Fact of the Case
Dunlop (plaintiff) made tyres. It did not want them sold cheaply but to maintain a standard resale price. It agreed with its dealers (in this case, Dew & Co.) not to sell them below its recommended retail price. It also bargained for dealers to get the same undertaking from their retailers (in this case, Selfridge). If retailers did sell below the list price, they would have to pay £5 per tyre in liquidated damages to Dunlop. Dunlop thus was a third party to a contract between Selfridge and Dew. When Selfridge sold the tyres at below the agreed price, Dunlop sued to enforce the contract by injunction and claimed damages. Selfridge argued that Dunlop could not enforce the burden of a contract between Dunlop and Dew, which Selfridge had not agreed to.
Issue
Whether the 5 pounds was a penalty or liquidated damages
Ratio Decidendi
Differences between a penalty clause and a limited damages clause: 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.
The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
The trial judge held the £5 sum was liquidated damages and enforceable. The Court of Appeal held the clause was a penalty and Dunlop could only get nominal damages. Dunlop appealed.The House of Lords held the clause was not a penalty, and merely a genuine pre-estimate of Dunlop’s potential sloss, and so Dunlop could enforce the agreement.
By: Resolution Law Firm
