Last edited 27 Oct 2020

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd

The case of Dunlop Pneumatic Tyre Co. Ltd. v New Garage and Motor Co. Ltd. [1914] created a precedent for the extent to which liquidated damages may be sought for failure to perform a contract.

The facts of the case are that Dunlop believed that New Garage had breached an agreement not to resell their tyres at a lower price than that stipulated in the contract, and so sued them. The agreement said that, in the event of such a dispute arising, New Garage would pay ‘by way of liquidated damages and not as a penalty’, a sum of £5 per tyre.

The £5 sum was held by the judge to be enforceable, however, the Court of Appeal held that it was a penalty. Dunlop appealed this decision. The House of Lords held that Dunlop were entitled to enforce the agreement as it was a ‘genuine pre-estimate’ of their potential loss as opposed to being a penalty. The ruling held that if the sum is not genuine, or of an unconscionable amount, it may be considered a penalty by the courts and so will be unenforceable.

The ruling of Dunlop has been significant in the construction industry, particularly in the case of contractors who have finished construction works later than the date required by the contract but try to demonstrate that the liquidated damages provision in the contract are not enforceable. In recent years, the courts have been increasingly unwilling to find such provisions to be penal.

For more details about the case ruling, see The distinction between liquidated damages clauses and penalty clauses.