18 But it does not necessarily follow that clause 20.3(c) is void as a penalty; indeed the main issue in the case is whether, as Mr Coles submits, the law of penalties does not apply to it at all because the clause is not conditioned on any breach, but on an event, and the contract was terminated, not for breach, but pursuant to a right to do so upon occurrence of an event. It was Mr Coles' submission that on its proper construction, clause 20.3(c) of the LOMA was not concerned with termination for breach, but rather that the parties, having negotiated at arm's length and with no suggestion of their consent being vitiated by unconscionability, had stipulated that upon the happening of certain events, a certain consequence should follow regardless of any question of breach of contract, and that in such circumstances, no question of penalty could arise [for which he cited Export Credits v Universal Oil Co; O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 367 (Gibbs CJ); Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445, [2] (Davies JA); [28] (Thomas JA); [30] (Ambrose J); PC Developments Pty Ltd v Revell, 625G-626C, 627G-628G (Mahoney JA); and Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd, [113], [140]-[148] (Hansen J)]; and that it necessarily followed that the first question must be answered in the negative, with the result that the second question did not arise.
19 The proposition that the doctrine relating to the unenforceability of penalties is confined to payments (and transfers, forfeitures, retentions or withholdings) agreed in advance to be made in respect of, but which are not a genuine pre-estimate of the damage arising from, a breach of obligation by one party - and thus that a provision in a contract providing for payment of money by one party on the occurrence of a specified event, rather than on breach of a contractual duty, cannot be a penalty - is well-supported by authority, although reservations have not infrequently been expressed. In considering the authorities, almost all of which arise in the context of the relevant event being termination of a hire-purchase agreement or a chattel lease, it is useful to bear in mind three classes of case to which they have referred:
· First, those in which a liability to pay a stipulated sum is imposed in the event of the hirer/lessee terminating the contract in accordance with its terms by returning the goods to the owner/lessor;
· Secondly, those in which a liability to pay a stipulated sum is imposed in the event of the owner/lessor exercising a right to terminate the contract upon an "event of default" (such as death, insolvency, or issue of execution against the lessee) where there is no contractual promise that such event of default will not occur - which is the present case; and
· Thirdly, those in which a liability to pay a stipulated sum is imposed in the event of the owner/lessor exercising a right to terminate the contract for breach by the hirer/lessee.
20 The relevant authorities begin with Elsey & Co Ltd v Hyde (1926), an otherwise unreported decision of a Kings Bench Divisional Court, mentioned in Jones & Proudfoot on Hire-Purchase Law, 2nd ed, which has had extraordinary influence in the evolution of the law in this field. Salter J, with whom Fraser J agreed, said, in the context of a hire-purchase contract which provided for payment of a sum upon termination of the contract within eight months, that the question whether an agreed sum was a penalty or not arose where the contract provided that if one party has done something which it ought not do and which has prejudiced the other, it would give the other a right to damages; that is, in cases where the person who is to pay has broken a contract with the other or done something which entitled the other to damages. The contract could be terminated by the hirer or by the owner. If it was terminated by the owner returning the goods in accordance with the contract, there was no breach and no right to damages; and if it was not a penalty in those circumstances, nor was it if the termination was by the owner retaking the goods, even though in consequence of a breach of contract by the hirer. Nor was it a penalty if the termination by the owner was in consequence of an event which was not a breach of the contract - for example, the issuing of execution against the hirer [the passages are cited by Simonds J in In re Apex Supply Company Ltd [1942] Ch 108, 115-117; [1941] 3 All ER 473, 479; and by Jenkins LJ in Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86; [1952] 2 All ER 915, 923-4] (emphasis added):
Supposing the hirer exercises his right to terminate this hiring, how can it be said that this sum of money, which it is agreed shall be paid, is a penalty or that it is a case in which either the agreed sum or liquidated damages must be paid? If the hirer terminates this agreement, what right does that give the owner to recover any damages against him? He has done him no wrong, he has broken no contract, and I am quite unable to see that this sum would or could give a penalty if it were claimable in those circumstances. It appears to me to be a strange conclusion, if this money is to be regarded as a penalty, where it was payable in one event and not regarded as a penalty where it was payable in another event. I think, therefore, as it is to my mind not a penalty where it is payable on the return of the article by the hirer, it ought not to be regarded as penalty where it was payable on the retaking of the article by the owner. Then the next case I take is where the money is paid on the determination of the hiring by the owner, not as in this case in consequence of the conduct of the hirer which is a breach of contract, but in consequence of the happening of an event which is not a breach of the contract. For example, supposing the owner justifies his right to re-take under cl. 8, because execution has been issued against the hirer. There is no wrong done by the hirer to the owner, and it is no breach of any contract which the hirer has made with the owner. How could that event give to the owner of the goods any right to recover damages against the hirer, liquidated or unliquidated? It appears to me that no question of penalty could arise in such a case, and if this sum is not a penalty where it is payable on the determination of the hiring by the owner, by reason of the levy of execution, it seems to me it would be a strange result if it were to be held a penalty where it is payable on the termination of the hiring by the owner on the ground of non-payment of rent by the hirer . That is this case. Then there is a third case I take, and that is this one, where the hire is determined by the owner, because the hirer is in arrear with his payments. It is proved that this is a breach of this contract, and it is proved that that breach, apart from any termination of the hirer, would give the owner a right to damages against the hirer. But what would those damages be? They would be interest on the amount unpaid and nothing more. The fact that the hirer is in arrear with his payments will not entitle the owner to any damages for depreciation of these things. The reason that they have suffered is that they have second-hand goods put on their hands before they have received very much money in respect of them. That is not the result of the hirer's breach of contract, in being late in his payments, it is the result of their own election to determine the hiring, and it appears to me, even in this case, there is no question of penalty at all, and there is no question whether the sum paid shall be regarded as liquidated damages or a penalty.
21 Elsey v Hyde was a case in the third class - termination for the hirer's default in the obligation to pay instalments. The fundamental proposition advanced by Salter J - particularly in the two passages emphasised above - was that (a) insofar as the contract provided for payment of an agreed sum on termination by the hirer returning the goods (the first class of case), it was not a penalty because it was not conditioned on breach, and it could not therefore be a penalty where it was payable on termination by the owner (the second and third classes); (b) insofar as the contract provided for payment of an agreed sum on termination upon an event which was not a breach of contract (the second class of case), it was not a penalty because it was not conditioned on breach, and so it could not be a penalty in the third class of case, because it was not conditioned on breach but on the owner's election to terminate which could arise in numerous circumstances, many of which did not involve breach. As shall be seen, this fundamental proposition has since been authoritatively rejected, in the Court of Appeal [Cooden Engineering Co Ltd v Stanford], the House of Lords [Bridge v Campbell Discount Co], and the High Court of Australia [O'Dea v Allstates Leasing System (WA) Pty Ltd, 367 (Gibbs CJ), 390 (Brennan J); AMEV-UDC v Austin, 184-5 (Mason and Wilson JJ), 211 (Deane J)], and it is now accepted that the third class of case involves an unenforceable penalty if the agreed payment is not a genuine pre-estimate of the loss.
22 In Chester & Cole Ltd v Avon (1929) [also unreported, mentioned by Simonds J in Apex, 117], Hawke J followed Elsey v Hyde, apparently without elaboration.
23 The next case, Chester & Cole v Wright [also unreported, mentioned by Simonds J in Apex, 118], was a decision of a Divisional Court constituted by Lord Hanworth MR and Greer LJ. There were two issues - whether the question of penalty or liquidated damages arose at all, and if so whether the sum was a genuine pre-estimate. Lord Hanworth did not address the first issue, but found on the second that the sum was a genuine pre-estimate and accordingly enforceable. Greer LJ came to the same conclusion, but added some observations in respect of the first issue, on which he said, somewhat diffidently (emphasis added):
The second question to be determined is a little more difficult. It is whether the sum of 95 l , diminished by the amounts already paid, is to be deemed to be a penalty for breach of a contract, and not damages, or, as may well be, that it is neither one nor the other, that it is neither a penalty, nor is it liquidated damages, but it is a sum which, in consideration of getting the use of this car, the hirer promised to pay in a certain event, that event being the determination in one way or another of the hiring agreement. There is no reason in law why, for a sufficient consideration, there should not be on the same document two contracts, one a contract to hire the motor-car on the terms of the agreement, and another, a contract that if that agreement comes to an end, then a certain sum will be payable by the hirer; and it may very well be that the view which is, I think, the view of Salter J, in Elsey & Co Ltd v Hyde , which was cited before us, is the right way to look at this clause, namely, that it is not either liquidated damages or a penalty, but it is a sum payable in respect of one event, namely, the determination and end of the hiring agreement, whether that end of the hiring agreement arises from the hirer delivering the car back again, or whether it arises from the owner taking it out of the possession of the hirer in the events in which he is entitled to take it out .
24 The first emphasised passage shows that the decision is affected by the view, since exposed as erroneous, that it is somehow relevant that the sum in question is part of the consideration for the whole contract, in the absence of which the price might have been higher. The High Court has stated that it is no answer to a contention that a provision is void as a penalty that it forms part of the consideration, in the absence of which the price would have been higher. In Ringrow v BP Australia, the Court said:
[37] There is, however, one argument advanced by the respondent which should be rejected. As part of an argument that the penalty doctrine did not apply in this case, the respondent contended:
The option was part of the consideration for the original conveyance of [BP Lansvale]: see special condition 38 of the [Contract for Sale of Site] ... The option encumbered the original conveyance. Had the option not been part of the consideration, the purchase price would have been higher.
[38] There is an echo of this argument in the reasoning of the courts below [ Ringrow Pty Ltd v BP Australia Ltd (2003) 203 ALR 281 at 303 [103]; Ringrow Pty Ltd v BP Australia Pty Ltd (2004) 209 ALR 32 at 44 [30]]. By itself, that point could not prevent a conclusion that a contractual term was a penalty, for in almost every case the impugned term will be part of the consideration for the innocent party's promises, and it can be said that if it had not been so, the other elements of the consideration required by the innocent party would be more valuable.
25 The second emphasised passage repeats the fundamental proposition in Elsey, which, as I have said, has since been rejected.
26 In Associated Distributors Ltd v Hall [1938] 2 KB 83, a hire-purchase agreement had been terminated by the hirer, who as a result was contractually obliged to pay a sum of money to the owner (the first class of case). The Court of Appeal, having been referred to the above-mentioned cases, concluded that no question of penalty or liquidated damages arose in those circumstances; however, the case was one in the first class, and dealt only with the position where the hirer determined the contract, deciding that in that event the hirer must pay the sum fixed as a minimum payment; it says nothing about the second or third class of case. It is true that no disapproval was expressed of the reasoning in the earlier cases, but Slessor LJ made clear that it was not necessary to express any opinion upon them because they had nothing to do with the instant case; Scott LJ agreed with Slessor LJ, adding that he wished to make clear that the Court was "expressing no opinion at all" on three other cases, in the third class, that the same County Court judge had decided concurrently with the case under appeal (holding that penalties were involved in all four cases); and Clauson LJ also agreed. The distinction of a case in the first class is not an insignificant one: the hirer chooses to be relieved from further obligations by paying the sum specified in accordance with the terms of the contract, whereas in the second or third class of case, the owner elects to terminate for an event upon which termination is authorised, and to gain a benefit wholly disproportionate to any loss occasioned to it by the relevant event.
27 In re Apex Supply Co concerned a hire-purchase agreement under which the hirer agreed that if it went into liquidation and the owner retook possession of the goods within nine months from the date of the agreement, the hirer would pay, in addition to payments already made, a further sum which with previous payments would total £1020, by way of compensation for depreciation of the goods. Those events occurred, and the owner claimed a sum of £676 pursuant to the provision. The case was therefore one in the second class. Simonds J held that the question whether the sum payable was a penalty or liquidated damages did not arise, as the sum became payable on a certain event - namely termination consequent upon liquidation - and not by way of damages for breach of the agreement; and further that even if it were in respect of damages, it was seemingly a genuine pre-estimate. In reaching that conclusion, his Lordship referred to the cases so far mentioned. Citing extensively from Elsey v Hyde, his Lordship interposed, after the first emphasised passage in the quotation above [[1942] Ch 108 (at 116)] (emphasis added):
If I may pause there in the reading of the learned judge's judgment, it exactly covers the case I have to consider to-day, and, if that stood alone, I do not think I should be justified in taking a view on this common commercial document different from that which the learned judge took, a view from which, as I shall show, no dissent has been expressed by any court before which the matter has come.
28 Thus, though a case in the second class, Apex is founded on the view expressed in Elsey v Hyde, that as an agreed payment on termination by the hirer returning the goods (the first class) was not a penalty, so a termination by the owner repossessing in accordance with a contractual right (the second and third classes) could not be a penalty. Simonds J also relied heavily on what Greer LJ had said in Chester & Cole v Wright, which he said was "of the greatest importance": however, it too relied on the same subsequently discredited proposition from Elsey v Hyde; moreover it was a diffidently expressed observation, obiter dicta, in a concurring judgment where the leading judgment did not address the issue. Further, Simonds J relied on the absence of any disapproval of the earlier cases in Associated Distributors - but the Court in Associated Distributors simply did not have to consider the correctness of those cases and made clear that it did not. Simonds J's decision therefore rests on Elsey, the reasoning in which is no longer at least fully sustainable and the result in which is now overruled, but which Simonds J essentially adopted for his own reasoning; on the diffident expression of opinion by Greer LJ in obiter dicta in Wright; and on an inferred endorsement of the earlier unreported cases by the Court of Appeal in Associated Distributors, which on examination does not bear that character. Apex is potentially important, because it seems to be the only case in the second class, but its authority is seriously undermined by the subsequent authoritative rejection of its ratio - that if the payment is not a penalty where it is payable on the return of the article by the hirer, it ought not to be regarded as penalty where it was payable on the retaking of the article by the owner.
29 The first case in which that view was rejected was Cooden Engineering Co Ltd v Stanford, in which the Court of Appeal held that where money was expressed as being payable on an event, but the event was also a breach of contract, the sum could not be recovered if it was penal in amount. The agreement provided (1) for termination by the hirer returning the vehicle to the owners whereupon the hirer would be under no further liability except to pay to the owners (a) all instalments of hire which had fallen due prior to the date of return and are unpaid and (b) forty per cent of the total amount of the monthly instalments which have not then fallen due (said to be in lieu of compensation for agreed depreciation in the market value of the vehicle between the date of this agreement and the date of the return of the vehicle) (cl 10); (2) that should the hirer fail to make any payment on the due day, or die, the owners may by twenty-four hours notice in writing determine the hiring, and should the hirer commit any act of bankruptcy or a receiving order be made or make any arrangement or composition with creditors or an execution or distress or legal process be levied or threatened upon the vehicle or fail to observe or perform any agreement or condition contained in the agreement, the hiring shall ipso facto be determined, and on any such determination by notice or otherwise the full balance then remaining unpaid of the total hire, together with all costs charges and expenses which the owners may incur in exercise of their powers shall at once become payable to and be recoverable by them (cl 11); and (3) if the hirer should duly make all payments and strictly observe and perform all the terms and conditions contained in the agreement, he should have the option of purchasing the vehicle for the sum of 10s, but that no such option should arise in case of termination of hiring under cll 10 and 11 (cl 12). The vehicle was delivered to the hirer and remained in his possession for nearly two years during which he paid, in addition to the initial instalment, seven of the monthly instalments. The owners gave notice determining the hire under cl 11, and repossessed the vehicle. They claimed the arrears of instalments and the balance of the total hire, under cl 11. The hirer contended that, as under cl 11 the owners were entitled to receive the full price of the car and the car itself, the sum claimed was excessive and amounted to a penalty. Accordingly, the case was in the third class - termination by the owner for an event which was also a breach of contract, but the contract also provided for payment of an agreed sum in the first and second classes, though in the first class it was discounted to 40% of the outstanding balance and explained as allowance for depreciation.
30 Somervell LJ, after considering Apex Supply and the unreported cases referred to in it, concluded that the proposition which founded Elsey v Hyde and Apex Supply - that a sum exigible for a breach or breaches could not in law be a penalty because it is made payable on the happening of some other event which is not a breach - was wrong, and that if the agreed amount was not a genuine pre-estimate of the damage, the payment in a case in the third class was an unenforceable penalty (at 920):
These passages suggest two lines of reasoning. The first is that, if a sum is payable on the happening of one or other of two events, if it is not a penalty in the one case it cannot be in the other. If this is suggested by Salter J I cannot, with respect, accept it. The events may, in fact, be so similar that a conclusion on one decides the other. The sum payable if the buyer desires to return the car may so clearly be a reasonable figure to cover depreciation that it would also be a reasonable pre-estimate if the owner exercises any right he has to terminate the agreement on a breach. But it cannot, I think, follow as a matter of law that a sum exigible for a breach or breaches cannot in law be a penalty because it is made payable on the happening of some other event which is not a breach. The second line of reasoning is put, if I may say so, very clearly in the passage cited from the judgment of Greer LJ. It is that the law as to penalties is inapplicable if the owner under the agreement is entitled to "determine" the agreement as the result of any breach. If in a contract of this kind, without the special provisions of cl 11, the hirer committed a breach going to the root of the contract, the owner would be entitled to treat this as a repudiation, to re-take possession of the car, to be free from all further obligations to let the hirer have possession of the car, and to sue for damages. In other words, to determine the contract and claim damages. The effect of the words we are considering is, I think, to give the same rights in the event of any failure to make punctual payment. The effect of this clause is, first, to make punctual payment a condition of the contract, and then to provide for the financial consequences to the hirer if the owner treats that breach as a repudiation giving him the right to free himself from all further obligations and claim money. No objection can be taken to the former, but, as it seems to me, the law as laid down in Dunlop's case is applicable to the financial consequences which are plainly a sum to be paid in consequence of the breach.
31 Resolution of the position in a case of the second class was unnecessary, and his Lordship left it open, but observed that the conclusion may well be the same (at 921):
In conclusion, I would like to emphasise that we are dealing with a case in which the right to determine and claim payment is based on a breach of contract. The part of the clause with which we are concerned also provides that if the hirer died, for example, a few days after he had taken delivery the owners could re-take possession of the car and claim the balance of the £412 7s 6d. This obviously raises a different point from that with which we have to deal where the claim is made as the result of a breach. In the Apex Supply case the claim was based on the hiring company having gone into liquidation. Though it may well be that the conclusion would be the same, it might fall to be considered on equitable rather than on common law principles. If anyone desires to argue that the conclusion should be different in the case of death or an event such as bankruptcy or liquidation, so far as my judgment is concerned I desire to make clear that that point is open.
32 Jenkins LJ dissented, holding that even in the third class of case, the agreed sum became payable not because the hirer had committed a breach of contract (which he need not necessarily have done, as the clause included the second class of case, in which no question of a penalty arose as there was no breach of contract), but because the hiring had been determined (at [1952] 2 All ER 915, 928-9) (emphasis added):
It remains to consider the first and more difficult question whether (being, as I have held, penal in point of amount) the sum payable on determination of the hiring under cl 11 is a penalty in the relevant sense at all. In order to be such the sum in question must, as I understand the law, be (as I have already described it) a sum which the hirer undertakes to pay to the owners in the event of, and in respect of, some breach by the hirer of the terms of the hire-purchase agreement. If the agreement contains a provision of that description, and a breach on the part of the hirer ensues and the owners sue for payment of the sum stipulated to be paid in respect of such breach, then, no doubt, arises the question of penalty or no penalty, turning on a comparison between the stipulated sum and the damages capable of flowing from the breach or breaches in respect of which the stipulated sum is, according to the terms of the agreement, expressed to be payable. But the provision here in question does not appear to me to answer that description. Clause 11 provides for the determination of the hire in a number of different events and in some of these events it enables the hiring to be determined by a specified notice from the owners to the hirer, while in others of them it causes the hiring to determine automatically. The events in which the hiring may be determined by notice include failure by the hirer to make any payment under the agreement on the due date (which would, of course, be a breach of contract), but they also include the death of the hirer (which would, of course, not be a breach of contract). The events bringing about automatic determination include failure by the hirer to observe or perform any agreement or condition contained in the agreement, but they also include the hirer's bankruptcy, the making of a receiving order against him, his making a composition with his creditors, the presentation of a winding-up petition against the hirer if a company, none of which is a breach of contract. On the determination of the agreement by notice or otherwise and whether the event on which the notice was founded or which brought about the automatic determination was a breach of contract on the part of the hirer or not, the sum prescribed by cl 11 becomes payable. It is not payable because the hirer has committed a breach of contract (which he need not necessarily have done), but because the hiring has been determined. Supposing the sum prescribed by cl 11 became payable on a determination by notice founded on the death of the hirer or on an automatic determination due to the presentation of a winding-up petition against the hirer (being a company), no question, so far as I can see, of the sum being a penalty in the relevant sense could arise, and, that being so, it seems to me impossible to invest the same sum with the character of a penalty where the determination by reason of which it becomes payable happens to be brought about by notice founded on or automatically by some breach of contract on the part of the hirer .
My conclusion on this aspect of the case is supported by the reasoning of Salter J in Elsey & Co Ltd v Hyde , which, although it turned partly on the circumstance, absent from the case now before us, and to my mind of doubtful relevance to the point at issue, that the same sum was there made payable on determination by the hirer, seems to me to be applicable in its essentials to the provisions of the hire-purchase agreement in the present appeal. The reasoning of Salter J in the case just cited appears to have commended itself to Greer LJ in Chester & Cole Ltd v Wright (Jones and Proudfoot, p 130), and for my part I find it convincing. I may add that in Re Apex Supply Co Ltd , Simonds J while finding it his duty as a judge of first instance to follow Salter J whatever his own view might be, said nothing to suggest that his own view would have been different.
33 Hodson LJ observed (at [1952] 2 All ER 915, 930-1) that in Roadways Transport Development Ltd v Brown & Gray (1927) (unreported):
No member of the court expressed the opinion that the contract was outside the penalty area on the simple ground that the agreement provided for a sum of money in a certain event, namely, the determination of the hiring in accordance with the terms of the agreement. I cannot but think that if this had been a complete answer to the appellant's argument the court would have so declared.
34 His Lordship also observed that Associated Distributors did not conclude the argument on the second and third classes of case:
The other decision of the Court of Appeal to which we have been referred, namely, Associated Distributors Ltd v Hall , was a case in which under an agreement of the same class the hirer elected to determine the agreement, and in those circumstances the court came to the conclusion that no question of penalty or liquidated damages arose. Scott LJ expressly left open the question, as Simonds J pointed out ([1941] 3 All ER 481) in the Apex case, of what might be the view of the court if the agreement had been terminated, not by the hirer, but by the owner. Slesser LJ also left the question open. The Court of Appeal certainly did not give any decision discouraging to the present defendant although it is true, as Simonds J also pointed out, that the judgment of Salter J sitting as a member of a Divisional Court of the King's Bench Division in Elsey & Co Ltd v Hyde , was not adversely criticised. This last is the authority from which flows the line of argument which was accepted in the court below and is contained in the passage from the judgment of Salter J where he discusses, inter alia, the case of a hire being determined by the owner because the hirer is in arrears with his payments.
35 After setting out the relevant passage from the judgment of Greer LJ in Chester & Cole v Wright, his Lordship observed that it was "not particularly strong support" for the opposing view, and that giving effect to it would enable form to prevail over substance (emphasis added):
But, even if it is a penalty, it will be observed that the whole of this passage is introduced by the phrase, "it may very well be", and is, therefore, not particularly strong support for the opinion of Salter J. My difficulty is to see the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract, and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine. The latter situation arises in cases of breach of condition amounting to a repudiation of the contract giving the opposite party the right to accept the repudiation and sue for damages. In so acting he determines the contract. Clause 11 purports to produce exactly this situation in respect of any breach referred to therein, and it seems to me unreal to speak of a remedy arising from the right to determine as opposed to a remedy arising from the breach. It is said that the right to determine arises in cl 11 not only in cases of breaches great or small, but also in a number of other events which have nothing to do with breach of contract, and, accordingly, since the law as to penalties for breach is inapplicable as such in these numerous instances, so it cannot be applied to that part of the clause to which it might otherwise be appropriate. I am unable to accept this contention which seems to involve that a draftsman of a written contract can always draw his document in such a way as to defeat the common law by incorporating in the same clause provisions dealing with the right to determine the contract on the occurrence of an infinite number of events only one of which is a breach of contract .
36 Although often referred to in this context, Alder v Moore [1961] 2 QB 57 is a rather different type of case, which did not involve a hire-purchase agreement or chattel lease, nor did it involve an agreed payment becoming due upon termination for an event. A professional football player agreed, in consideration of settlement of a total permanent disablement claim under an insurance policy, that he would not play in professional football in the future, and that in the event of infringement of that condition he would be subject to a "penalty" of the amount of the payment. By majority, the Court of Appeal held that, despite the use of the word "penalty", the obligation was one to reimburse a payment made on a basis which events proved to be false, and was not in substance penal. Sellers LJ, with whom Slade J agreed, referred with approval to Apex Supply and the proposition that no question of penalty versus liquidated damages arises where there is a contract for the payment of a certain sum in a certain event. Devlin LJ dissented; the dissent emphasises (at 69) the significance of the distinction between a promise that if an event occurs a payment will be made (not penal), and dual promises that an event will not occur but if it does a payment will be made (in which case the second - collateral - promise is penal). In my view, Alder is a true case of payment on an event; it was not a case in which a disproportionate detriment was incurred by one party to the benefit of the other upon the other electing to terminate for some event, but provided for payment of a sum which was entirely defensible upon the happening of the event, the non-occurrence of which was the main purpose of the contract. In substance, the payment was not collateral to the main purpose of the contract.
37 In Bridge v Campbell Discount Co Ltd [1962] AC 600 - a case which the House of Lords ultimately held to be in the third class (termination by the owner for breach by the hirer), whereas in the Court of Appeal it had been treated as in the first class (termination by the hirer in accordance with the contract) - the House of Lord unanimously approved Cooden v Stanford insofar as it rejected the proposition that if an agreed payment was not a penalty in some circumstances upon which it was triggered, it could not be a penalty in other circumstances, in particular where the termination was for breach of contract. As Lord Radcliffe observed (at 624-625):
The purpose of an owner entering into a hire-purchase transaction is to turn goods into cash; as a moneylender, which is what he is in all but form, his purpose is to recover with interest the amount of his advance. This clause is designed to provide him with a guarantee at the expense of the hirer that, come what may, he will get out of the deal in money at any rate two-thirds of the total hire-purchase price, which is defined as being cash price plus hiring charges and option fee. The guarantee thus becomes operative whenever the hiring determines before the purchase option is exercised, provided that something less than two-thirds of the whole sum has then been paid over, and it makes no difference to the terms of the obligation whether the hiring is put an end to by the hirer under his option, or by the owner under his, or by the automatic operation of any one of the events specified in cl 8. That is why cl 9 (b) is not attached separately to the various preceding clauses but applies indifferently to them all. It is this aspect which has troubled several judges in the past, and has led more than one to say that such a provision is not a penalty at all or, to put the same idea in another way, to express the view that, if it is not a penalty for all purposes and in all relations, as, for instance, when the hirer brings it on himself by exercising his option to terminate, it cannot be a penalty in any one situation, as, for instance, when the owner is suing for damages for breach of the hiring obligations. I do not think that the difficulty has ever been better put than it is in the judgment delivered by Greer LJ, in Chester & Cole, Ltd v Wright quoted from Jones And Proudfoot's Notes On Hire-Purchase Law (2nd Edn), p 124, in Cooden Engineering Co, Ltd v Stanford ([1952] 2 All ER at p 925; [1953] 1 QB at p 105).
I do not myself feel that this is a difficulty which should determine the matter. The court's jurisdiction to relieve against penalties depends on "a question, not of words or of forms of speech, but of substance and of things" (see per Lord Davey in the Clydebank Engineering case ([1905] AC at p 15)). It cannot really depend on a point of construction, though it is often spoken of as so depending. A sum of money sued for in one set of circumstances, as on a hirer's breach, when alone the "in terrorem" idea can have any application, may be a penalty in the eyes of the law, without it being necessarily anything but the price of an option in another set of circumstances or a mere guarantee in yet a third. On this point, therefore, I agree with the views of the majority of the Court of Appeal in Cooden's case. I know, of course, that, to travel to another branch of equity's relief jurisdiction, the precise reason why a deposit made on a sale of land is not recoverable if the bargain goes off by the purchaser's default is that it is treated as a guarantee (see Howe v Smith) ; but, nevertheless, every penalty, even a penal bond, is in some sense a guarantee for the due performance of the contract, and I do not see any sufficient reason why, in the right setting, a sum of money may not be treated as a penalty, even though it arises from an obligation that is essentially a guarantee. When such a sum is claimed, as it is here, as compensation for the hirer's breach of the hiring contract, I think that it bears every mark of being a penalty. The total hire-purchase price is called up to the extent of two-thirds, regardless of two considerations essential to any measurement of the owner's loss; the price includes a considerable interest element which the owner does not in the result forgo so far as the compensation is paid immediately, and the vehicle comes back into the owner's possession with a realisable value that, in many circumstances, may exceed the one-third balance of the price which the owner has not got in. In my opinion, a clause of this kind, when founded on in consequence of a contractual breach, comes within the range of the court's jurisdiction to relieve against penalties, and the respondents should be confined to the right of claiming from the appellant any damage that they can show themselves to have actually suffered from his falling down on the contract. I think, therefore, that Cooden v Stanford was rightly decided, though I do not necessarily agree with everything that was said by the majority of the members of the court in coming to their decision.
38 As to the first class of case, Viscount Simonds and Lord Morton of Henryton approved Associated Distributors Ltd v Hall, to the effect that had the position been (as the Court of Appeal had accepted) that the hirer had exercised his option to terminate the contract by returning the goods, no question of penalty would have arisen. Lord Denning however disapproved Associated Distributors, in its application to the second as well as the first class of case (at 629):
The Court of Appeal acknowledge that, in some cases, there is room for the intervention of equity. They accept that, where the hiring is terminated because the hirer is in breach, equity will relieve him from payment of the penalty: see Cooden Engineering Co. Ltd v Stanford . But they say that when it is terminated for any other reason, as, for instance, if the hirer gives notice of termination himself, or if he dies, there is no equity to relieve him or his executors from the rigours of the law: see Associated Distributors, Ltd v Hall . The jurisdiction of equity is confined, they say, to relief against penalties for breach of contract and does not extend further. Applied to this case it means this: If the appellant, after a few weeks, finds himself unable to keep up the instalments and, being a conscientious man, gives notice of termination and returns the car, without falling into arrear, he is liable to pay the penal sum of £206 3s 4d without relief of any kind; but if he is an unconscientious man who falls into arrear without saying a word, so that the respondents re-take the car for his default, he will be relieved from payment of the penalty. Let no one mistake the injustice of this. It means that equity commits itself to this absurd paradox: It will grant relief to a man who breaks his contract but will penalise the man who keeps it. If this be the state of equity today, then it is in sore need of an overhaul so as to restore its first principles. But I am quite satisfied that such is not the state of equity today.
39 His Lordship explained this with reference to cases in which equity relieved against penalties imposed for non-performance of a condition, as distinct from breach of contract (at 629-631) (emphasis added):
This case can be brought within long-established principles without recourse to any new equity. From the very earliest times, equity has relieved not only against penalties for breach of contract, but also against penalties for non-performance of a condition. And the stipulation for a "minimum-payment" was, it seems to me, a penalty which was payable on non-performance of a condition. The respondents said to the appellant: "If the hiring is terminated for any reason before you have paid £321 13s 4d, then you must make up the payments to that sum". The condition was designed to ensure that he should pay a minimum sum of £321 13s 4d. If he fulfilled that condition, he was not liable to pay any penalty; but, if he did not perform it, he had to pay the difference. The principal object was to secure a minimum payment of £321 13s 4d. The condition was the means of achieving it.
To prove this point, I need not dwell on the cases of penalties for breach of contract. Their name is legion, and no one disputed them before your Lordships. A good instance is Sloman v Walter , to which your Lordships were referred. But I must draw attention to the cases of penalties for non-performance of a condition . They, too, are legion. Take mortgages for instance. At law, the mortgagor was subject to a penalty for non-performance of this condition: "If you repay the money on this day six months, you shall have the land back: but if you do not repay it by that date, you shall lose it for ever", see Coke On Littleton, s 332. The court of equity always relieved the mortgagor in case of non-performance of this condition, and it did so, not by reason of any specialty about mortgages, but in pursuance of its general power to relieve against penalties: see Kreglinger v New Patagonia Meat & Cold Storage Co, Ltd ([1914] AC at p 35) by Viscount Haldane LC. Take next the common penalty bond. It was taken in order to secure that something should be done by the obligor, such as to be of good behaviour (or to pay an annuity, or anything else). The obligor bound himself by his bond to pay a specified sum, say £20, on some such condition as this: "If you are of good behaviour (or pay the annuity, or whatever else it might be), this obligation shall be void: but if you do not do so, then this obligation shall be of full force and effect." In many of those cases, there was no covenant by the obligor to perform the condition; no covenant by him to be of good behaviour (or to pay the annuity or to do anything else); no covenant on which he could be sued at law; but simply a bond that, if he did not perform the condition, he would pay the specified sum. There was thus no breach of contract for which he could be sued at law for damages, but only non-performance of a condition which exposed him to payment of the sum specified in the bond. Yet equity always granted relief in such cases if the sum was a penalty : see, for instance, Tall v Ryland ((1670), 1 Cas in Ch at p 184), Collins v Collins ((1759), 2 Burr at p 826) and the very learned note by Mr Evans in his appendix to Pothier On The Law Of Obligations (1806), p 92; and it did so not by reason of any specialty about penalty bonds, but in pursuance of its general power to relieve against penalties. It would restrain the obligee from suing at law on the bond so long as the obligor was ready to pay him the damage he had really sustained. Likewise, even when the sum had already been paid over in the shape of a deposit to secure performance, equity would be prepared to grant restitution if it was a penal sum: see Benson v Gibson by Lord Hardwicke LC, Steedman v Drinkle by Viscount Haldane.
In my judgment, therefore, the courts have power to grant relief against the penal sum contained in this "minimum-payment" clause, no matter for what reason the hiring is terminated. The "minimum-payment" clause is single and indivisible, and no just distinction can be drawn between the cases where the hirer is in breach and where he is not. I find myself in entire agreement with the judgment of Lord MacDermott CJ in Lombank Ltd v Kennedy, Lombank, Ltd v Crossan from which I have profited much. I do not think that Associated Distributors, Ltd v Hall was rightly decided.