Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1
Citation:Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1
Rule of thumb:Where a liquidated damages represents a very high end figure for damages caused, but is nonetheless still within the spectrum of being objectively justifiable, this is deemed to be a valid liquidated damages term.
Background facts:
The facts of this case were that Dunlop supplied tyres to New Garage to be sold. One of the terms of the agreement was that the tyres would not be sold below a certain amount. Dunlop had this condition in order to try to preserve the prestige of their brand. The contract stated that if a garage sold below this amount then they had to pay a sum of money. New Garage sold the tyres below the minimum amount and Dunlop tried to enforce the sum of money payable under the contract as well as obtain an injunction and order.
Parties argued:
New Garage provided accounting evidence demonstrating that the tyres simply would not sell well enough at that price, and were clearly overpriced - they argued that this was therefore a penalty clause, which was unenforceable. Dunlop led detailed evidence in response to make a complex but clear argument of how garages selling certain brands of tyres too low adversely affected the prestige of their brand and how this in turn had a knock-on effect on the company, with the figure being an estimate based upon a marketing and branding theory. Afer New Garage provided accounting evidence showing that they were not selling, Dunlop had to respond to this in detail, so that the Court could closely assess the matter.
Judgment:
The Court affirmed that if people want to use these types of clauses, and evidence in practice is led causing suspicions that they may well be extortionate, then detailed evidence of their rationale has to be provided by the person using them. The Court accepted Dunlop’s explanation and deemed the term to be a liquidated damages clause and not an unenforceable penalty clause. The Court affirmed liquidated damages clauses do not have to be exact and necessarily an optimum figure. Liquidated damages clauses are allowed to be based upon rough accounting estimations and do not have to show exactly how the figure is being calculated – they do not have to be reasonable, just justifiable and not extravagant. This decision affirmed that businesses who want to preserve the prestige of their brand can legally enforce clauses like these setting a minimum price and damages sum when it is not followed.
Ratio-decidendi:
‘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’, Lord Dunedin
'clearly explained in evidence ... provided that figure is not extravagant there would seem no reason to suspect that it is not truly a bargain', Lord Dunedin, 120.
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.