Bridge v Campbell Discount Co Ltd
[1962] 1 All ER 385(Decision by: LORD DEVLIN)
Bridge
vCampbell Discount Co Ltd
Judges:
VISCOUNT SIMONDS
LORD MORTON OF HENRYTON
LORD RADCLIFFE
LORD DENNING
LORD DEVLIN
Judgment date: 25 January 1962
UK
Decision by:
LORD DEVLIN
My Lords, for the reasons given by my noble and learned friends, Lord Morton Of Henryton and Lord Radcliffe, I agree with them that the appellant did not, by his letter of 3 September 1959, exercise the option given to him by cl 6 of the agreement, but that then or thereafter he committed a breach of that agreement enabling the respondents, under cl 7, to terminate it, which they did. It follows, in my opinion, that the court should not enforce the provision in cl 9 of the agreement for payment of agreed compensation for depreciation if it is shown that the object and effect of that provision is to deter the appellant from breaking his contract by imposing on him, if he does, a penalty in excess of the damages otherwise recoverable. I agree with all your Lordships in thinking that, on this point, Cooden Engineering Co, Ltd v Stanford was rightly decided. Finally, I agree that the sum made payable on termination by cl 9 is penal in character, and so cannot be recovered. The result is that, in my opinion, the appeal should be allowed.
In the course of the hearing in your Lordships' House, there was considerable discussion about the true effect of cl 9, on the footing that the letter of 3 September did amount to the exercise of an option. The noble and learned Viscount on the Woolsack considers that it did, and has expressed his opinion accordingly; and others of your Lordships, having regard to the importance of the point and to the full argument which took place on it, have expressed their opinion on the same footing. For my part, on this point I agree with the conclusion reached by my noble and learned friend, Lord Denning, and I think that Associated Distributors, Ltd v Hall was wrongly decided; and I shall express shortly my reasons for so thinking.
If a hire-purchase agreement is terminated before its natural end and the car is returned to or retaken by the owner, it will usually have depreciated in value and be worth less than the cash price paid for it. This will cause loss to the owner if the depreciation exceeds in value that part of any instalments paid as is to be counted as return of capital. The possibility of such an excess is a contingency against which the owner is entitled to protect himself. If the sum payable on termination under cl 9 (b) "by way of agreed compensation for depreciation of the vehicle" could be justified as a genuine pre-estimate of that excess, it would, I think, be recoverable under the agreement, whether the termination was the result of a breach, or of the exercise of the option, or of some other event. Viewed in relation to a breach, it would represent a pre-estimate of one head of the damage flowing from the breach; and an agreement genuinely liquidating one head of damage is, I think, just as good as one which liquidates the whole. When your Lordships have determined that cl 9 (b), when it comes into operation as the result of a breach, is a penalty clause, your Lordships must also have determined that the clause contained no genuine estimate of the loss caused to the owners by depreciation, and no genuine agreement that a sum should be paid in respect of it. There is no half-way house between a penalty and liquidated damages. However large the sum stipulated may be, if it is a genuine covenanted pre-estimate of damage, it is not stipulated as in terrorem, and so cannot be a penalty. If, therefore, your Lordships had taken cl 9 (b) at its face value, and had supposed that, as it states, there was really an agreement about the sum to be paid as compensation for depreciation (I do not mean necessarily a separate collateral agreement; an estimate in which the appellant acquiesced would serve the purpose) the respondents would inevitably have succeeded in their claim. The claim fails because your Lordships decline to take the words of cl 9 (b) at their face value. It is well settled that, when a court of law finds that the words which the parties have used in a written agreement are not genuine and are not designed to express the real nature of the transaction but for some ulterior purpose to disguise it, the court will go behind the sham front and get at the reality. That, indeed, is what the court is doing when it declares that what is expressed as an agreement about liquidated damages is not a genuine agreement, but cloaks the imposition of a penalty. The respondents have failed in this case because, wishing to make the appellant pay an extravagant sum if the contract was terminated under cl 6, cl 7 or cl 8, and aware that, if it was terminated under cl 7, the sum would or might be treated as a penalty, they chose to record a fictitious agreement to treat the sum as compensation for depreciation. As I understand it, none of your Lordships believes that the sum was arrived at in that way. There never was any agreement, genuine or purported, to pay compensation generally or except in relation to a specific sum; and so, if the sum was not genuine, there can be no genuine agreement at all. My Lords, I do not see how an agreement can be genuine for one purpose and a sham for another. If it is a sham, it means that it was never made and does not exist; if it does not exist, it must be ignored altogether. It cannot be a part of cl 9 when that clause is applied by virtue of cl 6 or cl 8, and not a part of it when it is applied by virtue of cl 7. There is no agreement to pay a sum irrespective of depreciations, as the price of exercising the options, and I am not prepared to construct one.
On this comparatively narrow ground, I should (if I had construed the letter of 3 September as the exercise of an option) have held that the appellant was, nevertheless, entitled to succeed. I have not fully considered the wider grounds on which my learned and noble friend, Lord Denning, reaches the same conclusion nor those on which Lord MacDermott CJ reached a similar conclusion in his dissenting judgment in Lombank, Ltd v Kennedy, Lombank, Ltd v Crossan .
I desire to reserve my opinion on them for, if they come to be considered in any future case, I think much might depend on the language of the option clause.
Appeal allowed ; case remitted to county court .
Solicitors : E Edwards, Son & Noice (for the appellant ); Ronald Brooke & Co, Ilford, Essex (for the respondents ).
Wendy Shockett Barrister.