LORD JUSTICE LAWTON: The judgments in this case have been handed down.
LORD JUSTICE MUSTILL: The respondent plaintiffs are a finance company. The appellant is an accountant. The appellant wished to buy a computer to improve his business, and enlisted the help of the plaintiffs. They purchased a particular model, and then entered into an agreement of hiring whereby they agreed to lease the computer to the defendant for a period of five years. There was to be an initial payment of £584.05 and nineteen subsequent instalments of the same amount, payable at intervals of three months. In addition, value added tax was to be paid.
The hiring agreement contained the following material provisions:
"THE LESSEE.....AGREES:-
2 (a) to pay to the lessor:
(i) punctually and without previous demand the rentals set out in Part 3 of the Schedule together with Value Added Tax thereon punctual payment of each which shall be of the essence of this Lease: ......
5. IN THE EVENT THAT
(a) the Lessee shall
(i) make default in the due and punctual payment of any of the rentals or of any sum of money payable to the Lessor hereunder or any part thereof.....
then upon the happening of such event, the Lessor's consent to the Lessee's possession of the goods shall determine forthwith without any notice being given by the Lessor, and the Lessor may terminate this Lease either by notice in writing, or by taking possession of the goods .....
6. IN THE EVENT that the Lessor's consent to the Lessee's possession of the goods shall be determined under clause 5 hereof
(a) the Lessee shall pay forthwith to the Lessor
(i) all arrears of rentals;
(ii) all further rentals which would but for the determination of the Lessor's consent to the Lessee's possession of the goods have fallen due to the end of the fixed period of this Lease less a discount thereon for accelerated payment at the rate of 5 per cent per annum;
and
(iii) damages for any breach of this Lease and all expenses and costs incurred by the Lessor in retaking possession of the Goods and/or enforcing the Lessor's rights under this Lease together with such Value Added Tax as shall be legally payable thereon;
(b) The Lessor shall be entitled to exercise any one or more of the rights and remedies provided for in clause 5 and sub-clause (a) of this clause and the determination of the Lessor's consent to the Lessee's possession of the Goods shall not affect or prejudice such rights and remedies and the lessee shall be and remain liable to perform all outstanding liabilities under this Lease notwithstanding that the Lessor may have taken possession of the Goods and/or exercised one or more of the rights and remedies of the Lessor.
(c) any right or remedy to which the Lessor is or may become entitled under this Lease or in consequence of the Lessee's conduct may be enforced from time to time separately or concurrently with any other right or remedy given by this Lease or now or hereafter provided for or arising by operation of law so that such rights and remedies are not exclusive of the other or others of them but are cumulative".
The letting under this agreement did not go well. The instalments were due to be paid by direct debit. The first two were effected satisfactorily but the third was twice recalled by the bank and remained unpaid for a period of four months: The fourth was paid two weeks late. The fifth was two months late. The sixth was paid on time, but was recalled by the bank. It was paid again one month later, and again recalled by the bank. Two weeks later the plaintiffs lost patience and sent to the defendant a letter in the following terms:
"We regret that in spite of our previous reminders you are still in arrear with your payments. Please take notice that pursuant to the terms of the Lease our consent to your possession of the Goods is now withdrawn and you are required to make them available for collection. Tour liability under the terms of the Lease will not cease upon the return of these goods as we are entitled to call upon you to make payment of the balance of the rentals due under the remaining period of the Lease.
If payment of the arrears has been made within the last 7 days please ignore this notice".
Subsequently, the plaintiffs recovered possession of the computer and sold it. The instrument fetched very little by comparison with its purchase price, and the net proceeds of sale were only £172.85.
On 18th May 1984 the plaintiffs commenced the present action by specially endorsed writ. The material parts read:
"4. Pursuant to Clause 5 of the said Lease Agreement the Plaintiff terminated its consent to the Defendant's possession of the said Computer and Printer by a notice in writing dated the 20th day of December 1982 and by virtue of the Defendant's default under the said Lease Agreement the same has been determined.
5. Pursuant to Clause 6 of the said Lease Agreement and by virtue of the determination of consent to possession pursuant to Clause 5 thereof the Plaintiff is entitled to claim (a) all of his rentals (b) all further rentals which would have been payable had the Lease Agreement continued for the full period and (c) damages for breach of the Lease Agreement.
6. The Plaintiff has recovered possession of the said Computer and Printer in accordance with its entitlement to do so under Clause 5 of the said Lease Agreement and the net proceeds of sale amounted to £172.85. Calculating the amounts due to the Plaintiff the Defendant will be given credit for this sum and an allowance will be made for accelerated recipt of the payment due under the said Lease Agreement as provided in Clause 6 thereof.
7. The defendant has failed to pay the sums referred to in paragraph 5 hereof and the Plaintiff is entitled under the Lease or alternatively as damages for breach of the Lease, the sum of £6,869.97".
The sum of £6,869.97 was arrived at by adding the amount of the unpaid instalments and VAT, and the 13 rentals due after termination, and then giving credit the net proceeds of sale and an allowance of £1,221.49 for accelerated receipt. The pleading concluded with claims for £6,869.97 under paragraph 7, interest and "damages for breach of contract".
The plaintiffs then issued an application for summary judgment under Order 14 R.S.C. An affidavit in reply was sworn on behalf of the defendant. This did not put in issue the plaintiffs' right to terminate the contract, or to recover a sum attributable to the future instalments, but complaint was made about the low price obtained on the resale. The affidavit concluded by asserting that the defendant had a partial defence on the merits, and asking that he should have leave to defend sufficient to enable him to dispute the calculations in the statement of claim.
Precisely what happened thereafter is not clear, but it appears that the plaintiffs did not go to judgment for their claim in debt under clause 6 of the agreement, but instead obtained a Judgment for damages to be assessed. The matter was then referred to Master Lubbock, who heard evidence on the resale value of the computer. He decided this issue in favour of the plaintiffs. Argument was also addressed on the measure of recovery. Notwithstanding that the plaintiffs had recovered-judgment for damages to be assessed, they continued to rely on clause 6. The defendant replied that this was a penalty. In the event, the Master found it unnecessary to reach a conclusion on this question, since he found that the defendant had repudiated the contract, and that accordingly damages were recoverable in respect of the future instalments, subject to the credits allowed in the statement of claim. He gave judgment accordingly. The defendant now appeals, maintaining that he should not be held liable for more than the amount due and unpaid at the date of termination.
Three issues were canvassed before us:
1. Is clause 6 of the agreement to be disregarded, on the ground that it creates a penalty? (Strictly speaking, this issue does not arise, since the judgment was for damages to be assessed, but clause 6 was relied on by the plaintiffs before the Master and in this Court, without objection).
2. Apart from clause 2(a) of the agreement, was the Master correct in holding that the conduct of the defendant amounted to a wrongful repudiation of the contract, and that the sum claimed was recoverable in damages?
3. Does the provision in clause 2(a) of the agreement that time for payment of the instalments was of the essence have the effect of making the defendant's late payment of the outstanding instalments a repudiatory breach?
As to the first two issues, I need say only that I have had the advantage of reading in draft the judgment to be delivered by Lord Justice Nicholls, and that I am in such entire agreement with his conclusions and reasons that it is unnecessary to add any observations of my own.
I would, however, wish to deal with the third point. Important as it is, this point has played only a minor part in the proceedings. There is no explicit reference to it in the pleadings, although it is gust open to the plaintiffs through their claim for damages. We are told that it was argued before the Master, yet there is no reference to it in his judgment. The matter received little prominence during the argument before us, nor were submissions directed at any stage to the possibility that the plaintiffs had by their prior conduct waived their right to insist on the stipulation that time was of the essence.
The reason why I am impelled to hold that the plaintiffs' contentions are well-founded can most conveniently be set out in a series of propositions.
1. Where a breach goes to the root of the contract, the injured party may elect to put an end to the contract. Thereupon both sides are relieved from those obligations which remain unperformed.
2. If he does so elect, the injured party is entitled to compensation for (a) any breaches which occurred before the contract was terminated, and (b) the loss of his opportunity to receive performance of the promisor's outstanding obligations.
3. Certain categories of obligation, often called conditions, have the property that any breach of them is treated as going to the root of the contract. Upon the occurrence of any breach of condition, the injured party can elect to terminate and claim damages, whatever the gravity of the breach.
4. It is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision.
5. A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.
6. It follows that where a promisor fails to give timely performance of an obligation in respect of which time is expressly stated to be of the essence, the injured party may elect to terminate and recover damages in respect of the promisor's outstanding obligations, without regard to the magnitude of the breach.
7. A term of the contract prescribing what damages are to be recoverable when a contract is terminated for a breach of condition is open to being struck down as a penalty, if it is not a genuine covenanted pre-estimate of the damage, in the same way as a clause which prescribes the measure for any other type of breach. Ho doubt the position is the same where the clause is ranked as a condition by virtue of an express provision in the contract,
8. A clause expressly assigning a particular obligation to the category of condition is not a clause which purports to fix the damages for breaches of the obligation, and is not subject to the law governing penalty clauses.
9. Thus, although in the present case clause 6 is to be struck down as a penalty, clause 2(a)(i) remains enforceable. The plaintiffs were entitled to terminate the contract independently of clause 5, and to recover damages for loss of the future instalments. This loss was correctly computed by the Master.
These bare propositions call for comment. The first three are uncontroversial. The fourth was not, I believe, challenged before us, but I would in any event regard it as indisputable. That there exists a category of term, in respect of which any breach whether large or small entitles the promisee to treat himself as discharged, has never been doubted in modern times, and the fact that a term may be assigned to this category by express agreement has been taken for granted for at least a century: see, by way of example only, Bettini v. Gye (1876) 1 Queen's Bench Division, 183, 187; Hong Kong Fir Shipping Company v. Kawasaki Kisen Kaisha (1962) 2 Queen's Bench 26, 70; Financings v. Baldock (1963) 2 Queen's Bench 104; Photo Productions v. Securicor (1980) AC 827, 84-9E; Bunge v. Tradax (1981) 1 WLR 711 , 715,719 (H.L); Cheshire & Fifoot, Law of Contracts, 10th Edition, 137.
The fifth proposition is a matter of terminology, and has been more taken for granted than discussed. That making time of the essence is the same as making timely performance a condition was, however, expressly stated by Megaw L.J and Browne L.J in Bunge Corporation v. Tradax Export at (1980) 1 Lloyd's Reports, 294, at pages 305, 307, 309 and 310, and the same proposition is implicit in the leading speeches of Lords Wilberforce and Roskill in the House of Lords.
The sixth proposition is a combination of the first five. There appears to be no direct authority for it, and it is right to say that most of the cases on the significance of time being of the essence have been concerned with the right of the injured party to be discharged, rather than the principles upon which his damages are to be computed. Nevertheless, it is axiomatic that a person who establishes a breach of condition can terminate and claim damages for loss of the bargain, and I know of no authority which suggests that the position is any different where late performance is made into a breach of condition by a stipulation that time is of the essence.
In this connection, it is useful to refer to Bunge v. Tradax supra. An f.o.b contract for the sale of goods required the buyers to give notice of the probable readiness of the ships on which the goods were to be carried. The notice was given four days too late. The sellers declared the buyers in default and claimed damages for default on the basis that the term as to notice was a condition. The damages claimed were the difference between the contract price and the market price, the classical measure for wrongful non-acceptance, by which the seller recovers on the basis that the buyer's repudiation has cost him the benefit of the buyer's future obligation to pay the price. The sellers did not contend that, if the term was not a condition, the delay of four days amounted to a repudiation ( (1980) 1 Lloyd's Reports, at page 303). Most of the attention given to the dispute, in its passage through two levels of arbitration and three hearings in the courts, was devoted to consideration of whether the term was a condition. There was, however, a subsidiary question whether the damages should be computed in accordance with a particular contractual term (which the House of Lords held that they should not), and if not, whether at common law they should be computed on the basis of the contract quantity. If the defendant's argument in the present case is right, the whole of this discussion was misconceived. Yet it was never suggested by counsel or by any of the arbitrators and judges who heard the case that the comparative triviality of the breach made any difference to the seller's right, if the term was properly to be regarded as a condition, to recover damages in respect of the buyer's unperformed obligations. If they were right in making this assumption, in a case where time was of the essence by implication, how much more should this be so where the parties have made an express stipulation to this effect.
I return to the propositions stated above. The seventh is uncontroversial, and I would add only the rider that when deciding upon the penal nature of a clause which prescribes a measure of recovery for damages resulting from a termination founded upon a breach of condition, the comparison should be with the common law measure: namely, with the loss to the promisee resulting from the loss of his bargain. If the contract permits him to treat the contract as repudiated,, the fact that the breach is comparatively minor should in my view play no part in the equation.
I believe that the real controversy in the present case centres upon the eighth proposition. I will repeat it: A clause expressly assigning a particular obligation to the category of conditions is not a clause which purports to fix the damages for breach of the obligation, and is not subject to the law governing penalty clauses. I acknowledge, of course, that by promoting a term into the category where all breaches are ranked as breaches of condition, the parties indirectly bring about a situation where, for breaches which are relatively small, the injured party is enabled to recover damages as on the loss of the bargain, whereas without the stipulation his measure of recovery would be different. But I am unable to accept that this permits the court to strike down as a penalty the clause which brings about this promotion. To do so would be to reverse the current of more than one hundred years' doctrine, which permits the parties to treat as a condition something which would not otherwise be so. I am not prepared to take this step.
It remains to mention two reported cases. The first is Steedman v. Dunkle (1916) AC 275. Land in Canada was purchased under an agreement, whereby the price was payable by one initial payment followed by annual instalments. The agreement stipulated that if the purchaser should make default in any of the payments, the vendor should be at liberty to cancel the agreement and to retain, as liquidated damages, the payments already made. It was also provided that time was to be considered as of the essence of the contract. The first deferred payment was not made on the due date. The vendor gave notice cancelling the agreement. Three weeks after the due date the purchaser tendered the amount due, which was refused. He thereupon brought an action claiming specific performance and relief from forfeiture of the amount already paid. The Judicial Committee of the Privy Council upheld the decision of the Canadian Court, that the stipulation as to the retention of the sums already paid was a penalty. But the Board declined to grant specific performance. Viscount Haldane said:
"Courts of Equity, which look at the substance as distinguished from the letter of agreements, no doubt exercise an extensive jurisdiction which enables them to decree specific performance where justice requires it, even though literal terms as to stipulation as to time have not been observed. But they never exercise this jurisdiction where the parties have expressly intimated in their agreement that it is not to apply by providing that time is to be of the essence of the bargain".
This authority would, of course, have been decisive of the present case if the vendor had gone on to claim damages for loss of the contract. He did not do so. Nevertheless, it does, in my view, show quite clearly that a clause making time of the essence, and hence making prompt performance a condition, is not to be struck down merely because a breach of the obligation is not sufficient on its own to constitute a repudiation.
Secondly, there is Photo Production v.Securieor, supra. This case is of great importance, for giving the quietus to the doctrine of fundamental breach. Its significance in the present instance lies in a passage from the speech of Lord Diplock. In order to place this in context, I must first quote from that part of the speech in which Lord Diplock develops a system of primary and secondary obligations, foreshadowed in earlier pronouncements:
"Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach; but, with two exceptions, the primary obligations of both parties so far as they have not yet been fully performed remain unchanged. This secondary obligation to pay compensation (damages) for non-performance of primary obligations I will call the 'general secondary obligation'. It applies in the cases of the two exceptions as well.
The exceptions are: (1) Where the event resulting from the failure by one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract, the party not in default may elect to put an end to all primary obligations of both parties remaining unperformed. (If the expression 'fundamental breach' is to be retained, it should, in the interests of clarity, be confined to this exception). (2) Where the contracting parties have agreed, whether by express words or by implication of law, that any failure by one party to perform a particular primary obligation ('condition' in the nomenclature of the Sale of Goods Act 1893), irrespective of the gravity of the event that has in fact resulted from the breach, shall entitle the other party to elect to put an end to all primary obligations of both parties remaining unperformed. (In the interests of clarity, the nomenclature of the Sale of Goods Act 1893, 'breach of condition', should be reserved for this exception).
Where such an election is made (a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their non-performance in the future and (b) the unperformed primary obligations of that other party are discharged. This secondary obligation is additional to the general secondary obligation; I will call it the anticipatory secondary obligation'".
A little later comes the passage relied upon:
"Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract; and must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to he in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation".
I do not read this passage as being concerned with anything other than penalty clauses in their ordinary sense; viz. clauses which purport to fix the damages recoverable for breach of a primary obligation in a manner which does not reflect those which would be recovered at common law. The reference is to clauses which, in the terminology established by Lord Diplock, fix the extent of the general secondary obligation (not, it may be noted, the 'anticipatory secondary obligation') to pay damages for breach of the primary obligation. I cannot see anything to suggest that Lord Diplock was putting in question the right of the parties to decide on the character of the primary obligation. Put in language perhaps more familiar, Lord Diplock was speaking of clauses which restrict the rights of the parties to recover the appropriate measure of damages; he was not concerned with the right of the parties to decide that all breaches of contract should be treated as breaches of condition. Nor am I able to accept that the learned Lord, who had been concerned for nearly twenty years with explaining the consequences of a breach of contract, should at this very late stage introduce the law of penalties so as to produce a result quite different from anything which he had said before.
For these reasons I conclude that the plaintiffs are entitled to retain the damages which the Master has awarded. This is not a result which I view with much satisfaction: partly because the plaintiffs have achieved by one means a result which the law of penalties might have prevented them from achieving by another, and partly because if the line of argument under clause 2 had been developed from the outset, the defendant might have found an answer based on waiver which the court is now precluded from assessing, for want of the necessary facts. Nevertheless, it is the answer to which, in my view, the authorities clearly point. Accordingly, I would dismiss the appeal.
LORD JUSTICE NICHOLLS: Shortly stated, the two issues raised on this appeal are whether the sums payable under clause 6 of the lease agreement constituted a penalty and, if so, whether the hirer's conduct amounted to a repudiation of the agreement that was accepted by the owner.
The claim under clause 6
On the first issue, the criticism of clause 6 advanced on behalf of the hirer was confined to the absence of provision giving credit for the net amount of the price obtained by the owner on any resale of the goods effected by it after re-taking possession. Argument in this court took place on the footing that the presence or absence of such a provision, which I shall call a "resale price allowance", was crucial on the penalty point, counsel for the hirer putting forward the omission of such an allowance as the fundamental objection to the clause.
If this were right, and clause 6 would be unobjectionable if it included a resale price allowance, it could only be because clause 6, with the addition of a provision for such an allowance, would represent a genuine estimate of the loss likely to be suffered in this case by the owner, Lombard Forth Central plc. It is on this footing that the clause would be enforceable. In -that event the sum of £6,869.97 claimed in the action wit a interest, would have been payable by the hirer, Mr Butterworth (because in arriving at that sum Lombard in fact gave credit for the net resale price of the computer, even though clause 6 did not require this). The sum of £6,869.97 is made up of one instalment in arrear (£585.05, plus £87.61 value added tax) and 13 future instalments (£7,592.65) less the net proceeds of sale (£172.85) and less also an allowance for accelerated receipt of the future instalments (£1,221.49). But, on the other hand, according to this argument advanced for the hirer, if clause 6 is struck down as a penalty because of the absence of a resale price allowance, the consequence in law is that nothing is recoverable by the owner except the one unpaid instalment (£585.05 plus value added tax) and interest thereon.
In my view these two alternative conclusions have only to "be set beside each other for their mutual incompatibility to be evident. As Lord Denning pointed out in Campbell Discount Co. Ltd. v. Bridge (1962) Appeal Cases, at page 632, when equity granted relief against a penalty it always required the recipient of its favours, as a condition of relief, to pay the damage which the other party had really sustained. If a genuine estimate of the damage really sustained by the owner here produces the sum of £6,869.97, how can the striking down of clause 6 as a penalty because of the omission of a resale price allowance somehow result in him recovering only £585.05?
As I see it, the answer to this question is to be found in the assumption underlying the hirer's argument that clause 6 with the addition of a resale price allowance would not be a penalty. In my view, in the absence of a repduiatory breach that assumption is misconceived. The ratio of the decision of this court in Financings Ltd. v. Baldock, (1963) 2 Queen's Bench 104, was that when an owner determines a hire purchase agreement in exercise of a right so to do given him by the agreement, in the absence of repudiation he can recover damages for any breaches up to the date of termination but not thereafter, and a "minimum payment" clause which purports to oblige the hirer to pay larger sums than this is unenforceable as a penalty. Lord Denning M.R. said (at page 110):
" Undoubtedly the cases in the past give rise to some conflict, and therefore I will try to state the matter on principle. It seems to me that when an agreement of hiring is terminated by virtue of a power contained in it, and the owner retakes the vehicle, he can recover damages for any breach up to the date of termination but not for any breach thereafter, for the simple reason that there are no breaches thereafter".
He added (at page 111):
" Seeing that they can no longer rely with any confidence on the 'minimum payment' clause, the owners have reverted recently to a claim for damages under the general law. But they can only do so, it seems to me, subject to the general principle which I have already stated, namely, that when they terminate the hiring and retake the vehicle, they can only get damages for any breaches up to the date of termination but not thereafter".
Diplock L.J said (at page 121):
!l In the present contract clause 8 itself merely defines a number of events, the occurrence of any one of which gives the owners an option to bring the contract to an end. Clause 11 purports to confer upon the owners other rights upon exercising their option to bring the contract to an end, but this clause is void as a penalty clause, at any rate in so far as it purports to confer rights upon the owners in the events which in fact gave rise to their right to bring the contract to an end, namely the hirer's breach of contract in failing to pay two instalments of hire. The owners are, therefore, in my opinion, forced to rely upon their ordinary remedies for those breaches of contract which had accrued at the date when the contract was determined, viz., April 7, 1960.
I have already expressed my opinion that on that date the only causes of action which had accrued to the owners were for the two instalments due on February 25 and March 22, I960, then in arrear. There had on April 7, 1960, been no repudiation by the hirer of his contract and no fresh breach by him which went to the root of the contract so as to evince his intention no longer to be bound by it. The owners' remedy is accordingly limited to recovery of the two instalments, together with interest thereon at the agreed rate of 10 per cent per annum from the dates they respectively fell due".
This principle has since been applied in several decisions of this court, including Brady v. St. Margaret's Trust Ltd, (1963) 2 Queen's Bench 494; Charterhouse Credit Co. Ltd. v. Tolly (1963) 2 Queen's Bench 683; United Dominions Trust v. Ennis (1968) 1 Queen's Bench 54} and Capital Finance Co. Ltd. v. Sonati (1977) 121 S.J 270, Supreme Court Library Transcript 132 of 1977. Of these I refer to one only, Capital Finance v. Donati. There the court applied the principle in a hire purchase case where upon determination of the hiring, the owner having power to determine the hiring if the hirer made default in the punctual payment of any instalment, a minimum payment clause came into operation that was substantially similar to clause 6 save that, unlike clause 6, it did give credit to the hirer for any sum recovered on the sale of the Fiat car subject to that agreement. The sum expressed to be payable comprised the arrears of hire rent up to the date of termination, any expenses incurred by the owner in recovering possession of the car, and also the amount of the owner's loss on the transaction which was agreed as being the difference between the hire purchase price and the total of (i) the net proceeds of sale of the car, (ii) the initial payment and the instalments paid by the hirer, and (iii) a sum representing a reasonable proportion of the charges shown in the schedule applicable to that part of the hire purchase price which the owner would by operation of the clause receive prematurely. Cairns L.J pointed out that while there was a difference of opinion in Financings v. Baldock as to the proper measure of damages in a case of repudiation, all members of the court held that in the absence of repudiation the common law measure of damages was limited to the overdue instalments and interest thereon and that the provision for additional damages was a penalty clause. He said:
"The clause in the present case does differentiate between an early and a late breach by providing for the deduction of a reasonable proportion of the charges, but it makes no distinction between the most trivial breach (for example, delay of a few days in the payment of one instalment) and a repudiatory breach. It purports to assess 'the owners' loss on the transaction' and the method of assessment shows "that what is meant is that the owners are to be recompensed for all the consequences of the hirer's breach and of their own election to determine the hiring. This could only be free from the element of penalty if the whole of this loss could be said to result from the breach, which would be contrary to the ratio decidendi of Financings v. Baldock".
In my view, applying the principle enunciated in Financings v. Baldock to this case leads inescapably to the conclusion that in the absence of a repudiatory breach clause 6(a) is a penalty insofar as it purports to oblige the hirer, regardless of the seriousness or triviality of the breach which led to the owner terminating the agreement by retaking possession of the computer, to make a payment, albeit a discounted payment, in respect of rental instalments which had not accrued due prior to 20 December 1982.
From what I have said it will be apparent that I consider that, in the absence of a repudiatory breach, the outcome of this issue is not dependent upon the inclusion or exclusion of a resale price allowance, and indeed the legal result would have been the same if clause 6 had contained a resale price allowance,
I consider below whether there was a repudiatory breach in this case, but for completeness I add here that it was accepted by counsel for Lombard (and, in my view, rightly so) that if clause 6 (a) was unenforceable as a penalty, the provisions in clause 6 (b) would not assist Lombard in this case.
The claim for damages
I turn to the second issue, which is whether the loss really sustained by the owner in this case by reason of the hirer's defaults in payment of the instalments amounted to loss of the whole hiring transaction. It would have so amounted if, but only if, the hirer's conduct amounted to a repudiation of the leasee: agreement and that repudiation was accepted by the owner.
I preface this issue with a reminder of the commercial realities of this lease transaction. In so doing I do not seek to ascribe to the transaction any legal characteristics other than those set forth in the lease agreement entered into by the parties. But in considering whether a hirer's conduct amounts to repudiation the commercial setting and objective of the agreement must be of prime importance. The owner, Lombard, is a well-known finance company. Its business is to provide finance for, amongst other matters, the acquisition by customers of goods, whether by hire purchase or lease or otherwise. It does not itself supply the goods. It adopts the normal practice of finance companies: it purchases the goods chosen by the customer from the supplier and pays for them, and then lets them to the customer on hire purchase or hire or as the case may be.
It is in these circumstances that Lombard became the owner of a Lomactina computer. When entering into the present lease agreement the objective of Lombard was the unexceptional one of obtaining over the agreed period of hire a rate of return, which would yield for it a commercial profit, on the money paid out by it on the acquisition of the computer being hired. I pause to observe that although the agreement was one of lease (or hire) and not of hire purchase, and the hirer was not given the right to buy the hired goods at the end of the hire period, the hirer was given the right (by clause 10(a)) at the expiration of that period to receive as a rebate of rentals paid a sum equal to 95 per cent of the net proceeds of sale if Lombard were successful in selling the goods, up to a maximum rebate of 80 per cent of the rentals paid. Under clause 10(c), if the hirer introduced a prospective cash purchaser for the goods within 7 days after the termination of the lease at a price in excess of the best price otherwise obtainable by Lombard, Lombard agreed to offer to sell the goods to him at the offered price. Thus in practice a route was open to the hirer to buy the goods at the end of the hire period for 5 per cent of their then value (the maximum rebate provision being unlikely to be material in the case of quickly depreciating goods such as a computer). In the case of this agreement, so far as Lombard was concerned its commercial interest in the goods, if they were possessed, would be confined to re-selling them for what they would fetch.
In these circumstances, it was a matter of importance to Lombard that the agreed instalments should be paid, and should be paid promptly. I can see no reason to doubt that the interest charges were calculated by reference to the agreed hire instalment dates, on the footing that the instalments would be paid regularly and with reasonable promptness. To Lombard a hirer who is repeatedly and significantly late with his payments, and who has to be chased with reminders and warnings, time after time, is an unattractive hirer whose transaction may eventually become an unprofitable one, in which event Lombard will lose substantially the whole benefit intended to be acquired by it under the agreement.
For his part the hirer's objective was to have the use of the hired goods whilst making the instalment payments and at the end of the hire period, when he had paid all the instalments, to have the opportunity in practice to acquire ownership of the goods on payment of a small or nominal sum.
I now turn to the detailed facts.
Lombard's outlay on the computer in May 1981 was £8,955. Interest charges over the 5 year period were fixed at £2,726, making a total of £11,681. This was the sum payable by the hirer by 20 quarterly instalments of £584.05 (plus value added tax), starting on 19 May 1981. Unfortunately and regrettably the evidence before the court on the payments history is sparse, consisting only of the hirer's statement of account with Lombard and the notice of termination dated 20 December 1982. The statement of account shows that the first three of the quarterly payments, those accruing in May, August and November 1981, were duly made. However, 1982 was a different story. The direct debit of the instalment payable on 19 February 1982 was recalled by the bank twice, on 24- February and again on 29 March. The next instalment was due on 19 May, but on that date neither that instalment nor the February instalment was paid. On 5 June (that is some 3½ months late in the case of the February instalment and 3 weeks late in the case of the May instalment) the February and May instalments were paid. Thereafter the August instalment was not paid until 28 October, which was ten weeks late. Payment by direct debit of the next instalment due, on 19 November, was recalled by the bank twice, on 24 November and again on 3 December 1982.
It was against this background that, the November instalment remaining unpaid, Lombard gave notice of termination on 20 December. I add that no interest had been paid by the hirer in respect of any of his late payments.
In these proceedings no explanation has been put forward by the hirer, or on his behalf, concerning these events in 1982. The explanation for the repeated recall of the direct debits which immediately springs to mind is financial difficulty, temporary or otherwise, but no such explanation has been advanced for the hirer. The affidavit evidence filed on his behalf in answer to the application for summary judgment under Order 14 was limited to contesting the adequacy of the price obtained when the computer was re-sold, and the oral evidence adduced on his behalf on the inquiry as to damages was similarly limited. On the other hand, it is for Lombard, as the party asserting that the hirer's conduct amounted to repudiation, to plead and prove this. In particular, there must have been further communications between Lombard and Mr. Butterworth over the latter's repeated failure to make prompt payment. Lombard is asking the court to find that by his conduct the hirer committed a repudiatory breach of the agreement, but it has not produced any of these communications or given any evidence of Mr. Butterworth's response, or lack of response, to any reminders or warnings given to him. The court has been left in the dark over what was going on between the parties.
In these circumstances I have come to the conclusion that the court is not entitled to draw the inference that by 20 December 1982 the hirer had evinced an intention not to adhere to, not to be bound by, his obligation under the lease agreement to pay the instalments and to do so promptly and regularly. In reaching this conclusion I have in mind the commercial objective of this agreement as far as Lombard was concerned, as described above. But given the bare facts I-have mentioned, Lombard's action was too hasty. The three 1981 instalments had been paid promptly, the first three of the 1982 instalments had been paid belatedly or very belatedly but they had been accepted, and when notice of termination was given on 20 December 1982 only one instalment, the one due on 19 November, was outstanding. Without more I do not think those facts justify a finding of repudiation by 20 December 1982.
Thus far I have reached my conclusion regarding repudiation without giving any weight or effect to the provision in clause 2(a) of the lease, that punctual payment of each rental instalment was of the essence of the lease.
I must now consider a further submission advanced by Lombard that, time of payment having been made of the essence by this provision, it was open to Lombard, once default in payment of any one instalment on the due date had occurred, to treat the agreement as having been repudiated by the hirer, and claim damages for loss of the whole transaction, even though in the absence of this provision such a default would not have had that consequence. On this, the question which arises is one of construction: on the true construction of the clause, did the 'time of the essence' provision have the effect submitted by Lombard? In my view, the answer to that question is "Yes". The provision in clause 2(a) has to be read and construed in conjunction with the other provisions in the agreement, including clauses 5 and 6. So read, it is to be noted that failure to pay any instalment triggers a right for the owner to terminate the agreement by re-taking possession of the goods (clause 5), with the expressed consequence that the hirer becomes liable to make payments which assume that the hirer is liable to make good to the owner the loss by it of the whole transaction (clause 6). Given that context, the "time of the essence" provision seems to me to be intended to bring about the result that default in punctual payment is to be regarded (to use a once fashionable term) as a breach going to the root of the contract and, hence, as giving rise to the consequences in damages attendant upon such a breach. I am unable to see what other purpose the "time of the essence" provision in clause 2(a) can serve or was intended to serve or what other construction can fairly be ascribed to it.
If that construction of the agreement is correct then, as at present advised, it seems to me that the legal consequence is that Lombard is entitled to claim damages for loss of the whole transaction. I say "as at present advised", because on this no argument to the contrary was advanced on behalf of the hirer, and Lord Justice Mustill's illuminating analysis leaves no escape from the conclusion that parties are free to agree that a particular provision in their contract shall be a condition such that a breach of it is to be regarded as going to the root of the contract and entitling the innocent party (1) to accept that breach as a repudiation, and (2) to be paid damages calculated upon that footing.
I have to say that I view the impact of that principle in this case with considerable dissatisfaction, for this reason. As already mentioned, the principle applied in Financings v. Baldock was that when an Owner determines a hire purchase agreement in exercise of a power so to do given him by the agreement on non-payment of instalments, he can recover damages for any breaches up to the date of termination but (in the absence of repudiation) not thereafter. There is no practical difference between (1) an agreement containing such a power and (2) an agreement containing a provision to the effect that time for payment of each instalment is of the essence, so that any breach will go to the root of the contract. The difference between these two agreements is one of drafting form, and wholly without substance. Yet under an agreement drafted in the first form, the owner's damages claim arising upon his exercise of the power of termination is confined to damages for breaches up to the date of termination, whereas under an agreement drafted in the second form the owner's damages claim, arising upon his acceptance of an identical breach as a repudiation of the agreement, will extend to damages for loss of the whole transaction.
Nevertheless, as at present advised, I can see no escape from the conclusion that such is the present state of the law. This conclusion emasculates the decision in Financings v. Baldock, for it means that a skilled draftsman can easily side-step the effect of that decision. Indeed, that is what has occurred here.
I add only that I can see nothing in Financings v. Baldock itself that would assist the hirer on this point. Each member of the court emphasised that in that case there had been no repudiation of the agreement, and Lord Justice Diplock observed (at page 118) that in that case time of payment was not of the essence of the contract and (at page 120)- that in the absence of any express provision to the contrary in the contract" the failure to pay two instalments on the due date did not of themselves go to the root of the contract.
For these reasons, I too would dismiss this appeal.
LORD JUSTICE LAWTON: I have read in draft the judgments of Lord Justice Mustill and Lord Justice Nicholls; I agree and have nothing to add.
(Order: Appeal dismissed. No costs of the appeal. Legal Aid taxation.)
