Previous cases

[joneshousehold]

In an idle moment of browsing I came across a website of case references and spotted this one

Lordsvale Finance Plc -v- Bank of Zambia Times, 08 April 1996; [1996] QB 752

It is on the website of swarb.co.uk. I have a link here

http://www.swarb.co.uk/lisc/Banki19961996.php[/url]

 

it says

The court looked at a provision for prospective increase in the interest rate payable by a borrower, following the borrower's default. Held: A term in a contract providing for a modest increase of one per cent in the interest rate in the case of a default was not a penalty and therefore not invalid. The court analysed the concept of a penalty as follows: "whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred." A dichotomy between a genuine pre-estimate of damages and a penalty does not always cover all the possibilities. Although the payment of liquidated damages is "the most prevalent purpose" for which an additional payment on breach might be required under a contract "…. the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach."

 

The emphasis is on whether the charge commercially justifiable or if the dominant purpose is to deter.

 

I expect you have already seen this but I thought I would post it anyway - just in case.

[BankFodder]

Haven't seen this. Good case. Thanks

[martinwhite]

Actually, I think you have missed the emphasis of the last line.

 

There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach."

 

The emphasis is on whether the charge commercially justifiable or if the dominant purpose is to deter.

 

You have described an either or situation. I think its more subtle than that.

 

Unless I have misread, I interpret the last sentence as saying that even if the charge is commercially justifiable, if its dominant purpose is to deter the other party from breaching the contract, then it is a penalty. This is the section that I have marked in bold.

 

I agree that this is up for debate however.

 

M

[martinwhite]

Dave,

 

That is my understanding. However, if the sum was a true pre-estimate, and therefore commercially viable, I don't know how you would differentiate. But it seems to be there in black and white.

 

There is an excellent and balanced discussion of this, including the key phrase "In terrorem" in this case

 

http://www.hmcourts-service.gov.uk/judgmentsfiles/j2089/cine-bes.htm

 

See para 12.

 

Also contained here, there is legal backing for the banks closing the account and demanding immediate repayment. However I should emphasise that this is a commercial case and personal consumer contracts must be viewed slightly differently due to the differences in negotiating status.

 

Another authority for penalties is given at para 11;

 

Privy Council in Workers Trust Bank Ltd. v. Dojap Ltd. [1993] AC 573:

"In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach."

[joneshousehold]

This topic was closed on 03/06/19.

If you have a problem which is similar to the issues raised in this topic, then please start a new thread and you will get help and support there.

If you would like to post up some information which is relevant to this particular topic then please flag the issue up to the site team and the thread will be reopened.

- Consumer Action Group