| Date | 5 February 2003 |
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| Judgment | Jeancharm Limited v Barnet Football Club Limited, CA 16 January 2003 |
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| The Issue | Whether extravagant amounts can be included within liquidated and ascertained damages provisions. |
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| Implication |
The law will still require that a liquidated damages provision must be in an amount which can be shown to be a genuine pre-estimate of the likely loss to be suffered in the event of breach, as estimated at the time of making the contract, otherwise the clause may be rendered unenforceable. |
printIn the construction industry, we commonly think of liquidated and ascertained damages as a sum of money stated in the contract, calculated per day or per week, which will be paid by the contractor to the owner in the event of late completion. Pre-ascertained damages such as this can however be used in other circumstances. An example is to be found in the Court of Appeal's decision in the case of Jeancharm v Barnet Football Club. Jeancharm had agreed with Barnet to supply football kits under a contract that provided that Barnet should pay interest at 5% per week in the event of late payment. The contract also stated that Jeancharm should pay 20p per garment per day in the event of late delivery. In the event, Barnet complained of late delivery and complained also about the quality of the goods, and made a claim calculated at the rate of 20p per garment per day in accordance with the terms of the contract. The matter proceeded to court where the judge accepted certain of Barnet's claims. Nevertheless, he ordered that a balance was due and payable to Jeancharm in the approximate amount of £5,000. Jeancharm then argued that the interest clause, which effectively operated as liquidated damages in the event of late payment, should apply to the amount held to be payable at the rate of 5% per week. Jeancharm were apparently unabashed by the fact that even on a simple interest basis, that would amount to 260% per annum. Barnet contested the interest claim on the basis that it was a penalty clause, and as such under English law unenforceable. It has long been recognised that the English courts will not enforce liquidated damages provisions if the sum stipulated is meant to be a penalty rather than a genuine pre estimate of the loss. In the 1915 case of Dunlop Pneumatic Car Co v New Garage Motor Co, the House of Lords set out the general principles. It was held that whether a provision would be treated as a penalty was a question to be judged at the time of making the contract, not at the time of the breach. As a matter of interpretation of the contract, it was not relevant how the provision was described in the contract, but it would be held to be a penalty "if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach". Whether or not this simple test, involving only an examination of the amount of the liquidated damages, was the correct approach was criticised in the 1993 case of Philips (Hong Kong) v The Attorney General of Hong Kong. Here it was suggested that it was the contract as a whole and the risks that each side had undertaken, that had to be investigated to determine whether the liquidated damages clause was appropriate and enforceable. Jeancharm argued that it simply was not enough to look at the 260% per annum interest clause. The court should examine fully the risks borne by each party to the contract and, for example, balance the commercial risks which Jeancharm had taken by agreeing to the payment of 20p per garment per day in the event of late delivery. The Court of Appeal concluded that the decision in the Philips (Hong Kong) case did not depart from the law as laid down in 1915 in the Dunlop case. There was certainly no abandonment of the rule that such a clause should be a genuine pre-estimate of loss. On any basis, 260% interest was to be regarded as an extraordinarily large sum to have to pay for interest or administrative costs. Accordingly, reversing the decision of the trial judge, the clause was to be treated as a penalty in the sense described in the Dunlop case and was therefore unenforceable. Lord Justice Peter Gibson considered that there were four principles relevant to distinguishing a penalty clause from a valid contractual provision for the payment of damages. Firstly, the court had to look to the substance of the matter rather than the form of words used in order to identify the parties intentions. Secondly, the essence of a penalty would be distinct from a genuine pre-estimate of loss. In other words, the provision would not be construed as a penalty where a genuine pre-estimate of loss had been carried out Thirdly, the question of whether such a clause was to be treated as a penalty was a question of construction or interpretation of the contract at the time of making the contract, not at the time of the breach. And, finally, if the amount was extravagant or unconscionable in comparison with the greatest loss that could be perceived, the clause would be a penalty. The Court of Appeal concluded that it was plain from the magnitude of the interest rate which Jeancharm sought to invoke, that it was not a pre-estimate of actual loss and was therefore unenforceable.
CJ-0304
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