DISTINCTION BETWEEN 'LIQUIDATED DAMAGES' AND 'PENALTY

• Date: 06 February 2019

"We agree with Mr. Majekodunmi, learned counsel for the respondents; that Dunlop Pneumatic Tyre Company Limited v. New Garage Motor Company Limited (1915) A.C. 79 wherein most of the authorities dealing with the distinction between liquidated damages and penalty were, reviewed by the House of Lords appear to have established principles which are relevant and applicable to the case on Appeal. There it was held that where a simple sum is agreed to be paid as liquidated damages on the breach of a number of stipulations of varying importance, and the damage is the same in kind for every possible breach and is incapable of being precisely ascertained, the stipulated sum, provided it is a fair pre-estimate of the probable damage and not unconscionable, will be regarded as liquidated damages and not a penalty. In dealing with this matter Lord Dunedin in his judgment said at p. 86: "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 word "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, (Clyde Bank Engineering and Ship Building Co. v. Don Jose Ramos Yzquierdo Y Castaneda (1905) A.C. 6). (3). 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. (Public Works Commissioner v. Hills (1906) A.C. 368; and Webster v. Bosanquet (1919) A.C. 394). (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 its extravagant and unconscionable in amount in comparison with the greatest loss that could...