Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
[1915] AC 79
Ratio Decidendi
A contractual clause requiring the payment of a stipulated sum on breach of contract is enforceable as liquidated damages if it represents a genuine pre-estimate of the loss which the innocent party will suffer from that breach. If, however, the stipulated sum is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach, it is a penalty and will not be enforced. Lord Dunedin set out a series of tests (in the form of presumptions) for distinguishing liquidated damages from penalties: (i) the sum is likely to be a penalty if it is extravagant compared with the greatest conceivable loss; (ii) if the obligation is to pay a sum of money and the clause requires payment of a greater sum, it is a penalty; (iii) a single sum payable for a variety of breaches of very different gravity raises a presumption of penalty; (iv) but it is no obstacle to calling a clause one of liquidated damages that the consequences of a breach are such as to make precise pre-estimation almost impossible.
حقائق
Dunlop Pneumatic Tyre Co supplied tyres to New Garage & Motor Co under a price-maintenance agreement by which New Garage undertook not to sell or offer the tyres at less than the listed prices, not to sell them to persons on the 'suspended list', not to exhibit the prices without Dunlop's consent, and not to sell export tyres in the UK. For any breach of any of these obligations New Garage was to pay £5 per tyre by way of 'liquidated damages and not penalty'. New Garage sold tyres below the listed prices and Dunlop sued for £5 per tyre.
فیصلے کا خلاصہ
The House of Lords (Lords Dunedin, Atkinson, Parker, and Sumner) held the £5 clause was liquidated damages, not a penalty, and was enforceable. Lord Dunedin gave the most influential speech, setting out four propositions that have defined the law on penalties for a century. He considered the underlying question to be: what was the probable loss which the parties contemplated at the time of contracting? For Dunlop, the damage from underselling (damage to brand, loss of business confidence, damage to the resale price maintenance system) would be real but extremely difficult to quantify precisely. The parties had agreed on a pre-estimate of £5 per tyre, which could not be said to be extravagant. Lord Dunedin drew a distinction between a clause designed to deter breach (a penalty) and a clause designed to compensate for loss (liquidated damages). However, he also acknowledged that the distinction between the two was not always clear. Lords Atkinson and Sumner both agreed that the commercial context and the genuine difficulty of estimating the loss were relevant factors in upholding the clause.
اہم اقتباسات
"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 at 86
"It will be held to be a 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."
— Lord Dunedin at 87
"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."
— Lord Dunedin at 88
بعد کا علاج
The four Dunlop tests remained the governing law for a century. In Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67, the Supreme Court replaced them with a broader test: a clause is a penalty only if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the obligation. Dunlop is still cited for the underlying distinction.
Applied in Jeancharm Ltd v Barnet Football Club Ltd [2003] EWCA Civ 58, where the Court of Appeal applied the Dunlop tests to hold that a clause requiring payment of 5% per week compound interest on a late payment was an unenforceable penalty.
Distinguished in Cavendish Square Holding v Makdessi [2015] for complex commercial contracts between sophisticated parties, where the broader 'legitimate interest' test applies rather than the narrow Dunlop 'genuine pre-estimate' formula.
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