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 is not confined to the terms of the agreement and may look at the ‘inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach . . ‘. In my judgment, the inherent circumstances to which the court may have regard extend beyond those which may be adduced in evidence for the purposes of determining the true interpretation of the agreement under the well known test in the Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. But the purpose of adducing that evidence is not so that the parties can demonstrate that they agreed to opt out of the remedies regime provided by the common law but rather that the reasons that they had for doing so constitute adequate justification for the discrepancy between the contractual measure of damages and that provided by the common law.’
The claimant’s employment contract provided for payment of a year’s gross salary, pension contributions and other benefits in kind if his employment were determined without one year’s notice. The defendant argued that the clause was unenforceable as a penalty, since it provided for the payment of a greater amount than could conceivably have been recovered by the claimant as damages for breach of contract.
Held: The clause was not a penalty.
Buxton LJ (and Clarke LJ) said that the two alternatives, deterrent penalty or genuine pre-estimate of loss, are indeed alternatives which underlie the requirement that in order to be enforceable the clause should be compensatory rather than deterrent. However, the court should take a broad view of the matter and he deprecated excessive concentration on the difference between the amount payable under the clause and the measure of damages recoverable at common law, because it overlooked the principal test formulated by Lord Dunedin in Dunlop by reference to extravagance and unconscionability.
Judges:
Lord Justice Buxton, Lady Justice Arden Lord Justice Clarke
Citations:
[2005] EWCA Civ 963, [2005] IRLR 946
Links:
Jurisdiction:
England and Wales
Citing:
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, . .
Appeal from – 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 by:
Appplied – General Trading Company (Holdings) Ltd v Richmond Corporation Ltd ComC 3-Jul-2008
. .
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 [1915] AC 1979 and re-stated in Lordsvale Finance PLC v Bank of Zambia [1996] QB 752, . .
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, Employment
Updated: 01 July 2022; Ref: scu.229093
