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Contract law

Liquidated damages are a genuine pre-estimate of the expected loss
and are enforceable by the court.

A penalty clause imposes a sum which is arbitrary or excessive and it
will not usually be enforceable. Instead the courts will act as if there is
no provision in the contract and as with unliquidated damages they will
value the claimant’s losses.

A sum is presumed to be a penalty clause if:

 The amount is out of proportion to the potential losses

 The same amount is given for a number of potential losses.

Illustration 28 – Damages

FORD MOTOR CO (ENGLAND) LTD v ARMSTRONG 1915

Facts:

The defendant had entered into a contract with Ford within which they agreed to
not sell Ford’s cars at less than the list price. A £250 penalty was given in the
contract for each breach of this provision.

Held:

As the same amount was given for a number of different breaches within the
contract this was held to be a penalty clause and as such was not enforceable.

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