Bridge v Campbell Discount Co Ltd

[1962] 1 All ER 385

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(Judgment by: LORD RADCLIFFE)

Bridge
vCampbell Discount Co Ltd

Court:

Judges: VISCOUNT SIMONDS
LORD MORTON OF HENRYTON

LORD RADCLIFFELORD DENNING
LORD DEVLIN

Hearing date: 22, 23, 27, 28 NOVEMBER 1961
Judgment date: 25 January 1962

UK

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Judgment by:
LORD RADCLIFFE

My Lords, it is an unfortunate circumstance that we find ourselves beginning this appeal at a very different point from that at which the Court of Appeal left it. The facts of the case, though meagre and not properly brought out in the county court proceedings, do, in my view, admit of only one conclusion on the basic question as to how the hire-purchase agreement was brought to an end; and I think it came to an end in a different way from that which was, in effect, assumed by all the members of the appeal court. In the result, the question of law which was, no doubt, the cause of their granting leave for the case to come to this House does not arise. On the other hand, the question which we do have to determine on the basis of fact which is, I believe, acceptable to your Lordships, is itself both important and difficult. I do not think, therefore, that either the appeal proceedings or the arguments on them have been in any way wasted.

First, then, as to the facts. We have here a hire-purchase agreement made on 20 July 1959, under which the appellant, Mr Bridge, took from the respondents a second-hand Bedford Dormobile motor car, 1954 make, paying at once £10 in cash and receiving a credit for £95 for surrendering another motor car in part exchange and undertaking to pay thereafter thirty-six consecutive monthly sums of £10 9s 2d each, the first falling due on 20 August 1959. At the conclusion of those payments, the appellant was to have the usual purchase option of acquiring the motor car by the payment of an additional £1. The agreement was on a printed form, which is evidently one of the regular instruments used by the respondents for transactions of this nature. It contains a somewhat voluminous set of fourteen clauses, setting out conditions, stipulations and undertakings by which the hirer is to be bound. For the purpose of deciding the issue of fact, it is enough if I note that, by cl 6, it was provided that the hirer could at any time terminate the hiring by giving written notice of termination to the owners, whereupon the provisions of cl 9 were to apply; that by cl 7, the owners had a right, if the hirer failed to pay any of the sums due under the agreement or to observe any other of the numerous stipulations contained in it, immediately to terminate the hiring and the agreement and retake possession of the motor car; that by cl 8, it was provided that, in certain specified events, of which the death or bankruptcy of the hirer may be taken as instances, the agreement and hiring were immediately to determine, though without prejudice to (inter alia) the hirer's obligations under cl 9; and that cl 9, which, since it is crucial to this case, I set out in full, ran as follows:

"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 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. Provided always that if the hire-purchase price as specified in the schedule hereto does not exceed £300 (but not otherwise) such of the foregoing provisions as are inconsistent with the provisions of the statutory notice hereinafter contained shall not apply and the provisions of the statutory notice (and of the Hire-Purchase Acts) and any other statute affecting hire-purchase transactions shall prevail."

The hiring itself was not destined to have a long life. The appellant paid £10 10s by way of his first monthly instalment on 20 August 1959, but, on 3 September he wrote to the respondents in the following terms:

"Agreement No. 78900

"Dear Sir, 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."

It seems to be common ground that, on 14 September he returned the vehicle to the sales room of the motor car dealers from whom he had taken it at the time when the hire-purchase transaction was entered into with the respondents. They accepted this as a return of the motor car, and in due course proceeded to sue him in the county court for the sum of £206 3s 4d at issue in this action. The sum was made up of £321 13s 4d, being the two-thirds of the hire-purchase price of £482 10s claimed as due under cl 9 (b) of the agreement, less the £105 deposit and the £10 10s single instalment.

It is not for me to say what exactly was the basis of fact on which the respondents launched their claim. Their particulars of claim wrapped the matter in an impenetrable obscurity and, since that was never dissipated by any amendment, it must always remain obscure what it was on which they thought that they were founding. It is obvious that there were two possible positions. One was that the appellant had decided to exercise his option under cl 6 to terminate the hiring and thereby to bring down on his head the not insubstantial consequence of cl 9. The other was that the appellant had fallen down on his agreement and declared his inability to perform it, with the result that the respondents were entitled under cl 7 to treat the contract as at an end and to sue for whatever they were entitled to recover under its provisions, including those of cl 9. The particulars of claim consisted of three paragraphs. The first merely referred to the terms of the hire-purchase agreement. The second and third 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."

It is to be noted that the letter of 3 September is not referred to. Yet, if the hirer is to be held to have been exercising his option of determination, it can only have been exercised by the sending of this as the written notice that was required. But the letter was written on 3 September and the respondents' particulars elect to say that it was on 14 September the day of the return of the motor car, that the hirer "purported to terminate the hiring". I can only say that I do not know which of the two possible positions the respondents wished it to be understood that they were adopting; and I cannot think that the appellant's legal defences have been affected one way or the other by the fact that, in reply to this pleading, his solicitors merely stated in their defence that he admitted that, on or about 14 September he terminated the agreement. This must refer to the return of the motor car, not to the sending of the letter; and, for the purposes of these agreements, there is a distinction between terminating a hiring (which is all that cl 6 deals with) and terminating the agreement itself. "Terminate" is an ambiguous word, since it may refer to a termination by a right under the agreement or by a condition incorporated in it or by a deliberate breach by one party amounting to a repudiation of the whole contract. There is nothing in the learned county court judge's notes of the hearing that helps to clear up the matter. It was evidently the respondents' case by that time that the appellant had exercised the hirer's option to determine; but the judge merely dismissed the claim as involving a penalty, without any further record of his views. When the matter reached the Court of Appeal, the issue of fact was dealt with very briefly, Holroyd Pearce LJ who delivered the leading judgment, merely saying ([1961] 2 All ER at p 100; [1961] 1 QB at p 454) that the letter of 3 September was a notice to terminate and that it was an untenable argument to suggest that the sum claimed under cl 9 was claimed as damages for the hirer's own breach. With great respect to the members of that court, I think, myself, that that is just what it was and that they were too summary in their disposal of this aspect of the case.

An interpretation of the facts can be derived only from what we know of the parties' acts or from the issues established by their pleadings. There is nothing else to go on. I have dealt with the latter; I think that the pleadings leave the issue too ambiguous to warrant any conclusion. There remains then the letter of 3 September. Is this to be treated as an exercise of the hirer's option to determine? I cannot help saying that I can see no ground for so treating it. It makes no reference to the option; it is not expressed in the terms of a man exercising a right; its whole tenor is that of a regretful apology for unexpected inability to carry out a contract that has been undertaken. In my opinion, the natural interpretation of such a message is that the writer intended merely to state the facts of his position, that he could not carry on with his hire payments, and to ask for directions as to what he was to do with the vehicle to the possession of which he would no longer be entitled. I do not think that it would be right to proceed on any other basis of fact. The consequence is that we are dealing with a case in which the hirer declared his inability to go on with the hiring and the owners resumed possession of their vehicle and then went to court to assert their contractual rights under cl 9 (b) of the agreement, claiming "as agreed compensation for depreciation" the balance sum of money required to make up two-thirds of the total hire-purchase price. Are they entitled to judgment for this sum, or was the learned county court judge right in dismissing their claim as being a claim for a penalty?

My Lords, when a question arises whether a sum stipulated to be payable under a contract is liquidated damages for a breach of that contract or some part of it or is a penalty attached to the breach, I think that, by this date, there is ample guidance in the authorities how to decide between the two alternatives. The appropriate tests have been worked out in a number of leading cases and, as we know, they are conveniently brought together in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co, Ltd v New Garage & Motor Co, Ltd . I believe that the line of demarcation is drawn in its simplest form (as Lord Dunedin himself said in Public Works Comr v Hills ([1906] AC at p 375)) if one says that a sum cannot be legally exacted as liquidated damages unless it is found to amount to "a genuine pre-estimate of" damages (to use the phrase originated by Lord Robertson in Clydebank Engineering & Shipbuilding Co v Yzquierdo y Castaneda (Don Jose Ramos ) ([1905] AC at p 19)). If it does not amount to such a pre-estimate, then it is to be regarded as a penalty, and I do not myself think that it helps to identify a penalty to describe it as in the nature of a threat "enforced in terrorem" (to use Lord Halsbury's phrase in Lord Elphinstone v Monkland Iron & Coal Co ((1886), 11 App Cas at p 348)). I do not find that that description adds anything of substance to the idea conveyed by the word "penalty" itself, and it obscures the fact that penalties may quite readily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them and yet are, as I understand it, entitled to claim the protection of the court when they are called on to make good their promises. The refusal to sanction legal proceedings for penalties is, in fact, a rule of the court's own, produced and maintained for purposes of public policy (except where imposed by positive statutory enactment, as in 8 & 9 Wm 3 c 11; 4 & 5 Anne c 16). The intention of the parties themselves is never conclusive, and may be overruled or ignored if the court considers that even its clear expression does not represent "the real nature of the transaction" or what "in truth" it is to be taken to be.

Is it plausible to say that we have in this "agreed compensation for depreciation" a genuine pre-estimate of damages? The first difficulty is to know for what it is to be taken as damages, for, until one can identify the obligation and the possible consequences of its breach, one does not have anything against which to measure the stipulated sum which is claimed as liquidated damages. Now the depreciation of the vehicle is not itself a breach of contract on the part of the hirer. He has a separate obligation under cl 9 (a) to deliver it up, if it does not become his property, in a "proper state of repair and condition"; so cl 9 (b) does not provide any compensation for a lack of that state and condition. The depreciation referred to can only be the loss of value in the vehicle ascribable to its increasing age and the natural processes of wear and tear and there is, of course, no responsibility on the hirer to prevent this. Even if, by a less accurate use of language, depreciation is to cover the loss of market value due to the unpredictable movements of the second-hand market, the point is the same; such losses do not arise from any default of the hirer. I can say at once that, if one really tied oneself to this idea of compensation for depreciation, the case for treating the clause as a genuine pre-estimate of the damage suffered by depreciation would be almost unarguable. Since the obligation under cl 9 (b) may mature at any time from the beginning to the end of the hiring, a week after the beginning or a week before the end, it seems to me impossible to take a single formula for measuring the damage as any true pre-estimate. It produces the result, absurd in its own terms, that the estimated amount of depreciation becomes progressively less the longer the vehicle is used under the hire. This is because the sum agreed on diminishes as the total of the cash payments increases. It is a sliding scale of compensation, but a scale that slides in the wrong direction, if the measure of anticipated depreciation is to be supposed to be the basis for the compensation agreed on. The fact that this anomalous result is deliberately produced by the formula employed suggests, I think, that the real purpose of this clause is not to provide compensation for depreciation at all but to afford the owners a substantial guarantee against the loss of their hiring contract. The difficulty of the case, as I see it, is to decide whether an agreement of this kind falls within the legal conception of a penalty.

It is fairly easy to see what is really involved in cl 9 (b). 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. It see nothing "unconscionable" in an owner feeling that, when he goes into transactions of this nature, he should have some protection against having goods, part worn and of uncertain realisable value, thrown back on his hands, with the attendant difficulty of putting any satisfactory second-hand value on them for the purposes of proving his damage. I doubt, however, whether he could ever validly protect himself on the scale of up to two-thirds that is envisaged here, without much more elaborate provisions for adjustment according to the circumstances in which the claim falls due. Indeed, the matter may be one in which only legislation can mark the limits of what is to be treated as permissible.

Having regard to the view that your Lordships have taken as to the true facts of the case, our decision does not, I take it, conclude the question of an owner's rights under such agreements, when the hiring is determined under a hirer's option or by an event specified in the contract but not involving a breach. Such questions are closely related to what we have to consider here, but it does not follow that the legal arguments that sustain the hirer, when he is sued on breach, would be capable of sustaining him in these other situations. Indeed, although I wish to decide nothing, I appreciate that the doctrine of penalties can only be applied to those situations by the construction of almost a new set of arguments that would not arise naturally out of the arguments and considerations that have prevailed with courts, either of equity or of common law, when relieving against penalties in the past. "Unconscionable" must not be taken to be a panacea for adjusting any contract between competent persons when it shows a rough edge to one side or the other, and equity lawyers are, I notice, sometimes both surprised and discomfited by the plenitude of jurisdiction and the imprecision of rules that are attributed to "equity" by their more enthusiastic colleagues. Since the courts of equity never undertook to serve as a general adjuster of men's bargains, it was inevitable that they should, in course of time, evolve definite rules as to the circumstances in which, and the conditions under which, relief would be given, and I do not think that it would be at all an easy task, and I am not certain that it would be a desirable achievement, to try to reconcile all the rules under some simple general formula. Even such masters of equity as Lord Eldon and Sir George Jessel MR it must be remembered, were highly sceptical of the court's duty to apply the epithet "unconscionable" or its consequences to contracts made between persons of full age in circumstances that did not fall within the familiar categories of fraud, surprise, accident, etc, even though such contracts involved the payment of a larger sum of money on breach of an obligation to pay a smaller (see the latter's judgment in Wallis v Smith ). But I do not speculate what principles they would have thought applicable to a hire-purchase contract, in which the hirer, I dare say willingly enough, transacts only with a dealer who is not the agent of the owner and, if he signs up at all, signs up to an elaborate fixed menu of stipulations and conditions, which he probably does not bother himself to read and very likely does not or cannot understand.

I agree that the appeal should be allowed.