish Square Holding v Makdessi [2015] replaced the 'genuine pre-estimate' test with a broader test of whether the clause is out of all proportion to any legitimate interest of the innocent party.