Dunlop v New Garage [1915] AC 79

• Plaintiff made a contract with Defendant to sell Plaintiff’s goods. Within the contract was a requirement that the goods aren’t sold below a certain price and for every good that is sold below that price, £5 is payable to Plaintiff by Defendant as “liquated damage” and “not as a penalty”.

• Defendant breached this and Plaintiff sued Defendant for damages.

• Defendant defended this as a penalty clause, in which case Plaintiff could only claim nominal damages. Plaintiff said it was a liquidated damage clause, meaning that Plaintiff could enforce it according to its own terms.

• HL agreed with Plaintiff.   

Lord Dunedin

• There a re 6 guiding principles to decide if a clause is a penalty:

  1. The parties’ description is not conclusive: it is for the courts to decide;

  2. A penal clause is one with disproportionality between the sum payable and the seriousness of the breach;

  3. All circumstances of the contract at the time of making should be taken into account in determining if it is a penalty;

  4. An agreed damages clause is enforceable even if it is far more or less than the loss suffered, provided the court believe it is genuinely made as an assessment of damages (NB if the court do not so believe, then it will be a penalty);

  5. The court will grant a wide margin of tolerance to pre-determined damages and will not rule them to be penalties unless to do so would be “unconscionable”;

  6. The clause is always a penalty where the only wrongdoing is to pay a failure of money i.e. where the money stipulated is larger than the money owed.