Liquidated damages - Building Contract Claims - page 56

together with arrears of rentals, all further rentals which would have fallen
due and damages for breach of the agreement. It was held not to be a
penalty.
The right of parties to make their own bargain within specified limits has
long been sacred and that seems to be the key to unravelling these decisions.
It has been said:
' . . . one purpose, perhaps the main purpose, of the law relating to
penalty clauses is to prevent a plaintiff recovering a sum of money in
respect of a breach of contract committed by a defendant which bears
little or no relationship to the loss actually suffered by the plaintiff as a
result of the breach by the defendant. But it is not and never has been for
the courts to relieve a party from the consequences of what may in the
event prove to be an onerous or possibly even a commercially imprudent
bargain.' 160
The case concerned a number of interlocking contracts of great complexity.
In essence, the matter for consideration was whether breach of an obligation
by one party to another could give rise to payment by a third party or was
such a payment to be considered a penalty and unenforceable. A significant
statement was made in the course of the appeal:
' . . . the mere fact that a person contracts to pay another person, on a
specified contingency, a sum of money which far exceeds the damage
likely to be suffered by the recipient as a result of that contingency does
not by itself render the provision void as a penalty.' 161
The House of Lords concurred with this view. These and other similar
cases give food for thought in the context of building industry contracts 162 .
In each of the cases, the sum of money is payable on the occurrence of an
event. This event is the termination. The difficulties seem to have arisen
due to the specified grounds for termination. In each case, termination may
take place at the instance of either party and some of the grounds for
termination by the owner are breaches by the hirer. In one of the cases,
even trivial breaches were made conditions so as to enable the owner to
terminate.
Lord Denning drew attention to what he termed the 'absurd paradox' that
if a hirer under a hire purchase agreement lawfully terminated the agree-
ment, he would not be able to say the sum then payable by him according to
the terms of the agreement was a penalty, but he would be able to do so
about the same term if the agreement was terminated as a result of his
breach of contract 163 .
The courts seem to be agreed that no question of liquidated damages or
penalties arises unless a breach of contract is involved. A Hong Kong case
160 Export Credits Guarantee Department v. Universal Oil [1983] 2 All ER 205 at 222 per Lord Roskill.
161 [1983] 2 All ER 205 at 215 per Slade LJ.
162 See also Cooden Engineering Co Ltd v. Stanford [1952] 2 All ER 915 CA; Campbell Discount Co Ltd v.
Bridge [1962] AC 600; Re Apex Supply Co Ltd [1941] 3 All ER 473; Alder v. Moore (1961) 2 QB 57, CA.
163 Campbell Discount Co Ltd v. Bridge [1962] AC 600 at 629.