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, cover or tube sold or offered in breach of this agreement, as and by way of liquidated damages and not as a penalty.’
Held: It is a fundamental principle of English law that only a party to a contract who had provided consideration could sue on it. The House, in discussing penalty clauses, drew a distinction between a payment on breach stipulated as in terrorem of the offending party and a genuine covenanted pre-estimate of damage, and summarised the law.
Lord Dunedin said: ‘(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. . (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 pre-estimate of damage. (3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of the breach. (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 a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach. (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 . . (c) There is a presumption (but no more) that it is a 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.’ 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.’
Lord Dunedin, Lord Atkinson,
 AC 67,  UKHL 1, (1904) 12 SLT 498, (1904) 7 F (HL) 77,  UKHL 861
England and Wales
Cited – Clydebank Engineering Co v Castaneda HL 19-Nov-1904
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 . .
Cited – 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 . .
Cited – 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 – Kemble v Farren 6-Jul-1829
Liquidated Damages Clause to Specify Which Loss
The manager of Covent Garden sought damages from an actor (a principal comedian) in the form of liquidated damages for breach of a contract. He had contracted to perform for four seasons, but had refused to continue after the first.
Held: . .
Cited – Willson v Love 1896
The lessees of a farm covenanted 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. . .
Cited – Lord Elphinstone v Monkland Iron and Coal Co HL 1886
Lord Herschell LC examined the validity of a covenant by which lessees who had been given a right to place slag on the land leased to them covenanted to pay the lessor andpound;100 per acre for all land not levelled and soiled within a particular . .
Cited – Wallis v Smith CA 1882
Jessel MR said: ‘You may depart from the literal meaning of words, if reading the words literally leads to an absurdity.’ and ‘It has always appeared to me that the doctrine of the English law as to non-payment of money – the general rule being that . .
Applied – Duffen v Fra Bo Spa CA 30-Apr-1998
The plaintiff had been appointed as an exclusive sales agent for the defendant for a minimum period of four years. The defendants terminated it eighteen months early claiming fraudulent misrepresentation.
Held: The clause setting the damages . .
Affirmed – Philips (Hong Kong) Ltd v The Attorney General of Hong Kong PC 9-Feb-1993
After referring to two Australian cases on penalty clauses in contracts: ‘These statements assist by making it clear that the court should not adopt an approach to provisions as to liquidated damages which could, as indicated earlier, defeat their . .
Cited – Murray v Leisureplay Plc QBD 5-Aug-2004
The claimant sought payment of three years’ salary after termination of his service contract. He said that an agreement had been made by the company to purchase a ‘financial institution’, which would trigger the additional payments. The defendants . .
Cited – Cine Bes Filmcilik Ve Yapimcilik and Another v United International Pictures and Others CA 21-Nov-2003
The parties entered into agreements licensing the exclusive distribution of encrypted television channels within Turkey. A clause provided a calculation of damages for a breach amounting to the balance of licence fees due, and other penalties, . .
Cited – R v Her Majesty’s Attorney-General for England and Wales PC 17-Mar-2003
PC (From Court of Appeal of New Zealand) T had been a member of the British SAS. Other members had written books and the Army sought to impose confidentiality contracts or to impose a return to their unit. R . .
Cited – Euro London Appointments Ltd v Claessens International Ltd CA 6-Apr-2006
The court considered whether a clause in an employment agency’s terms and conditions amounted to a penalty and was unenforceable. The contract provided that if the offer was withdrawn by the eventual employer after acceptance but before the . .
Cited – Lordsvale Finance Plc v Bank of Zambia QBD 20-Mar-1996
The court looked at a facility agreement opened by a bank in favour of the defendant which provided that in the event of default the defendant should pay interest during the period of default at an aggregate rate equal to the cost to the bank of . .
Mentioned – Beswick v Beswick HL 29-Jun-1967
The deceased had assigned his coal merchant business to the respondent against a promise to pay andpound;5.00 a week to his widow whilst she lived. The respondent appealed an order requiring him to make the payments, saying that as a consolidating . .
Cited – Jeancharm Ltd (T/A Beaver International) v Barnet Football Club Ltd CA 16-Jan-2002
The claimant contracted to supply football shirts to the defendant, but claimed that clauses in the contract with regards to late delivery and payment operated as penalties and so were void at common law.
Held: The sums set out were immodest . .
Cited – Anglo Group Plc, Winther Brown and Co Ltd v Winter Brown and Co Ltd, BML (Office Computers) Ltd, Anglo Group Plc, BML (Office Computers) Ltd TCC 8-Mar-2000
Contract – Contract for provision of computer services – purchaser contract with finance company – duty of co-operation to be implied in computer contracts – practice – responsibilities of expert witnesses generally – whether computer company liable . .
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 – Azimut-Benetti Spa (Benetti Division) v Healey ComC 3-Sep-2010
The claimant sought summary judgment under a guarantee. The defendant said that the liquidated damages clause under which the claim was made was a penalty clause and unenforceable.
Held: The request for summary judgment was granted.
Cited – Cleeve Link Ltd v Bryla EAT 8-Oct-2013
EAT Unlawful Deduction From Wages – The principles enunciated in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 1979 and re-stated in Lordsvale Finance PLC v Bank of Zambia  QB 752, . .
Cited – Murray v Leisureplay Plc CA 28-Jul-2005
The court considered the extent to which the content of negotiations leading up to the signing of a contract were admissible. Arden LJ said: ‘Lord Dunedin in the Dunlop case makes the point that, although the issue is one of construction, the court . .
Cited – Cavendish Square Holdings Bv and Another v El Makdessi ComC 14-Dec-2012
The parties disputed whether clauses in a share sale agreement between them amounted to a penalty and as such were rendered unenforeable.
Held: Burton J felt able to escape those constraints, and concluded that the two provisions were valid . .
Cited – El Makdessi v Cavendish Square Holdings Bv and Another CA 26-Nov-2013
The appellants had agreed for the sale of his company by way of a share sale agreement. The price to be paid was to vary accoriding to the operating profits. A large part of the price reflected goodwill. The agreement contained a clause providing . .
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.
Updated: 01 November 2021; Ref: scu.197031