Keenan and Riches’BUSINESS LAW

Chapter 7Introduction to the law of contract

If the court holds that the sum is liquidated damages, it
will be enforced irrespective of whether the actual loss is
greater or smaller.

1 The damage can include sums for financial loss,

damage to property, personal injury and distress, dis-

appointment and upset caused to the claimant.

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(a) to what breaches of contract the clause applies;

(b) what amount is payable on breach;

(c) what amount would be payable if the claim was

brought under common law;

(d) what were the parties’ reasons for agreeing the

clause;

(e) whether the party who claims the clause is a penalty

can show that it was imposed as a deterrent and that

it does not constitute a genuine pre-estimate of loss.

M & J Polymers Ltdv Imerys Minerals

Ltd(2008)

The Commercial Court had to decide whether a ‘take or

pay’ clause in a contract for the supply of chemical dis-

persants amounted to a penalty. A ‘take or pay’ clause is

a provision which obliges a buyer to pay for a minimum

quantity of products, irrespective of whether that quantity

is ordered. Burton J held that the clause in question was

not a penalty, although as a matter of principle the rule

against penalties could apply to ‘take and pay’ clauses.

Based on the facts of the case, he was satisfied that the

clause was commercially justifiable, was not oppressive,

was entered into freely by parties of comparable bargain-

ing power, and did not have the predominant purpose of

deterring a breach of contract or amount to a provision

‘in terrorem’.

Cellulose Acetate Silk Co Ltdv Widnes

Foundry Ltd(1933)

Widnes Foundry agreed to pay £20 for every week of

delay in completing a plant for the Silk Co. The work was

completed 30 weeks late. The Silk Co claimed that its

actual losses amounted to nearly £6,000. It was held that

Widnes Foundry was only liable to pay £20 a week (i.e.

£600) as agreed.

Unliquidated damages

The aim of unliquidated damages is to put the injured
party in the position he would have been in if the con-
tract had been carried out properly. Damages are
designed to compensate for loss. If no loss has been suf-
fered, the court will only award nominal damages,
which is a small sum to mark the fact that there had been
a breach of contract. The courts observe the following
guidelines when awarding damages:

Jarvisv Swans Tours(1973)

Jarvis, a solicitor, paid £63.45 for a two-week winter

sports holiday in Switzerland. The Swans Tours brochure

promised a ‘house party’ atmosphere at the hotel, a bar

which would be open several evenings a week and a

host who spoke English. The holiday was a considerable

disappointment: in the second week, he was the only

guest in the hotel and no one else could speak English.

The bar was only open one evening and the skiing was

disappointing. The Court of Appeal awarded him £125 to

compensate for ‘the loss of entertainment and enjoy-

ment which he was promised’.

Exemplary or punitive damages designed to punish the

party in breach are not normally awarded in contract.

2 The injured party cannot necessarily recover dam-

ages for every kind of loss which he has suffered.The

breach might have caused a chain reaction of events to

occur. Clearly, there is a point beyond which the damage

becomes too remote from the original breach. The rules

relating to remoteness of damage were laid down in

Hadleyv Baxendale(1854). The injured party may recover

damages for:

■loss which has resulted naturally and in the ordinary

course of events from the defendant’s breach; and

■the loss which, although not a natural consequence of

the defendant’s breach, was in the minds of the par-

ties when the contract was made.

The practical application of these rules can be seen in

the following cases.

Victoria Laundry (Windsor) Ltdv Newman

Industries Ltd(1949)

The claimant company of launderers and dyers wished to

expand its business and, for this purpose, had ordered a

new boiler from the defendants. The boiler was damaged

during the course of its removal and, as a result, there was

a five-month delay in delivery. The claimant claimed:

(a) damages of £16 per week for the loss of profits it

would have made on the planned expansion of the

laundry business; and