IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LEEDS COUNTY COURT
(His Honour Judge Hawksworth)
B e f o r e :
LORD JUSTICE KEENE
MR JUSTICE JACOB
| JEANCHARM LIMITED t/a BEAVER INTERNATIONAL||Claimants/Respondents|
|BARNET FOOTBALL CLUB LIMITED ||Defendants/Appellants|
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
(Official Shorthand Writers to the Court)
MR MICHAEL KAY (instructed by Messrs Levi & Co, Leeds LS1 2JJ) appeared on behalf of the Respondents.
(AS APPROVED BY THE COURT)
Crown Copyright ©
"3. Beaver hereby undertakes to provide the Club free of charge for use by the team, its managers, coaching and training staff, playing and training goods to the value of £12,000 at trade prices in each season of the contract. This sum to be subject to inflation in line with any price increases, shown on Schedule One, each season. And the club guarantees purchase of 5000 replicas per season.
Schedule to be produced each season no later than end of January and orders to be placed before end of February except that in the first year the order will be placed within one week of the samples being viewed.
The Club agrees to purchase replica shirts from Beaver International at £13.95 each adult size and £12.95 each childrens size.
Any additional goods required by the Club shall be purchased from BEAVER at normal trade prices and in accordance with the Company's trading terms which are Net 45 days subject to the following late payment penalty.
All orders from the club must be in the form of a written purchase order, authorised by the Chairman, and all invoices that are matched to such orders will be settled within 45 days from the invoice date.
Payments will be made by the Club within 45 days, having deducted any relevant penalty clauses or credit notes that are due.
Payment of a correct invoice, more than 45 days after the invoice date, shall incur interest at the rate of 5% per week (pro rata) on the outstanding sum, for the period from 45 days after the invoice date.
4. BEAVER agrees to the following penalty clauses.
Training gear deliveries.
If the training kit referred to in Clause 3 is delivered after the due date of June 14, unless otherwise agreed in writing then the Club will be entitled to a late penalty payment of 20 pence per garment per day.
Club shop replica items.
Within 45 days of the date of an official purchase order from the Club unless otherwise agreed in writing. If Beaver have not supplied the complete order, the Club reserve the right on the part of the order not delivered to receive a penalty for late delivery at the rate of 20 pence per garment [per day.
Club shop leisurewear items.
Within eight weeks of the date of an official order from the Club, unless otherwise agreed in writing, if Beaver have not supplied the complete order, the Club reserve the right on the part of the order not delivered to receive a penalty for late delivery at the rate of 20 pence per garment per day."
It is to be noted that the parties agreed that paragraph 4, dealing with late payment, was a penalty clause and described it as such. That is, of course, not conclusive.
"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. This doctrine may be said to be found passim in nearly every case.
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 covenanted pre-estimate of damage (Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda (1)).
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 as at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v. Hills (1) and Webster v. Bosanquet (2)).
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 penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank Case. (3))
(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 (Kemble v. Farren (4)). This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable -- a subject which much exercised Jessel M.R. in Wallis v. Smith (5) -- is probably more interesting than material.
(c) There is a presumption (but no more) that it is 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' (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. (6)).
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 (Clydebank Case, Lord Halsbury (1); Webster v. Bosanquet, Lord Mersey (2))."
Later cases have emphasised that a court should be careful not to strike down as a penalty a clause negotiated between willing parties who have similar bargaining strengths. Thus in Robophone Facilities Ltd v Blank  3 All ER 128 at page 142 Diplock LJ said this:
"The court should not be astute to descry a 'penalty clause' in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former."
He also pointed out, as is common ground here, that the onus of a showing such a stipulation is a penalty clause is upon the party who is sued on it.
"But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties: see generally Atiya, The rise and Fall of Freedom of Contract (1979), especially Chapter 22."
"... the nature of the relationship between the contracting parties, a factor relative to the unconscionability of the plaintiff's conduct"
and elevates that to the leading principle for deciding whether or not a clause is or is not a penalty. But, immediately following that passage, Lord Woolf said this:
"It should not be assumed that, in this passage of their judgment, Mason and Wilson JJ were setting out some broader discretionary approach than that indicated as being appropriate by Lord Dunedin. On the contrary, earlier in their judgment they had noted that the 'Dunlop approach' had been eroded by recent decisions and they stated that there was much to be said for the view that the courts should return to that approach."
"Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss." (Emphasis added).
His Lordship went on to explain that one can have a range of losses that could have reasonably been contemplated when the contract was made.
"... the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression."
The judge said:
"In this case it is clear that there was no such oppression."
He explained that by reference to the fact that the parties were of equal bargaining power, and he referred to the interest rate clause as being a kind of quid pro quo for the late delivery clause. In my judgment the judge's approach was wrong. One is not concerned with the general position of the parties vis-à-vis each other. This is not a case of duress. Nor do the arguably penal terms of the late delivery clause justify the penal interest clause.
(1) the court looks at the substance of the matter, rather than the form of words, to determine what was the real intention of the parties;
(2) the essence of a penalty is a required payment in terrorem of the party in default, as distinct from being a genuine pre-estimate of loss resulting from the default;
(3) the question whether a provision for payment on default is a penalty is a question of construction of the contract, and that is assessed at the time of the contract and not at the time of the breach;
(4) if the required payment is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be established as the consequence of a default, it is a penalty.