The House considered a contract for the construction by a Scottish shipbuilder of four torpedo boats for the Spanish government. The contract provided that: ‘The penalty for late delivery shall be at the rate of andpound;500 per week for each vessel’.
Held: Although described as a penalty, the sum in question was to be regarded as liquidated damages and therefore recoverable.
Lord Halsbury considered that the basis for interference by the courts in an agreement between the parties was whether the clause was unconscionable and extravagant. It was ‘obvious on the face of the contract that the very thing intended to be provided against by this pactional amount of damages is to avoid [the] kind of minute and somewhat difficult and complex system of examination that would be necessary if you were to attempt to prove the damage.’
Lord Davey applied a principle of interpretation of contracts in Scottish law: ‘My Lords, I therefore conceive that it may be taken as an established principle in the law of Scotland that, if you find a sum of money made payable for the breach, not of an agreement generally which might result in either a trifling or a serious breach, but a breach of one particular stipulation in an agreement, and when you find that the sum payable is proportioned to the amount if I may so call it, or the rate of the non-performance of the agreement – for instance, if you find that it is so much per acre for ground which has been spoilt by mining operations, or if you find, as in the present case, that it is so much per week during the whole time for which the non-delivery of vessels beyond the contract time is delayed – then you infer that prim? facie the parties intended the amount to be liquidate damages and not penalty. I say ‘prim? facie’ because it is always open to the parties to shew that the amount named in the clause is so exorbitant and extravagant that it could not possibly have been regarded as damages for any possible breach which was in the contemplation of the parties, and that is a reason for holding it to be a penalty and not liquidated damages notwithstanding the considerations to which I have alluded.’ Evidence as to the loss which the Spanish government had actually suffered was inadmissible, and that it would be contrary to the purpose of the clause to admit such evidence.
Lord Halsbury LC, Lord Davey
[1904] UKHL 3, (1904) 12 SLT 498, (1904) 7 F (HL) 77, [1905] AC 6
Bailii
Scotland
Cited by:
Cited – Tullett Prebon Group Ltd v El-Hajjali QBD 31-Jul-2008
The defendant signed an employment contract to join the claimants as a senior broker. He changed his mind and decided to stay in his existing job. The new employers sued for breach of contract. The defendant said that the claimants had refused to . .
Cited – Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd HL 1-Jul-1914
The appellants contracted through an agent to supply tyres. The respondents contracted not to do certain things, and in case of breach concluded: ‘We agree to pay to the Dunlop Pneumatic Tyre Company, Ltd. the sum of 5 l. for each and every tyre, . .
Applied – Webster v Bosanquet PC 1912
(Ceylon) The Board was asked whether a clause in a contract amounted to a penalty: ‘whatever be . . the expression used in the contract in describing the payment, the question must always be whether the construction contended for rendered the . .
Explained – Commissioner of Public Works v Hills PC 24-May-1906
(Cape of Good Hope) A railway construction contract provided that in the event of a breach by the contractor he should forfeit ‘as and for liquidated damages’ certain percentages retained by the Government of the Cape of Good Hope of money payable . .
Cited – Parkingeye Ltd v Beavis CA 23-Apr-2015
The appellant had overstayed the permitted period of free parking in a retail park by nearly an hour. The parking was managed by the respondent who had imposed a charge of 85.00 pounds. The judge had found that the appellant was in breach of a . .
Cited – Cavendish Square Holding Bv v Talal El Makdessi; ParkingEye Ltd v Beavis SC 4-Nov-2015
The court reconsidered the law relating to penalty clauses in contracts. The first appeal, Cavendish Square Holding BV v Talal El Makdessi, raised the issue in relation to two clauses in a substantial commercial contract. The second appeal, . .
Lists of cited by and citing cases may be incomplete.
Contract
Leading Case
Updated: 10 November 2021; Ref: scu.279658