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Present: Lord MacNaghten, Lord Shaw, Lord Mersey, andLord Robson.
WEBSTER v. BOSANQUET.
L>. C. Colombo, 26,132.
Liquidated damages—Penalty—Breach, of contract.
In decidingwhether a stipulated paymentin respect of the
breach of a contract should be regarded as liquidated damagesfixing once for all the sum to be paid, or merely as a penaltycoveringthedamagesthough not assessing them, whatever bethe
expression used in the contract in describing the payment, thequestionmust always be whether the construction contendedfor
renderstheagreement unconscionable and extravagant. andone
which no Court ought to allow to be enforced.
It is impossible to lay down any abstract rule as to what it mayor may not be extravagant or unconscionable to insist upon,without reference to the particular facts and circumstances whichate established in the individual case.
The consideration must be whether it is extravagant, exorbitant,or unconscionable at the time when the stipulation is made—thatis to say, in regard-to any possible amount of damages which maybe conceivedto havebeen within the contemplation' of the parties
when they made the contract.
HE facts are stated in full in the judgment of the SupremeCourt reported in 13 N• L. R- 47-
Grant, K.C. (with him Owen Thompson), for appellant.
Upjohn, K-C., and F. H. M- Corbet, for the respondent-
February 21, 1912. Delivered by Lord Mersey : —
This is an appeal from a judgmeut of the Supreme Court of Ceylon,dated December 21, 1909, reversing a judgment of the DistrictCourt of Colombo, dated March 1, 1909. The question raised bythe appeal is whether a payment stipulated by deed to be made bythe defendant to the plaintiff is to be regarded as a payment by way ofliquidated damages or merely as a penalty.
The Court of First Instance held that the sitpulation was for apayment by way of liquidated damages; the. Supreme Court, took adifferent view, and held that the stipulation was for a penalty only.
There is no dispute about the facts of the case, and they are asfollows:- —
In 1891 the plaintiff and the defendant entered into partnershipfor the purpose .of exporting and selling Ceylon tea, ■ and particularlytea grown upon, certain estates in the Island belonging to thedefendant, and known as the Palamcotta and Marawilla estates.The part of the plaintiff in connection with the enterprise was totravel .for the purpose of pushing the sale of the tea, and this he didso successfully that by the year 1895 he had established a valuabletrade. In that year the partnership was dissolved, the plaintiffbuying the defendant’s interest in the goodwill for a sum of £8,500,and taking over the assets at a valuation. The dissolution waseffected by a deed dated February 14, 1895, which contained amongother things a provision that the .defendant should for a period often years after July 30, 1896, sell the whole or any part of the cropsof the Marawilla and Palamcotta estates to the plaintiff at a valuationso long as the plaintiff should pay to the defendant yearly a sumof £75 for the use of the names of the two estates, and shouldexpress his intention of purchasing the whole or any part of thesaid crops. The deed then provided as follows: —
" And the said Bosanquet shall not be at liberty to sell during theperiod aforesaid the whole or any part of the .tea crops of the Marawillaand/or Paramcotta estates to any person other than the said Websterwithout first. offering to the ■ said Webster the option of buying thesame, so long as Webster shall pay to Bosanquet the yearly paymentof £75; and if the said Bosanquet shall fail, neglect, or refuse to sell thewhole or any part of the crop of the Marawilla and/or Palamcotta estatesas hereinbefore provided to the said Webster, he shall pay to Websterthe sum of £500 as liquidated damages and not as a penalty."
The plaintiff duly performed his part of this agreement, but inthe first half of the year 1906 the defendant, in breach of the
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agreement, sold to persons other than the plaintiff five differentpareels of tea of the Palamcotta crop, amounting in the aggregateto 53,315 lb., without offering to the plaintiff the option of buyingthe same. In February, 1908, the plaintiff issued his writ in-thepresent action, claiming the sum of £500 as liquidated damages inrespect of the said breach. It was alleged (and found as a fact atthe trial) that the sales had been made by the defendant under amistake of fact as to the date on which the obligation to give theoption of purchase to the plaintiff terminated, but the learpedJudge held this to be immaterial, and being of opinion that thestipulation for the payment of the £500 meant what it- said, namely,that it should be by way of liquidated damages, gave judgment forthe amount claimed. The Supreme Court over-ruled this decision,and sent the case back to the Court of First Instance to ascertain theactual damage sustained by the plaintiff by reason of the breach-On the rehearing the plaintiff offered no evidence as to damages,and the Coftrt awarded the plaintiff, by way of nominal damages, thesum of £10, which amount the defendant had brought into Court insatisfaction of the plaintiff's claim. The question is, which view ofthe contract Is right.
Tht cases in which the Courts have had to consider whether astipulate ’ payment in respect of the breach of a contract should beregarded as liquidated damages fixing once for all the sum to bepaid, or merely as a penalty covering the damages though notassessing them, are innumerable, and perhaps difficult to reconcile.But it is unnecessary to examine them, for their effect is sufficientlyand very clearly stated in the case of The Clydebank EngineeringCompany, Limited, v. Don Jose Castaneda, reported in Appeal Cases,1905, page 6. From that case it appears that whatever be theexpression used in the contract in describing the payment, thequestion must always be whether the construction contended forrenders the agreement unconscionable and extravagant, and onewhich no Court ought to allow to be enforced- After stating thisprinciple, Lord Halsbury proceeded as follows: —
“ It is impossible to lay down any abstract rule as to what it may ormay not be extravagant or unconscionable to insist ' upon, withoutreference to the particular facts and circumstances which are establishedin the individual case.'*
And Lord Davey, in delivering his opinion, says:—
“• You are .to consider • whether it is extravagant, exorbitant, orunconscionable at the time when the stipulation is made—that is to say,
in regard to any possible amount of damages which may be conceivedto have been within the contemplation of the parties when they madethe contract."
Applying the principle to be found in these judgments to thefacts of the present case, the proper construction to be put upon thecontract appears to their Lordships to be plain. When making the
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contract it was impossible to foresee the extent of the injury whichmight be sustained by the plaintiff if sales of the tea were made tothird parties without his consent. That such sales might seriouslyaffect his business was obvious, and the very uncertainty of theloss likely to arise made it most reasonable for the parties to agreebeforehand as to what the deunages should be. And, furthermore,it is well known that damages of this kind, though very real, maybe difficult of proof, and that the proof may entail considerableexpense. This consideration also afforded a reason for fixing theamount beforehand. It was suggested in the course of the argumentthat to treat the £500 as liquidated damages might involve suchextravagant consequences as to render the agreement absurd, forthe sum might be claimed in respect of every pound of tea sold inbreach of the stipulation. Their Lordships, however, are of opinionthat the stipulation is not capable of such an interpretation. Theparties to the agreement were merchants using language in the sensein which it is used in their trade. When they speak of a part of acrop ” they are not contemplating packets which might be scldover a grocer’s counter, but parcels such as were in fact sold in the .present case. Moreover, the breach consists of the selling to thirdparties. It matters not whether the sale is of the whole or of partof a crop, nor whether it is made in one lot or in many. Theagreement neither says nor means that, if successive parcels formingparts of the same crop be sold, a right to claim £500 in respect ofeach sale shall accrue; all such parts put together cannot amountto more than the whole crop, and the penalty for the sale of thewhole, is limited to the £500.
For these reasons their Lordships are of opinion that the contractstipulates for what in words it says, namely, for a payment of moneyby way of liquidated damages and not by way of penalty. Theywill, therefore, humbly advise His Majesty that the appeal shouldbe allowed, that the judgment of the Supreme Court should, beset aside, and the original judgment of the District Court restored.The respondent must pay all the costs in he Courts below and alsothe cost of this appeal.
WEBSTER v. BOSANQUET