Keenan and Riches’BUSINESS LAW

important terms (warranties). The distinction will be
considered in more detail in Chapter 9. A breach of
condition does not automatically terminate the con-
tract. The injured party has a choice: he may wish to be
discharged from the contract or he may prefer to carry
on with the contract and claim damages for the breach.
A breach of warranty only entitles the injured party to
sue for damages.

Remedies

So far we have looked at the essential elements of a valid
contract, the factors which may affect the validity of an
agreement and the ways in which a contract may come
to an end. We now turn to the remedies available to the
injured party when a term of the contract has been bro-
ken. Every breach of contract will give the injured party
the common law right to recover damages (financial
compensation). Other remedies, such as specific perform-
ance and injunction, may be granted at the discretion of
the court as part of its equitable jurisdiction.

Damages

In the business world it is quite common for the parties
to agree in advance the damages that will be payable in
the event of a breach of contract. These are known as
liquidated damages. If there is no prior agreement as to
the sum to be paid, the amount of damages is said to be
unliquidated.

Liquidated damages

It makes commercial common sense for the parties to
establish at the outset of their relationship the finan-
cial consequences of failing to live up to their bargain.
Provided the parties have made a genuine attempt to
estimate the likely loss, the courts will accept the relev-
ant figure as the damages payable. In practice, knowing
the likely outcome of any legal action, the party at fault
will simply pay up without argument. An example of
liquidated damages are the charges imposed for can-
celling a holiday (see Fig 7.3).
Of course, there is a temptation for a party with
stronger bargaining power to try to impose a penalty
clause, which is really designed as a threat to secure per-
formance. The distinction between liquidated damages
and penalty clauses is illustrated by the following cases.

More recent examples of the distinction between liquid-

ated damages and penalty clauses are provided by the

following cases.

Part 3Business transactions

254

Sunkist Tours – Cancellation charges

Cancellation notified Charges

Over 6 weeks prior to departure Loss of deposit

Within 4 to 6 weeks of departure 30% of holiday cost

Within 2 to 4 weeks of departure 45% of holiday cost

Within 1 day to 2 weeks of 60% of holiday cost

departure

On or after the day of departure 100% of holiday cost

Figure 7.3An example of a cancellation charges

notice

Dunlop Pneumatic Tyre Co Ltdv New

Garage & Motor Co Ltd(1915)

Dunlop supplied tyres to New Garage under an agree-

ment by which, in return for a trade discount, New

Garage agreed to pay £5 by way of ‘liquidated damages’

for every item sold below list prices. The House of Lords

held that since the sum was not extravagant, it was a

genuine attempt by the parties to estimate the damage

which price undercutting would cause Dunlop. The £5

was liquidated damages.

Ford Motor Cov Armstrong(1915)

Armstrong, a retailer, agreed to pay £250 for each Ford

car sold below the manufacturer’s list price. The Court of

Appeal held that the clause was void as a penalty.

Murrayv LeisurePlay Ltd(2005)

Murray, a director of LeisurePlay, had a clause in his

service contract which entitled him to payment of a

year’s gross salary if his contract was terminated without

one year’s notice. Murray was given seven-and-a-half

weeks’ notice and he brought a claim for liquidated dam-

ages. LeisurePlay argued that the clause was a penalty

clause and therefore unenforceable. The Court of Appeal

held that it was not a penalty clause. In deciding such

cases courts should consider: