Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
| Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd | |
|---|---|
 |
|
| Court | House of Lords |
| Decided | July 1, 1914 |
| Citation(s) | [1914] UKHL 1, [1915] AC 79 |
| Keywords | |
| Termination, penalty clause | |
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1 (1 July 1914) is an English contract law case, concerning the extent to which damages may be sought for failure to perform of a contract when a sum is fixed in a contract. It held that only if a sum is of an unconscionable amount will it be considered penal and unenforceable.
It should not be confused with Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, which held that the same resale price maintenance practice was unenforceable against a third party reseller as a matter of the English rule of privity of contract.
Dunlop sued its tyre retailer, New Garage, for breaching an agreement to not resell Dunlop tyres at a price lower than that listed in the contract. The agreement then said if that did happen, New Garage would pay £5 per tyre ‘by way of liquidated damages and not as a penalty’.
The 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 preestimate of Dunlop’s potential loss, and so Dunlop could enforce the agreement. Lord Dunedin set out the following principles.
On the other hand:
Turning now to the facts of the case, it is evident that the damage apprehended by the appellants owing to the breaking of the agreement was an indirect and not a direct damage. So long as they got their price from the respondents for each article sold, it could not matter to them directly what the respondents did with it. Indirectly it did. Accordingly, the agreement is headed "Price Maintenance Agreement," and the way in which the appellants would be damaged if prices were cut is clearly explained in evidence by Mr. Baisley, and no successful attempt is made to controvert that evidence. But though damage as a whole from such a practice would be certain, yet damage from any one sale would be impossible to forecast. It is just, therefore, one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that figure is not extravagant there would seem no reason to suspect that it is not truly a bargain to assess damages, but rather a penalty to be held in terrorem.
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