Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914]

Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1 is a notable English contract law case addresses the extent to which damages may be sought for a contract breach when a sum is fixed in the contract. It emphasises the enforceability of liquidated damages unless the sum is considered unconscionable. Despite its historical significance, the case's legal standing has been superseded Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis [2015], where the Supreme Court revisited the law on penalties.

Dunlop sued New Garage, a tyre retailer, for breaching an agreement not to resell Dunlop tyres below a specified price. The contract stipulated that, in the event of a breach, New Garage would pay £5 per tyre by way of liquidated damages and not as a penalty.

Initially, the judge deemed the £5 sum as liquidated damages and enforceable. However, the Court of Appeal viewed it as a penalty, limiting Dunlop to nominal damages. The House of Lords ultimately ruled that the clause was not a penalty but a genuine pre-estimate of potential loss, allowing Dunlop to enforce the agreement. A number of principles were set out by Lord Dunedin:
  1. The sum stipulated is considered a penalty if it is extravagant and unconscionable compared to the greatest conceivable loss from the breach.
  2. If the breach involves only failing to pay a sum of money, and the stipulated sum is greater than the amount owed, it may be deemed a penalty.
  3. A presumption (though not conclusive) of a penalty arises when a single lump sum is payable for one or more events causing varying degrees of damage.
  4. It is not an obstacle to a genuine pre-estimate of damage if precise pre-estimation is challenging due to the complex nature of the breach's consequences.

The ruling's status as a leading case was superseded by the 2015 Supreme Court ruling in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis. This decision acknowledged the deficiencies in the penalty rule and the challenges in applying outdated tests to complex situations. It signalled the need for a reconsideration of the penalty rule in England, advocating for a reconstruction or extension to better accommodate contemporary legal complexities.
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