Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
[1915] AC 79
Ratio Decidendi
A clause in a contract providing for payment of a sum of money on breach is a penalty (and unenforceable) if it is extravagant and unconscionable in amount compared with the greatest loss that could result from the breach. If it is a genuine pre-estimate of loss, it is enforceable as liquidated damages.
Facts
Dunlop supplied tyres to New Garage under a contract providing that New Garage must not sell below list price. For each breach, New Garage was to pay £5 per tyre. New Garage sold tyres below the list price.
Judgment Summary
The House of Lords held the £5 clause was enforceable as liquidated damages, not a penalty. Lord Dunedin set out guidelines for distinguishing penalties from liquidated damages.
Key Quotes
"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."
— Lord Dunedin
Subsequent Treatment
The test was reformulated in Cavendish Square Holding v Makdessi/ParkingEye v Beavis [2015] to focus on legitimate interest, but Dunlop remains cited.