Case Name: Dunlop Pneumatic Tyre Company v New Garage & Motor co
Citation: [1915] AC 79
Jurisdiction: UK Law
Key Legal Concepts: Breach of contract, liquidated damages, measure of damages, sale of goods.
Background and Facts
The Claimant (Dunlop Pneumatic Tyre Company) manufactured and supplied goods to the Respondents (New Garage & Motor Co).
They had an agreement that prohibited the Respondent from selling below a list price.
The Respondent breached this agreement by selling an item below the list price.
Dunlop sought a claim for breach of contract and demanded a payment of £5.
The Respondent argued that this clause was a penalty clause and unenforceable.
Court Proceedings
First Instance: Court favored the Claimant, ruling the clause was a damages clause.
Court of Appeal: Reversed the decision, classifying the clause as a penalty clause.
Legal Issue
Was the sum of £5 a penalty or a liquidated damages clause?
Decision/Outcome
House of Lords: Appeal allowed, setting aside the Court of Appeal's decision.
Deemed the clause a liquidated damages clause, thus enforceable.
Legal Principles and Rules
Penalty vs. Liquidated Damages:
Terminology: The terms used by the parties (penalty or liquidated damages) are not conclusive. The court must determine whether it is a penalty or liquidated damages.
Essence of a Penalty: A penalty is a payment of money as a deterrent to the offending party.
Essence of Liquidated Damages: It is a genuine pre-estimate of damage.
Construction: Determination based on the contract terms and circumstances at the time of contract formation.
Tests for Construction:
Held as a penalty if the amount is extravagant compared to the greatest loss from breach.
Penalty if breach is non-payment of money and the stipulated sum exceeds the owed amount.
Presumption of penalty if a single lump sum compensates multiple breaches of varying severity.
Genuine pre-estimate is valid even if pre-estimation is difficult.
Related Legal References
Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda
Public Works Commissioner v. Hills
Webster v. Bosanquet
Conclusion
The ruling clarified the distinction between penalty clauses and liquidated damages, emphasizing a factual determination based on contract circumstances and terms at the time of creation.