DUNLOP PNEUMATIC TYRE CO LTD v NEW GARAGE & MOTOR

For facts and discussion see Lord Neuberger's judgment in Cavendish Square Holdings v Makdessi, [21]-[24]. The guidelines suggested by Lord Dunedin for distinguishing liquidated damages and penalty clauses may remain of relevance following the Supreme Court's decision in circumstances where financial compensation for breach is the non-breaching party's only legitimate interest in performance.

LORD DUNEDIN: I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative:—

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 . . .

.The question whether a sum stipulated is 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 . . .

(p. 487) 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…