KOCH A.J.—Attorney-General v. Coder.
1933Present : Koch A.J.
ATTORNEY-GENERAL v. CADER.
271—C. R. Colombo, 79,979.
Telephone-Contract with Postmaster-General—Agreement to rent telephone—Rent in arrear—Right to recover damages—Liquidated damages notpenalty.
By an agreement entered into for the rent of a telephone, the Post-master-General reserved to himself the right to terminate the contractby notice in writing, if, at any time, the renter was in arrear in respectof the payment of the annual rent for one month after it was due.
The right to recover from the renter as liquidated damages and not byway of penalty a sum equal to one-fourth of the annual rent was alsosecured to the Postmaster-General on such determination of the contract.
Held, that the sum stipulated as recoverable from the renter on thetermination of the contract for failure to pay the rent was in the natureof liquidated damages and recoverable as such in law.
APPEAL from a judgment of the Commissioner of Requests, Colombo.
M. F. S. Pulle, C.C., for plaintiff, appellant.
L. A. Rajapakse, for defendant, respondent.
Cur. adv. vult.
September 5, 1933. Koch A.J.—
This appeal raises an interesting point of law as regards the interpre-tation of a term in agreements in respect of telephones read in conjunctionwith the conditions contained in the schedule annexed thereto, to whichsuch term is expressly made subject. I am informed that although the
i 2 C. L. R. 84.
KOCH A.J,—Attorney-General v. Coder.
sum involved in the case is not considerable, quite a number of disputeshave arisen between the Postmaster-General and renters of telephones,which will be set at rest as the result of this appeal. The point is, there-fore, of some importance.
The facts are briefly these. The defendant had rented a telephoneunder an agreement with the Postmaster-General. This agreement wasexecuted on November 11, 1929. According to its terms, the defendanthad agreed to rent the instrument and telephone line for one year com-mencing from the aforesaid date and thereafter until determined, subjectto the conditions in the schedule aforesaid. The schedule is annexed tothe contract. The agreement provided for either party determining thelease at the end of the term of one year or at any time afterwards bygiving to the other three calendar months’ previous notice, whatever thereason may be. In addition the Postmaster-General, under the scheduleof conditions, further reserved to himself the right to terminate thecontract by notice in writing, if at any time the renter was in arrear inrespect of payment of the annual rent for one month after the same oughtto have been paid. The renter undertook to pay to the Postmaster-General annually in advance a rent of Rs. 130. The right also to recoverfrom the renter as liquidated damages and not by way of penalty a sumequal to one-fourth of the annual rent was also secured to the Postmaster-General on such determination of the contract. After two years of usethe defendant, although attention had been previously called to thematter, failed to pay his third year’s rent in advance. The latest date onwhich this rent was payable was November 11, 1931. In fact the 1931-32rent was never paid at all, and the Postmaster-General after theexpiry of one month after the date of default terminated the agreementby a notice in writing dated December 17, 1931. The seventh clause ofthe schedule further provided a right in the Postmaster-General todisconnect the telephone without notice, inter alia, if the subscription isoverdue. Acting under this power, the telephone rented by the defendantwas disconnected on November 23, 1931.
The Attorney-General thereafter as plaintiff instituted this actionagainst the renter on May 4, 1932, for the recovery of a sum of Rs. 71.33.In this is included a sum of Rs. 32.50, which was claimed as liquidateddamages calculated on the basis of one-fourth of the annual rent. Thelearned Commissioner allowed the claim less this sum of Rs. 32.50, whichhe held the plaintiff was not entitled to recover (1) by reason of the factthat the telephone was disconnected on November 23, 1931, only twelvedays after the new year had commenced and within the period of onemonth from that date; (2) that this sum sought to be recovered wasprovided for in the agreement in the light of a penalty and not by way ofactual liquidated damages. The breaches complained of and the datesof the determination of the agreement as well as the disconnection of thetelephone are admitted.
On the first point the learned Commissioner was of opinion that readingclause 6 of the schedule as a whole there was an implication “ thatmatters would be allowed to go without interruption for a period of one. month before liquidated damages were claimed ” (I am quoting the wordsof the judgment), and that as the service was interrupted within that37/26
KOCH A.J.—Attorney-General v. Cader.
month, the plaintiff was not entitled to claim the damages he did. Icannot agree with this conclusion. No doubt ordinarily, in the absenceof express provision to the contrary, it would be reasonable to supposethat damages should not be allowed for a period during which the partycharged had been deprived of the use of the subject of the contract at theinstance of the claimant, but in this case the amount of the sum claimedby way of damages for a breach of the contract instead of being specificallymentioned in rupees and cents is on grounds of convenience, presumablyinasmuch as rents differ in regard to different telephones, estimated forpurposes of computation as being the amount represented by a fourth ofthe annual rent. The words used are “ a sum equal to one-fourth of theannual rent ”. The power to disconnect the telephone at any time afterthe subscription is overdue, is specifically provided for and has beenagreed to by the defendant. The subscription was overdue at the lateston November 11, 1931, and the telephone in my opinion was rightlydisconnected on November 19, 1931. This is a clause by itself andinvests this power in the Postmaster-General independent of the otherprovisions of the agreement including the schedule, and a disconnectioneffected by virtue of this power is not therefore relevant to the legality ofthe claim under the agreement for liquidated damages.
On the second point too the learned Commissioner has held against theappellant. I quite agree with the Commissioner that whatever the wordsemployed in the contract are, whether “ penalty ” or “ liquidated damages ”it is open to the contesting party to show that the expression “ penalty ”was intended to be regarded as “ liquidated damages ” or vice versa that■the expression “ liquidated damages ” was intended to operate as apenalty. The law differentiates the results that would accrue from theconclusion arrived at. If it be held that a “ penalty ” was intended, thenit is for the claimant to prove that the sum set out as such penalty coversthe damage alleged to be sustained as the idea was merely to hold theseeming liability “ in terrorem ” over the head of the other party as aninducement towards a compliance by him of the terms of the agreement.If on the other hand the amount mentioned was in the nature of a genuinepre-estimate of the damages likely to accrue to the party claiming,then the sum was to be regarded as liquidated damages and could berecovered without assessment.
The indicia of this question will vary according to circumstances. Thisin brief is the result of a number of important judicial pronouncementson the point. In the famous Clyde Bank Case1 the Earl of Halsburylaid down that the Court must proceed according to what is the realnature of the transaction, and that the mere use of the word “ penalty ”on the one side or “ damages ” on the other would not be conclusive as tothe rights of the parties. He gave as the reason why parties do in factagree to such a stipulation that sometimes although undoubtedly thereis damage and undoubtedly damages ought to be recovered, the natureof the damage is such that proof of it is extremely complex, difficult, andexpensive.
This view was upheld by the Privy Council in a judgment of LordDunedin in a later case, Commissioner of Public Works v. Hills. * His
* (1905) 1 A. C. 6.= (J906) A. C. 368.
KOCH AX—Attorney-General v. Coder.
Lordship remarks that the question arises in each particular case whethersuch a stipulation has been made, and it is well settled law that themere form of expression “ penalty ” or “ liquidated damages ” does notconclude the matter.
In a still later case, Dunlop Pneumatic Tyre Co., Ltd. v. New Garage andMotor Co. the House of Lords accepted the dicta in the two previouscases referred to and suggested as tests inter alia the following : —
“ (1) It will be held to be a penalty if the sum stipulated is extravagantand unconscionable in. amount, in comparison with the greatest loss that,could conceivably be proved to have followed the breach.
“ (2) On the other hand it is no obstacle to the sum stipulated being agenuine pre-estimate of damage, that the consequences of the breach aresuch as to make precise pre-estimation almost an impossibility. On thecontrary that is just the situation, when it is probable that pre-estimateddamage was the true bargain between the parties ”.
The latter test was quoted from the judgment of Lord Mersey inWebster v. Bosanquet.’
It will be seen that the legal position is quite clear, and it only remainsfor me to consider whether in the circumstances of the agreement in thiscase the amount agreed upon as " liquidated damages ” was a genuinepre-estimate of damage.
The defendant is a proctor who must be presumed to have appreciatedthe terms and conditions of the agreement he signed. In spite of noticesbeing forwarded to him in regard to every single step taken by thePostmaster-General, he has made no remonstrance or questioned thelegality of the claim. He has not given evidence or called a defence, andhas not, so far as he was concerned, in any way helped the Court toconclude that the sum of Rs. 32.50 is harsh or unconscionable. It maywell be that the damage was computed on the basis of three months’rent, as that was the period considered by both parties to be a fair lengthof notice that either party should give to the other before determinationof the contract, and this period was hit upon, as it was considered thatreasonably it might be expected that such a period would or-iinarily elapsebefore a new renter was secured, certainly in these last Jew years ofdepression when telephones have been thrown up the difficulty of obtain-ing custom can be appreciated I am unable to see that anything hasbeen established to disprove that the sum of Rs. 32.50 was net a genuinepre-estimate of the damage anticipated, and I therefore uphold the claimof the plaintiff to this sum.
The order of the Commissioner will be varied so as to include this sum,and judgment will be entered for the appellant as prayed for with costs.The order made by the Commissioner as to costs is set aside. Theappellant will also have his costs of appeal.
> 11915) A. C. 79,
Appeal allowed.» (1912) A. C. 398.
ATTORNEY- GENERAL v. CADER