Bridge v Campbell Discount Co Ltd
[1962] 1 All ER 385(Judgment by: LORD MORTON OF HENRYTON)
Bridge
vCampbell Discount Co Ltd
Judges:
VISCOUNT SIMONDS
LORD MORTON OF HENRYTONLORD RADCLIFFE
LORD DENNING
LORD DEVLIN
Judgment date: 25 January 1962
UK
Judgment by:
LORD MORTON OF HENRYTON
My Lords, the events leading up to this appeal are as follows: By an agreement in writing dated 20 July 1959, and made between the respondents and the appellant, the respondents agreed to let and the appellant agreed to hire (with an option to purchase as therein provided) a used Bedford Dormobile motor car described therein as having been manufactured in the year 1954, for a total hire-purchase price of £482 10s, payable as follows: (a) By an initial rental of £105, payable as to £10 in cash and as to £95 by an allowance on another motor car then surrendered by the appellant in part exchange; (b) by thirty-six consecutive monthly rentals thereafter of £10 9s 2d each, the first such rental being due on 20 August 1959; (c) by a final payment of £1 to be paid with the last of such monthly rentals in consideration of the exercise by the appellant of his option to purchase. By cl 4 of the agreement, the appellant agreed:
"(a) To keep and maintain the vehicle at his own expense in good order repair and condition, not to make any alteration to it without the written consent of the owners, to report to the owners any damage to the vehicle so soon as the same has been caused, to keep the owners informed of the address of the hirer, to notify the owners of any change of place where the vehicle is housed or ordinarily kept, to permit the owners or their duly authorised representative to inspect the vehicle at any reasonable hour and to provide facilities to enable them to do so.
"(b) To keep the vehicle during the currency of this agreement in his own possession and control and not take the said vehicle out of the United Kingdom without the previous written consent of the owners.
"(f) To use his best endeavours to have carried out within ten days all repairs necessary to remedy any damage suffered by the vehicle and all repairs which the owners may at their discretion reasonably require the hirer to have effected, all such repairs to be carried out at the hirer's expense ... "
Clause 5 provides:
"If the hirer shall have punctually paid all sums due to the owners under this agreement and shall further have strictly observed and performed all the terms conditions and obligations on his part herein contained, he shall have the option to purchase the vehicle for the sum of £1 (one pound) but until such option is exercised the vehicle shall remain the sole and absolute property of the owners."
Clause 6 to cl 9 of the agreement are as follows:
"6. The hirer may at any time terminate the hiring by giving notice of termination in writing to the owners, and thereupon the provisions of cl. 9 hereof shall apply.
"7. If the hirer shall fail to pay any sum due hereunder or to observe any of the stipulations in cl. 4 hereof or any other stipulations on his part contained herein the owners may thereupon and without notice terminate the hiring and/or this agreement, and may, subject only to the restriction of the owner's rights to recover (where the hire-purchase price does not exceed £300 and contained in the statutory notice hereto), retake possession of the vehicle whereupon the provisions of cl. 8 hereof shall apply.
"8. Without in any way derogating from their rights under cl. 7 hereof, and without discharging or prejudicing any pre-existing liability of the hirer to the owners (including the liability of the hirer under cl. 9 hereof), this agreement and the hiring hereunder shall forthwith and for all purposes be determined absolutely and come to an end and neither party shall thereafter have any rights hereunder, and the right of the hirer to possession of the vehicle shall cease without any previous notice or demand being given by the owners, who shall be entitled to immediate possession of the vehicle and to retake and resume possession of the vehicle upon the happening of any of the following events: (a) Upon the death of the hirer. (b) The abandonment of the vehicle by the hirer. (c) If any step should be taken to levy a distress or if a distress should be levied or threatened to be levied upon the goods of or in possession of the hirer or upon the premises where the vehicle may be for rent, rates, or taxes. (d) If the hirer should commit or suffer to be committed any act of bankruptcy or have a receiving order made against him. (e) If the hirer, being a limited company, should be liquidated or wound up or have a petition for winding-up presented against it or pass a resolution for voluntary winding-up (otherwise than for the purpose of bona fide reconstruction) or have a receiver appointed. (f) If any step should be taken by any judgment creditor of the hirer to levy execution upon the goods of or in possession of the hirer.
"9. If this agreement or the hiring be terminated for any reason before the vehicle becomes, under cl. 5 hereof, the property of the hirer, then the hirer shall no longer be in possession of the vehicle with the owner's consent and the hirer shall forthwith (a) at his own cost and risk deliver up the vehicle in a proper state of repair and condition together with all necessary licences, registration books or certificates, insurance policy and other documents relative to the vehicle to the owners at such address as they may direct; and (b) pay to the owners all arrears of hire rent due and unpaid at the date of termination of the hiring together with interest thereon stipulated under cl. 1 hereof and by way of agreed compensation for depreciation of the vehicle such further sum as may be necessary to make the rentals paid and payable hereunder equal to two-thirds of the hire-purchase price as specified in the schedule hereto; and (c) pay to the owners such other sums due and payable hereunder including all expenses incurred by the owners in ascertaining the whereabouts of the hirer and/or in tracing and recovering possession of the vehicle and putting it into reasonable repair order and condition, fair wear and tear excepted ... "
Since the hire-purchase price arising under the agreement exceeded the sum of £300, the provisions of the Hire-Purchase Act, 1938, as amended, did not apply thereto.
The respondent complied with his obligations in respect of the initial rental of £105, and paid the sum of £10 10s in respect of the first monthly rental of £10 9s 2d which fell due on 20 August 1959. On 3 September 1959, the appellant wrote to the respondents in the following terms:
"Owing to unforeseen personal circumstances I am very sorry but I will not be able to pay any more payments on the Bedford Dormobile. Will you please let me know when and where I will have to return the car. I am very sorry regarding this but I have no alternative."
The respondents did not reply to that letter, and, on or about 14 September 1959, the appellant returned the motor vehicle to Messrs Monarch Car Services, who were the motor dealers concerned in the transaction. On 17 March 1960, the respondents began proceedings in Ilford County Court against the appellant. For reasons which will appear hereafter, I must refer to the pleadings. Paragraph 1 of the particulars of claim set out briefly the terms of the agreement of 20 July 1959. Paragraph 2 and para 3 were as follows:
"2. It was a provision of the said agreement that if the [appellant] should terminate the hiring he should pay to the [respondents] by way of agreed compensation for depreciation a sum equal to two-thirds of the hire-purchase price less payments already made.
"3. On or about Sept. 14, 1959, the [appellant] purported to terminate the hiring by returning the said vehicle to Messrs. Monarch Car Services of 625, Romford Road, Manor Park, London, E.12, from whom the [respondents] had purchased the said vehicle to let on hire with option to purchase to the [appellant]. The liability of the [appellant] on termination is calculated as follows:
£ s. d. £ s. d. "Two-thirds of the hire-purchase price 321 13 4 "Less deposit 105 0 0 "Instalments received 10 10 0 115 10 0 £206 3 4
"And the [respondents] claim the sum of £206 3s. 4d."
The defence was as follows:
"1. Paragraph 1 of the particulars of claim is admitted.
"2. The [appellant] admits that on or about Sept. 14, 1959, he terminated the said agreement. The [appellant] denies that he is indebted to the [respondents] in the sum claimed or in any other sum. The alleged compensation for depreciation equal to two-thirds of the hire-purchase price is a penalty and is not recoverable."
The learned county court judge, after hearing the solicitors for both parties, recorded his judgment as follows: "Hold penalty. Claims dismissed." From this judgment, the respondents appealed. The Court of Appeal allowed the appeal and gave judgment for the respondents for £206 3s 4d with costs. The court, holding that the appellant had exercised his option to terminate the hiring under cl 6 of the agreement, followed the decision of the Court of Appeal in Associated Distributors, Ltd v Hall , where Slesser LJ said ([1938] 1 All ER at p 513; [1938] 2 KB at p 87):
"This is a case where the hirer has elected to terminate the hiring. He has exercised an option, and the terms on which he may exercise the option are those set out in cl. 7. The question, therefore, whether these payments constitute liquidated damages or penalty does not arise in the present case for determination."
My Lords, in my opinion Associated Distributors, Ltd v Hall was rightly decided, and, if I had thought that, in the present case, the appellant exercised his option under cl 6 of the agreement of 20 July 1959, I should have agreed with the decision of the Court of Appeal in the present case. In that event, the appellant would have been bound to pay the stipulated sum of £206 3s 4d, not by way of penalty or liquidated damages, but simply because payment of that sum was one of the terms on which the option could be exercised. I am of opinion, however, that the appellant never had the slightest intention of exercising the option contained in cl 6, and the terms of his letter show that he did not have cl 6 in mind. He frankly and simply informs the respondents that "I will not be able to pay any more payments on the Bedford Dormobile." There is no reference to any option, and I cannot reconcile the statement just quoted with the view that he intended to exercise an option, the terms whereof put him under an immediate obligation to pay a further large sum to the respondents. To my mind, the letter means that the writer feels reluctantly compelled to break his agreement, and the apologetic terms of the letter confirm me in this view. Why should the hirer apologise so humbly, twice, if he thought that he was merely exercising an option given to him by the agreement? Another indication that he never thought of the option is the fact that he returned the car to the dealers, whereas, under the clear terms of the option, he was bound to return it to the respondents.
The respondents contended in this House that the defence of the appellant, already set out, amounted to an admission that he had exercised his option under cl 6. My Lords, I cannot agree. The date mentioned in the defence is 14 September 1959, when the car was returned to the dealers. If the appellant "terminated the agreement" under the option, he must have done so on 3 September when he gave the "notice in writing" required by cl 6. The defence alleges that the termination was effected by an act, namely the return of the vehicle, and not by any notice in writing. For these reasons, I think that no admission was made. Moreover, in the Court of Appeal, counsel for the appellant argued that he had not exercised the option and no objection was raised to his so arguing.
My Lords, if I am right so far, the appellant has clearly committed a breach of the hire-purchase agreement by failing to pay the subsequent instalments, and it becomes necessary to consider whether the payment stipulated in cl 9 (b) of the agreement was a penalty or liquidated damages.
"The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage."
See per Lord Dunedin in Dunlop Pneumatic Tyre Co, Ltd v New Garage & Motor Co, Ltd ([1914-15] All ER Rep at p 741; [1915] AC at p 86). I find it impossible to regard the sum stipulated in cl 9 as a genuine pre-estimate of the loss which would be suffered by the respondents in the events specified in the same clause. One reason will suffice, though others might be given. This was a second-hand car when the appellant took it over on hire-purchase. The depreciation in its value would naturally become greater the longer it remained in the appellant's hands. Yet the sum to be paid under cl 9 (b) is largest when, as in the present case, the car is returned after it has been in the hirer's possession for a very short time, and gets progressively smaller as time goes on. This could not possibly be the result of a genuine pre-estimate of the loss. Further, in my view, the provisions of cl 9 were "stipulated as in terrorem" of the appellant. As counsel for the appellant put it: "They are intended to secure that the hirer will not determine the agreement until at least two-thirds of the price has been paid." The result is that the appellant is entitled to relief in accordance with the principles laid down by Lord Thurlow LC in Sloman v Walter .
In the course of the argument, your Lordships' attention was directed to s 4(1) of the Hire-Purchase Act, 1938, which is as follows:
"A hirer shall, at any time before the final payment under a hire-purchase agreement falls due, be entitled to determine the agreement by giving notice of termination in writing to any person entitled or authorised to receive the sums payable under the agreement, and shall, on determining the agreement under this section, be liable, without prejudice to any liability which has accrued before the termination, to pay the amount, if any, by which one-half of the hire-purchase price exceeds the total of the sums paid and the sums due in respect of the hire-purchase price immediately before the termination, or such less amount as may be specified in the agreement."
Counsel for the respondents submitted that the effect of that subsection is the same as the effect of cl 9 (b), with the substitution of "one-half" for "two-thirds" of the hire-purchase price. He further submitted that this is a trivial difference, and that the legislature cannot have thought that s 4(1) was a penal provision. This was, he said, a strong indication that cl 9 (b) was not a penal provision. My answer is that s 4 confers an option, and an option to determine an agreement cannot be a penal provision, because the person to whom the option is given is free to exercise it or to disregard it, as he thinks fit. For this reason, I cannot draw any inference from the terms of s 4(1) of the Act of 1938.
I would allow the appeal with costs, and remit the case to the county court to ascertain the amount of the damages (if any) suffered by the respondents as a result of the appellant's breach of contract.