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Transcript
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[2005] EWCA Civ 963
Murray v Leisureplay Plc
Case No: A2/2004/1827
Court of Appeal (Civil Division)
• Mr Edward Bannister QC (instructed by Bray Walker ) for the appellant.
• Mr Richard Salter QC and Mr Michael Lazarus (instructed by Ingram Winter Green ) for the respondent.
Judgment
Lady Justice Arden :
1 Following the trial of this action, Stanley Burnton
J gave a careful and lengthy judgment in which he
dealt with a number of difficult issues arising out of
the dismissal by the respondents (“MFC”) of the
appellant, Mr Murray, as Chief Executive Director
of MFC. That dismissal prompted Mr Murray to
sue MFC under clause 17.1 of his service
agreement dated 2 June 1998 with MFC (“the
agreement”). This court is concerned only with the
small number of issues in the action which are the
subject of the present appeal and cross appeal. The
first issue (“the penalty issue”) is whether the
clause in the agreement providing for the payment
of a year's gross salary in the event of termination
of Mr Murray's employment without one year's
notice is unenforceable as a penalty. The second
issue (“the amendment issue”) arises only if the
appeal against that holding is dismissed: the judge
rejected an application at the start of the trial on the
part of Mr Murray to amend his particulars of claim
so as to include a claim for damages of £252,897 at
common law. The third issue (“the section 320
issue”) is whether under section 322 of the
Companies Act 1985 (“CA 1985”) MFC can
recover from Mr Murray the costs which it incurred
in an arrangement to acquire a company from Mr
Murray made in breach of section 320 of the
Companies Act 1985 . The costs were incurred by
MFC in instructing accountants to prepare a draft
due diligence report on the company to be acquired
and in hiring an additional director to assist with
the acquisition. Section 320 (as amended) of the
CA 1985 invalidates transactions and arrangements
involving the acquisition of assets worth more than
£100,000 from a director without a resolution at
general meeting. The judge held that MFC had
entered into an agreement in breach of section 320
when it entered into an agreement for the
acquisition from Mr Murray of the share capital of
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Lady Justice Arden, Lord Justice Clarke, and
Lord Justice Buxton
Thursday, 28 July 2005
Representation
Blue Planet Investment Management Ltd
(“BPIM”). The fourth and last issue on this appeal
(“the section 727 issue”) is whether if Mr Murray is
liable for those costs the court should grant him
relief under section 727 of the CA 1985 .
The Penalty Issue
2 The agreement provides in material part as
follows: — “1.
Interpretation
1.1In this Agreement the following words and
expressions have the meanings set opposite them:
…(a)“Wrongful Termination”(b)termination of this
Agreement by the Company except in accordance
with any of clauses 3.1, 3.2, or 15; or(b)termination
of this Agreement by the Executive in
circumstances which amount to the acceptance of
the Company's repudiary [sic] breach of contract …
2.
Appointment
2.1The Company shall employ the Executive as
chief executive director and the Executive shall
serve the Company as chief executive director …3.
Term
3.1The Executive's employment shall be treated as
having commenced on 1 December 1997 and he
shall be employed until the expiry of not less than
one year's written notice given by either party to
the other so as to expire at any time, save that
following the execution of heads of agreement
relating to the acquisition of a building society or
other financial institution the Executive's
employment shall be terminable by not less than
three years' written notice given by either party so
as to expire at any time. The Company reserves the
right to terminate the Executive's employment by
payment in lieu of notice.
3.2Notwithstanding the provisions of clause 3.1
the Executive's employment shall terminate
automatically when the Executive reaches the age
of 70 years …5.
Remuneration
5.1As remuneration for his services hereunder the
Company shall pay to the Executive a salary at the
rate of one hundred and twenty five thousand
pounds (£125,000) per annum (which shall be
deemed to accrue from day to day) payable in
arrears by equal monthly instalments on the
fifteenth (15) day of each month such salary being
inclusive of any fees to which the Executive may
be entitled as a director of the Company.
5.2The said salary shall be reviewed by the
Remuneration Committee of the Board from time
to time (but not less frequently than annually) and
the rate thereof may be increased with effect from
any such review date …12.
Restrictive Covenants
12.1The Executive shall not without the prior
written consent of the Board (such consent to be
withheld only so far as may be reasonably
necessary to project the legitimate interests of the
Company or any Associated Company):(a)For a
period of 12 months after the termination of his
employment hereunder be engaged or interested
(whether as a director, shareholder, principal,
consultant, agent, partner or employee) in any
business concern (of whatever kind) which shall in
the United Kingdom be in competition with the
Company or with any Associated Company and
whose activities include the acquisition of building
societies, and other financial institutions including
life insurance companies and friendly societies
being activities of a kind with which the Executive
was concerned to a material extent during the
period of one year prior to the termination of his
employment with the Company PROVIDED
ALWAYS that nothing in this clause 12.1(a) shall
restrain the Executive from engaging or being
interested as aforesaid in any such business concern
insofar as his duties or work relate principally to
activities of a kind with which the Executive was
not concerned during the period of one year prior to
the termination of his employment hereunder:
(b)For a period of 12 months after the termination
of his employment hereunder either on his own
behalf or on behalf of any other person, firm or
company directly or indirectly solicit or entice or
endeavour to solicit or entice away from the
Company or from any Associated Company any
employee of executive or managerial status
engaged in its or their business and with whom the
Executive had dealings at any time during last year
of his employment hereunder.
12.2Whilst each of the restrictions in clauses
12.1(a) and 12.1(b) are considered by the parties to
be reasonable in all the circumstances as at the date
hereof it is hereby agreed and declared that if any
one or more of such restrictions shall be judged to
be void as going beyond what is reasonable in all
the circumstances for the protection of the interests
of the Company and/or any Associated Company
but would be valid if words were deleted there
from the said restrictions shall be deemed to apply
with such modifications as may be necessary to
make them valid and effective and any such
modification shall not thereby affect the validity of
any other restriction contained herein.13.
Termination by Reconstruction or
Amalgamation
If the employment of the Executive hereunder
shall be terminated by reason of the liquidation of
the Company for the purposes of amalgamation or
reconstruction or as part of any arrangement for the
amalgamation of the undertaking of the Company
not involving liquidation and the Executive shall be
offered employment with the amalgamated or
reconstructed company on terms not less
favourable than the terms of this Agreement the
Executive shall have no claim against the Company
in respect of the termination of his employment by
the Company …17.
Liquidated Damages
17.1In the event of a Wrongful Termination by
way of liquidated damages the Company shall
forthwith pay to the Executive a sum equal to one
year's gross salary, pension contributions and other
benefits in kind assuming that salary, pension
contributions and benefits in kind had continued to
be paid at the same rate as immediately prior to the
date of Wrongful Termination, save that following
the execution of heads of agreement relating to the
acquisition of a building society or other financial
institution the Company shall forthwith pay to the
Executive a sum equal to three years' gross salary,
pensions contributions and other benefits in kind
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assuming that salary, pensions contributions and
benefits in kind had continued to be paid at the
same rate as immediately prior to the date of
Wrongful Termination. In the event of a dispute as
to the value of any benefit in kind the amount
payable shall be determined by the Company's
auditors.
17.2Subject to any rights accrued at the date of
termination of the Executive's employment under
the provisions of any pension scheme, option
scheme or bonus or benefit plan of the Company,
any payment of liquidated damages by the
Company shall be made in full and final settlement
of all and any claims arising out of the Executive's
employment, its termination, or his ceasing to hold
the office of director of the Company or any
associated company …”
3 At the trial, the judge heard a number of
witnesses, including Mr Murray. He concluded that
Mr Murray was an unreliable witness ([70]). The
agreement was signed by two directors, namely Mr
Brian Rankin and Mr John Redwood. The judge
found that although the agreement had been
approved by the board of MFC in its original form
(which was less favourable to MFC) and in the
amended form in which it was finally executed, Mr
Murray “was able within broad limits to determine
the terms of his service agreement …” ([97]). At
the date of the execution of the agreement, Mr.
Murray was 39 years of age. The agreement
provided for him to work three days a week. The
original form of the contract gave him a right to
three years' gross salary and benefits in the event of
breach. Particulars of this agreement were included
in a pathfinder prospectus, and there is evidence
that one prospective investor expressed the view to
MFC's financial advisers that “The service
agreement of Mr. Murray is inappropriate … 3 year
protection is excessive” (fax dated 18 May 1998
from Cargill Financial Markets PLC to Peel Hunt).
The same objection was not apparently taken to the
particulars of other directors' service contracts, who
had similar protection but limited to one year.
4 The judge found that the agreement was
determined by MFC by letter dated 7 May 2003
with effect from 30 June 2003. Accordingly Mr
Murray was only given 7½ weeks notice of
termination rather than the 12 month's notice to
which he was entitled under the agreement.
5 The judge also found that, although MFC had
considered two acquisitions during the agreement,
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neither constituted the acquisition of a financial
institution for the purposes of the proviso to clause
17.1 of the agreement. There is no appeal against
that finding and on that basis Mr Murray's claim
under clause 17.1 of the agreement is for £243,897
or thereabouts.
6 Mr Murray does not contend that MFC exercised
its option under clause 3.1 to make a payment to
him in lieu of notice. Mr Murray's case is that the
termination of his employment constituted
Wrongful Termination for the purposes of the
agreement and that he is entitled to payment under
clause 17.1 of the agreement.
The Judge's Judgment on the Penalty Issue
7 The judge referred to the analysis of the law or
penalties in the judgement of Mance LJ in Cine Bes
Filmcilik Ve Yapim Click v United International
Pictures [2003] EWCA Civ 166g (referred to below
as the Cine case). The judge himself summarised
the principles he considered applicable and at [103]
of his judgment, he held that the fact that clause
17.1 of the agreement took no account of Mr
Murray's duty to mitigate his damages was
sufficient to render the clause a penalty. He held
that reasonable contracting parties must have had in
mind that there was a real possibility that if Mr
Murray were not constrained to act as an executive
director of MFC he could and would benefit from
other work. He held that an enforceable liquidated
damages clause would have had to make a
significant allowance for the income and profits
that Mr Murray was likely to make if freed from his
commitment to MFC.
Submissions on the Penalty Issue
8 Mr Edward Bannister QC, for Mr Murray,
submits that the judge was wrong on the bargaining
power of the parties. In addition he submits that the
question whether clause 17 was a penalty was a
question of construction which was to be judged at
the time the contract was made. He further submits
that there is an initial presumption of validity. In
support of this submission he relies upon Dunlop
Pneumatic Tyre v New Garage [1915] AC 67 and
Robophone Facilities v Blank [1966] 1 WLR
1428 .
9 Mr Bannister submits that there is no authority
for the proposition that the presumption of validity
should be confined to contracts at arm's length. He
distinguishes the Robophone case on this point.

10 Mr Bannister further submits that on the facts
there was no inequality of bargaining power. The
fact that directors were chosen by Mr Murray did
not mean that there was an inequality of bargaining
power. The directors were persons with substantial
experience and reputations. The service agreements
were approved by resolutions of the board of
directors of MFC.
11 Moreover, Mr Murray's service agreement had
originally provided for the payment of three years'
gross salary in the event of wrongful termination.
As a result of investor pressure (see paragraph 3
above), this provision was modified and clause
17.1 was agreed.
12 Mr Bannister submits that this was a case in
which the company could determine its commercial
interests and in support of this submission he relies
on the judgment of Lord Woolf in Philips v. Hong
Kong v Attorney General of Hong Kong 1993 61
VLR 49 .
13 Mr Bannister submits that, if the judge is right,
it will be almost impossible to draft a liquidated
damages clause in an employment contract. As of
June 1998, it was impossible to say when Mr
Murray would earn anything at all if dismissed.
According to the judge, he would have gone to
work for his own companies. However no-one
could say whether his own companies would still
be in business or still be profitable even if he had
been fit to obtain other work in June 1998. If he
had applied himself solely to BPIM, there would
have been difficulties about calculation, for
example difficulties of knowing how much of his
time was spent on BPIM as a result of being
released from his employment with MPC.
14 Mr Bannister submits that the genuine pre-
estimate of damages required by the Dunlop case is
not an actuarial calculation but what the parties
have genuinely agreed. It is possible that he would
not have found a comparable job within one year.
The judge's approach opens up a set of disputes and
does not fulfil the commercial purpose of a
liquidated damages clause. Mr Bannister submits
that the correct test is whether clause 17.1 was
extravagant or unconscionable by reference to the
greatest loss that could conceivably have been
proved by Mr Murray (or could possibly have been
in the contemplation of the parties), viewing the
matter at the time the contract was made.
15 Mr Bannister submits that, if Mr Murray was
given less than 12 months' notice, he would have to
give credit for the period of notice which he was
given and for which he was paid. He would have to
give that credit against the amount received under
clause 17.1. The court should uphold the agreement
of the parties made in good faith unless the amount
of the damages agreed is so unconscionably
disproportionate as to the amount of damages
which MFC could be liable to pay that the only
inference that the court could draw is that they had
not genuinely agreed a pre-estimate of damages.
16 Mr Bannister also relies on Abrahams v
Performing Rights Society [1995] 1 WLR 1028 , in
which this court held that where there was a right to
receive a lump sum payment under a service
agreement the dismissed employee had no duty to
mitigate since he was not claiming damages.
17 Mr Bannister submits that the effect of clause
17.2 is that any arrears of contributions to Mr
Murray's private pension which MFC had failed to
pay were swept up in the settlement provided for
by clause 17.1. The same would apply to the loss of
directorships of associated companies.
Accordingly, he submits that it would be odd if the
company was liable for more under clause 17.1
than under clause 3.1.
18 Mr Richard Salter QC, for MFC, submits that a
clause may be a penalty even though the parties
were at arm's length. He submits that there is no
presumption of validity. He relies on the decisions
of this court in the Cine case, and Jeancharm Ltd
(t/a Beaver International) v Barnet Football Club
Ltd [2003] 92 Con LR 26 . In the latter case this
court held that nothing in the Philips case
represented a departure from the law as established
by Lord Dunedin in the Dunlop case. Mr Salter
submits that the correct test as to whether any
contractual sum is a penalty is to ask as a matter of
interpretation or the contract whether the sum
payable under that provision is a genuine pre-
estimate of what the loss is likely to be. If it is a
genuine pre-estimate of loss, the provision will be
enforceable as liquidated damages. Otherwise it
will be a penalty. The tests suggested by Lord
Dunedin in the Dunlop case are merely aids to
applying that test. The sum payable on breach does
not have to be extravagant or unconscionable.
19 Mr Salter submits that if, contrary to his
submission, there is a presumption of validity, it
applies only to agreements made at arm's length,
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and, on his submission, the agreement was not
negotiated at arm's length. He submits that the
judge so found in [97] of his judgment, quoted
above. He rejected the evidence of Mr Murray that
Mr Rankin negotiated the agreement on behalf of
the company.
20 Mr Salter submits that the parties contemplated
that Mr Murray would set up his own pension
scheme. The judge was right in holding that
pension accruals were excluded from clause 17.1 of
the agreement. In any event, it was unlikely that the
parties thought there would be any accruals at the
time the agreement was entered into. Accordingly
no account should be taken of the argument that
such accruals would be swept up in the settlement
effected by clause 17.2.
21 Mr Salter relies on the fact that the agreement to
pay one year's gross salary was greatly in excess of
the maximum that the employee could obtain.
Clause 17.1 applied to wrongful termination unless
Mr Murray was given full contractual notice or the
agreement terminated because he attained the age
of 70 years (clause 3.2) or became bankrupt or
incapable or the termination was for cause (clause
15). Clause 17.1 takes no account of mitigation or
of the possibility that MFC might give some,
though not full, notice. That follows from clause
17.1 which provides for the sum payable under
clause 17.1 to be paid forthwith on the termination
of the contract, viz at the end of the period of
(short) notice. Moreover at common law he would
have to give credit for the tax that he would have
paid if the sum had been paid as remuneration but
which was not payable because the amount was a
lump sum payable on determination of his service
agreement. (This relates to the first £30,000 tranche
of the compensation). In addition, it had to be
assumed that the employer would perform the
contract in the way most beneficial to him and that
accordingly he would not award bonuses or
increase the salary to which Mr Murray was
entitled during the year for which he should have
been given notice. Accordingly no account could
be taken of possible increases of bonuses.
22 Mr Salter points out that Mr Murray claimed at
trial that he was entitled to the 7½ weeks'
remuneration in addition to the 12 months under
clause 17.1. Mr Salter submits that when MFC
terminates Mr Murray's employment on notice, the
termination occurs at the expiration of the notice.
Accordingly in this case it occurred on 30 June
1998 when the notice expired.
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23 Mr Murray had his own companies and
therefore it must have been clear to the parties that
he would receive income from other sources if he
was dismissed. Mr Salter does not accept that Mr
Murray would necessarily have difficulty finding a
comparable position. If indeed he had become a
business mogul as a result of the acquisition of a
building society or financial institution, he would
have become entitled to up to three years' gross
salary under clause 17.1. Mr Salter submits that it
is plain that clause 17 overcompensates Mr Murray.
24 In support of his submission that the contract
terminated at the end of the period of notice, Mr
Salter relies on clauses 8 and 16 of the agreement.
25 Mr Salter submits that in determining whether
clause 17 constitutes a penalty, no account should
be taken of heads of damage which are not
recoverable by law. In effect, the parties have to
pre-estimate the damages correctly in broad terms.
In the Cine case, the inclusion of a head of damage
which was not recoverable was treated as an
indicator that the term might be a penalty.
26 In reply Mr Bannister relies on the board minute
of 29 April 1998 whereby the independent director
of MFC approved the agreement in its original
form. He submits that MFC could not unilaterally
alter the date of expiry of the contract by giving
short notice. He submits that the agreement draws a
distinction between terminating employment and
terminating the agreement. Mr Murray continued to
be employed even though the agreement itself has
terminated.
27 Mr Bannister submits that when the courts
speak of a genuine pre-estimate of damages in the
Clydebank Engineering and Shipbuilding Company
Limited v Don Jose Ramos Yzquierdo y Castenada
[1905] AC 6 and subsequent cases, that does not
involve an economic or financial forecasting.
Otherwise, the cases could not have been decided
as they were. A pre-estimate of damages for this
purpose is not the same as a builder's estimate
which is supposed to be accurate. It is sufficient
that the parties have treated the sum as an adequate
and sufficient sum. A contrast should be drawn
between sums of that nature and amounts
arbitrarily inserted into a contract with no purpose
other than to secure compliance in the event of
default. Such clauses are properly described as in
terrorem .
28 The crucial question is on which side of the line
clause 17.1 falls. Mr Bannister submits that in the
Robophone case Lord Diplock carried out
calculations because one of the parties was a
litigant in person. However on Mr Bannister's
submission the court does not have to do that. Mr
Bannister accepts that, when the courts are working
out common law damages, deductions are made.
However that is not the same situation. What a
person would have got is probably inadmissible
evidence. It is open to the parties to agree to pay a
sum without deduction of tax. Such a sum is not in
terrorem of a breach or a disincentive to a party to
breach a contract. Accordingly it does not begin to
be a penalty.
Conclusions on the Penalty Issue
29 The penalty issue is one of considerable
jurisprudential interest. English law is well-known
for the respect which it gives to the sanctity of
contact. The question which the law of penalties
poses is this: to what extent does English contract
law allow parties to a contract to specify for their
own remedies in damages in the event of breach?
The answer is that English law does not in this
particular field take the same laissez-faire approach
that it takes to (for example) the question whether
parties can agree to time limits for the performance
of obligations which they subsequently find
difficulty in meeting. So far as that is concerned,
pacta sunt servanda . So far as pre-determined
damages clauses are concerned, English contract
law recognises that, if the parties agree that a party
in breach of contract shall pay an unjustifiable
amount in the event of a breach of contract, their
agreement is to that extent unenforceable . The
reasons for this exception may be pragmatic rather
principled. Diplock LJ made the following
observations on this point in the Robophone case:
“I make no attempt, where so many others have
failed, to rationalise this common law rule. It seems
to be sui generis. The court has no general
jurisdiction to re-form terms of a contract because
it thinks them unduly onerous on one of the parties-
otherwise we should not be so hard put to find
tortuous constructions for exemption clauses,
which are penalty clauses in reverse; we could
simply refuse to enforce them. … But however
anomalous it may be, the rule of public policy that
the court will not enforce a “penalty clause” so as
to permit a party to a contract to recover in an
action a sum greater than the measure of damages
to which he would be entitled at common law is
well established, and in these days when so often
one party cannot satisfy his contractual hunger a la
carte but only at the table d'hote of a standard
printed contract, it has certainly not outlived its
usefulness.” (at pages1446 to 1447)
30 Interestingly, despite the influence of equity,
English law has not always taken a consistent
approach. As cases cited by the parties show, that
the present position was only reached through the
influence of Scots law and Commonwealth
jurisprudence. Dunlop Pneumatic Tyre v New
Garage and Motor Company, Ltd is thus a
remarkable example of the ability of English
common law to absorb rules from other legal
systems, and in addition of the influence of the
Privy Council. The latter point is relevant to the
question which Baroness Hale recently raised for
consideration, namely the question whether this
court is bound by previous decisions which have
been disapproved as part of the ratio decidendi in a
Privy Council case (see her speech in National
Westminster Bank plc v Spectrum Plus Ltd [2005]
UKHL 41 ,[163]).
31 The Clydebank case, cited by counsel, was a
Scottish appeal. It concerned a contract for the
construction by a Scottish shipbuilder of four
torpedo boats for the Spanish government. The
contract provided that: “The penalty for late
delivery shall be at the rate of £500 per week for
each vessel”. The House of Lords held that this
sum was not a penalty. In the words of Lord
Halsbury LC, it was “obvious on the face of the
contract that the very thing intended to be provided
against by this pactional amount of damages is to
avoid [the] kind of minute and somewhat difficult
and complex system of examination that would be
necessary if you were to attempt to prove the
damage.” (page 11). Lord Davey applied a
principle of interpretation of contracts in Scots law:
“My Lords, I therefore conceive that it may be
taken as an established principle in the law of
Scotland that, if you find a sum of money made
payable for the breach, not of an agreement
generally which might result in either a trifling or a
serious breach, but a breach of one particular
stipulation in an agreement, and when you find that
the sum payable is proportioned to the amount if I
may so call it, or the rate of the non-performance of
the agreement — for instance, if you find that it is
so much per acre for ground which has been spoilt
by mining operations, or if you find, as in the
present case, that it is so much per week during the
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whole time for which the non-delivery of vessels
beyond the contract time is delayed — then you
infer that prim? facie the parties intended the
amount to be liquidate damages and not penalty. I
say “prim? facie” because it is always open to the
parties to shew that the amount named in the clause
is so exorbitant and extravagant that it could not
possibly have been regarded as damages for any
possible breach which was in the contemplation of
the parties, and that is a reason for holding it to be a
penalty and not liquidated damages
notwithstanding the considerations to which I have
alluded.”
32 Lord Davey held that evidence as to the loss
which the Spanish government had actually
suffered was inadmissible, and that it would be
contrary to the purpose of the clause to admit such
evidence. For different view on this point, see per
Lord Woolf in the Philips case at pages 59–60.
33 The Clydebank case was decided in 1904, and it
was followed by two decisions of the Privy
Council, namely Public Works Commissioner v
Hills [1906] AC 368 and Webster v Bosanquet
[1912] AC 394 . The former case was an appeal
from the Cape of Good Hope. The advice of the
Privy Council was given by Lord Dunedin, who
later gave the leading judgment in the Dunlop case.
He noted that the Clydebank case was decided
according to “the rules of a system of law where
contract law was based directly on the civil law and
no complications in the matter of pleading had ever
been introduced by the separation of common law
and equity.” (page 375). The Privy Council held
that the clause in that case was a penalty. It held
that the principle to be deduced from the
Clydebank case was that the criterion of whether a
sum was a penalty or damages was to be found in
whether the sum in question “can or cannot be
regarded as a “genuine pre-estimate of the
creditor's probable or possible interest in the due
performance of the principal obligation.” (page
376). In Webster v Bosanquet the appeal to the
Privy Council came from Ceylon. The Privy
Council again applied the Clydebank case.
34 The three cases just cited play an important role
in the speech of Lord Dunedin in the Dunlop case.
In that case, a contractual provision in an
agreement between a manufacturer and dealer in
tyres for the payment of 5s per tyre sold below list
price in breach of contract was held on the facts not
to be a penalty. The House reversed the
(unreported) decision of this court (Vaughan
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Williams and Swinfen Eady LJJ, Kennedy LJ
dissenting). The Court of Appeal held that, since
the contract in question provided for damages to be
paid on breaches of varying degrees of importance,
the relevant provision had to be treated as a
penalty. The House took the view that such a clause
did not inevitably have to be treated as penalty. The
leading speech was that of Lord Dunedin and he,
drawing on the three cases mentioned above,
enunciated the law on penalties which is now
embedded in our common law. The classic
statement of the law on penalties by Lord Dunedin
in the Dunlop case is set out below.
35 The judge took the analysis of the case law on
penalties in the recent Cine case as a complete
statement of the law for his purposes. I will take it
as my starting point. The facts of that case are
complex and issues arose which are not relevant for
the consideration of penalties, and accordingly I
will restrict my examination of the case to a
statement of the facts and principles set out therein
relevant to the question of penalties. The first
judgment was that of Mance LJ. The other
members of the court, Peter Gibson and Thomas
LJJ, agreed with him, but gave concurring
judgments.
36 The Cine case concerned the appeal of a Turkish
cable television company and its guarantor from
the order of Mr Julian Flaux QC giving summary
judgment for damages to be assessed for breach of
an agreement dated as of 1 May 2000 in favour of
the claimant, a joint venture company (“UIP”).
Under this agreement Cine was given a licence to
exhibit films of the members of the joint venture.
Two critical provisions of the agreement were
clauses 16 and 17. Clause 16 required Cine to hold
an amount of $4,836,155 (“the AB amount”) in a
special account for use by UIP and the members of
the joint venture in advertising the films licensed.
On termination of the agreement the full AB
amount had to be paid to UIP. Clause 17 dealt with
termination. If Cine failed to maintain a letter of
credit in favour of UIP, for payment of the licence
fees, UIP could terminate the agreement and
thereupon the whole of the licence fees payable
over the balance of the term of the licence became
due and payable, together with all damages
resulting from such breach the AB amount and the
outstanding costs of certain prior proceedings
between the parties which had been compromised.
37 The relevant issue on the Cine appeal was
whether the argument that clauses 16 and 17 were
unenforceable as penalties had a real prospect of
success. If so, the claimant was not entitled to
summary judgment and the matter would have to
go to trial. Because this was an appeal from the
grant of summary judgment, this court did not have
to reach a final view on these matters.
38 There is a useful and succinct statement of the
law in the judgment of Mance LJ:
“11.The general scope of the law relating to
penalties was identified by Lord Browne-
Wilkinson giving the advice of the Privy Council in
Workers Trust Bank Ltd. v. Dojap Ltd. [1993] AC
573 :
“In general, a contractual provision which requires
one party in the event of his breach of the contract
to pay or forfeit a sum of money to the other party
is unlawful as being a penalty, unless such
provision can be justified as being a payment of
liquidated damages being a genuine pre-estimate of
the loss which the innocent party will incur by
reason of the breach. One exception to this general
rule is the provision for the payment of a deposit
(customarily 10% of the contract price) on the sale
of land …”
12.The classic distinction drawn by Lord Dunedin
in Dunlop Pneumatic Tyre Company v. New
Garage and Motor Company Ltd. [1915] AC 79 ,
86f was between a payment on breach stipulated as
in terrorem of the offending party and a genuine
covenanted pre-estimate of damage. Lord Dunedin
added that the question was one of construction of
each contract, to be decided as at the time of its
making, not the time of breach. He offered as tests
which might prove “helpful, or even conclusive”,
these:“a)It will be held to be penalty if the sum
stipulated for is extravagant and unconscionable in
amount in comparison with the greatest loss that
could conceivably be proved to have followed from
the breach …b)It will be held to be a penalty if the
breach consists only in not paying a sum of money,
and the sum stipulated is a sum greater than the
sum which ought to have been paid … This though
one of the most ancient instances is truly a
corollary to the last test. Whether it had its
historical origin in the doctrine of the common law
that when A. promised to pay B. a sum of money
on a certain day and did not do so, B. could only
recover the sum with, in certain cases, interest, but
could never recover further damages for non-
timeous payment, or whether it was a survival of
the time when equity reformed unconscionable
bargains merely because they were unconscionable
… is probably more interesting than material.
(c)There is a presumption (but no more) that it is
penalty when “a single lump sum is made payable
by way of compensation, on the occurrence of one
or more or all of several events, some of which
may occasion serious and others but trifling
damage”.On the other hand:(d)It is no obstacle to
the sum stipulated being a genuine pre-estimate of
damage, that the consequences of the breach are
such as to make precise pre-estimation almost an
impossibility. On the contrary, that is just the
situation when it is probable that pre-estimated
damage was the true bargain between the parties
…”
13.Although the phrase in terrorem has appeared
in many cases since Dunlop , there is force in Lord
Radcliffe's comment in Campbell Discount Co.
Ltd. v. Bridge [1962] AC 600 , 622, that
“I do not find that that description adds anything to
the idea conveyed by the word “penalty” itself, and
it obscures the fact that penalties may quite easily
be undertaken by parties who are not in the least
terrorised by the prospect of having to pay them
….” A more accessible paraphrase of the concept
of penalty is that adopted by Colman J in Lordsvale
Finance Plc v. Bank of Zambia [1996] QB 752 ,
762G, when he said that Dunlop Pneumatic Tyre
showed that:
“whether a provision is to be treated as a penalty is
a matter of construction to be resolved by asking
whether at the time the contract was entered into
the predominant contractual function of the
provision was to deter a party from breaking the
contract or to compensate the innocent party for
breach. That the contractual function is deterrent
rather than compensatory can be deduced by
comparing the amount that would be payable on
breach with the loss that might be sustained if
breach occurred.”
14.In Philips Hong Kong Ltd. v. The AG of Hong
Kong (1993) 61 BLR 49, the Privy Council in
advice delivered by Lord Woolf underlined test (a)
suggested by Lord Dunedin, endorsed the view that
the “court should not be astute to descry a ‘penalty
clause’” and emphasised that it would “normally be
insufficient … to identify situations where the
application of the provision could result in a larger
sum being recovered by the injured party than his
actual loss” (pp.58–59). However, Lord Woolf
went on:
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“A difficulty can arise where the range of possible
loss is broad. Where it should be obvious that, in
relation to part of the range, the liquidated damages
are totally out of proportion to certain of the losses
which may be incurred, the failure to make special
provision for those losses may result in the
“liquidated damages” not being recoverable. (See
the decision of the Court of Appeal on very special
facts in Ariston SRL v Charly Records Ltd (1990)
The Independent 13 April 1990 .) However, the
court has to be careful not to set too stringent a
standard and bear in mind that what the parties
have agreed should normally be upheld. Any other
approach will lead to undesirable uncertainty
especially in commercial contracts “
15.I have also have found valuable Colman J's
further observation in Lordsvale at pp.763g–764a,
which indicate that a dichotomy between a genuine
pre-estimate of damages and a penalty does not
necessarily cover all the possibilities. There are
clauses which may operate on breach, but which
fall into neither category, and they may be
commercially perfectly justifiable. In the case
before him, Colman J was concerned with a
provision for prospective increase in the interest
rate payable by a borrower, following the
borrower's default. He said that, although the
payment of liquidated damages is “the most
prevalent purpose” for which an additional
payment on breach might be required under a
contract
”… the jurisdiction in relation to penalty clauses is
concerned not primarily with the enforcement of
inoffensive liquidated damages clauses but rather
with protection against the effect of penalty
clauses. There would therefore seem to be no
reason in principle why a contractual provision the
effect of which was to increase the consideration
payable under an executory contract upon the
happening of a default should be struck down as a
penalty if the increase could in the circumstances
be explained as commercially justifiable, provided
always that its dominant purpose was not to deter
the other party from breach.”&4dquo;
39 In essence, this court held in the Cine case, that
in determining whether provisions were a penalty
the court had at the outset of its enquiry to look at
the aggregate amount that would be payable on
breach under the terms of the agreement, and
compare that with what would have been payable if
UIP had had to bring its claim under the common
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law. In other words the alleged genuine pre-
estimate of loss in clause 17 had to relate to the
overall net balance of losses payable on termination
less the credits to which Cine would have been
entitled at common law. The court declined to treat
the AB amount as separate from the other items
payable on breach under clause 17. It noted that
under the agreement UIP did not have to give credit
for the right to use the films licensed to Cine,
which came to an end on the termination of its
licence.
40 In the circumstances, this court concluded that a
triable issue was shown with respect to the question
whether the provisions of the agreement for the
acceleration of licence fees and the payment of the
AB amount to UIP in the event of breach were
unenforceable as penalties. At [50], Thomas LJ
held that it would have to be investigated at trial
why what appeared to be benefits to UIP on
termination were not brought into account when the
agreement was drawn up. He added: “A genuine
pre-estimate would ordinarily imply consideration
being given to bringing into account the material
and significant matters that went into the
ascertainment of the actual loss suffered by the
innocent party.” As Peter Gibson LJ observed, the
question, whether the failure to bring the benefit of
the termination of the film rights into account in
determining the amount payable on breach
rendered clause 17 a penalty, had to be assessed on
the basis of the position at the date of the
agreement.
41 It was also argued in the Cine case that there
was a triable issue as to whether the other amounts
payable on breach were also penalties but for
reasons which were specific to the facts of that case
and which I need not explore the court held that the
only triable issues were as I have set out above.
42 What, to my judgment, is striking about the
statement of the law in the Cine case and its
application is the way in which the court sought
objectively to rationalise its conclusions as to
whether the provisions of the agreement constituted
a penalty. The court's reasoning turns on a
comparison between the overall amount payable
under the agreement in the event of a breach with
the overall amount that would have been payable if
a claim for damages for breach of contract had
been brought at common law. The court proceeded
on the basis that, if such a comparison discloses a
discrepancy, which can be shown not to be a
genuine pre-estimate of damage or to be
unjustified, the agreement provides for a penalty.
43 The usual way of expressing the conclusion that
a contractual provision does not impose a penalty is
by stating that the provision for the payment of
money in the event of breach was a genuine pre-
estimate by the parties to the agreement of the
damage the innocent party would suffer in the
event of breach. As Lord Dunedin said in the
Dunlop case, the “essence” of a liquidated damages
clause is “a genuine covenanted pre-estimate of
damage” (at page 86). As the Dunlop case and the
citation from the Philips case (in the Cine case)
show, a contractual provision does not become a
penalty simply because the clause in question
results in overpayment in particular circumstances.
The parties are allowed a generous margin.
44 The judgments in the Cine case show the
continued usefulness of the authoritative guidance
given by Lord Dunedin in the Dunlop . There are
two particular points I would make about that
guidance for the purposes of this appeal. First,
paragraph (a) envisages an exceptional payment,
though paragraph (a) does not state that this is the
only circumstance in which a payment will be held
to be a penalty. Second, paragraph (c) of Lord
Dunedin's guidance shows that there are several
types of clause which may amount to penalties.
Some may provide for the same sum to be paid on
different breaches of contract. That is the sort of
penalty clause which Lord Dunedin had in mind in
(c). There are other kinds of clauses which may
constitute penalties, such as those which provide
for a single sum or aggregate sum to be paid on a
single breach. This was the situation in the Cine
case. It is also the case in this case where there is a
single event giving rise to the payment of money
under clause 17, namely the termination of the
agreement without giving one year's notice.
45 Third, paragraph (d) of Lord Dunedin's
guidance is also relevant in this case. When a
person is dismissed without notice, it is difficult to
forecast in advance what the damages payable will
be. It may depend for instance on whether he is
able to obtain comparable employment. Paragraph
(d) makes it clear that, even in the situation when
the parties cannot at the time of contracting, predict
the loss likely to result from a breach of contract, a
sum can be a genuine pre-estimate of damage.
46 In paragraph (a) Lord Dunedin refers to the sum
stipulated in the parties' contract being
“extravagant and unconscionable”. The decision of
this court in the Cine case shows that those words
have to be given a contemporary meaning. The real
question is whether the sums for which the parties
have provided the paid on breach differ
substantially from the sums that would be
recoverable at common law and whether there is
shown to be no justification for that.
47 In paragraph 13 of his judgment, quoted above,
Mance LJ refers to the observation of Lord
Radcliffe in Campbell Discount Co Ltd v Bridge
[1962] AC 600 , 622 that the description of sums
being stipulated as in terrorem adds little to the
concept of penalty. That point has particular
resonance in this case. The evidence of Mr Murray
at trial was not that he wanted to terrorise MFC or
that he wanted to deter MFC from dismissing him
without one year's notice. His evidence was that he
wanted a remuneration package which, seen
overall, was generous because of the loss that his
working for MFC would cause to his other business
interests. In other words Mr Murray was motivated
by his own desire to protect his own interests not a
desire to terrorise MFC. Since he had other
business interests, he would not necessarily want to
deter MFC from terminating his agreement. For the
reasons given below, I do not consider that the
absence of evidence that Mr. Murray intended to
deter MFC from breaching the agreement means
that clause 17.1 cannot be a penalty.
48 I have already referred to the Philips case, which
is referred to by Mance LJ in paragraph 14 of his
judgment. The words of Lord Woolf which he
quotes are a timely reminder of the importance of
legal certainty. The court should give weight to the
fact that the parties have agreed the particular
clause. In the same case Lord Woolf said:
“Except possibly in the case of situations where
one of the parties to the contract is able to dominate
the other as to the choice of the terms of a contract,
it will normally be insufficient to establish that a
provision is objectionably penal to identify
situations where the application of the provision
could result in a larger sum being recovered by the
injured party than his actual loss.” (at pages 58 to
59)
49 The appellant has relied on the opening phrase
in this passage. He contends that this is not a case
where domination can be shown and that
accordingly the respondent cannot, simply by
pointing to the absence of any deduction for
mitigation from the payment provided for by clause
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17 in this case, contend that clause 17 must be a
penalty because in some situations a greater loss
could be recovered under clause 17 than at
common law. In my judgment there are two
answers to this point. The first is that Lord Woolf
was not laying down any principle that a different
rule would apply in the case of domination; he
simply recognised that there might be a different
rule in that case. Indeed this court in the Jeancharm
case held that the Philips case did not represent a
departure from the law as laid down by Lord
Dunedin in the Dunlop case. Accordingly I do not
consider that oppression on a party to make a
contract is of itself a criterion in determining
whether a contractual sum is a penalty. Second the
fact that a greater loss can be recovered under a
contractual provision than at common law may lead
to the conclusion that the clause in question is a
penalty, although that result is not inevitable. It all
depends on the circumstances.
50 In paragraph 15 of his judgment, Mance LJ
makes the point that it need not simply be shown
that the clause was a genuine pre-estimate of the
damage that would occur on breach. There is scope
for other justification for the amount payable on
breach. The Cine case illustrates this point. Clause
17 of the agreement in that case provided for the
payment of costs of prior proceedings. Those
proceedings had been compromised on terms
which did not require Cine to pay UIP's costs.
However, Mance LJ was not prepared to hold that
the clause was necessarily a penalty. It was open to
the parties to agree to forego the costs in the prior
litigation on terms that the new agreement was
entered into and duly performed.
51 However in the normal situation, the test will be
whether or not the parties genuinely pre-estimated
the loss that would occur on breach. This is a
relatively low level of review: see paragraphs 44
and 45 above. I agree with Mr Bannister that the
parties do not have to make an accurate assessment
of the damages that would have been awarded at
common law. Indeed it may be very difficult for
them to do so. That will frequently be the case in
an employment contract. In ascertaining whether
the parties have made a genuine pre-estimate of the
damage, the court will consider the reasons which
the parties had for agreeing to the clause in
question at the time when the agreement was made.
52 Lord Dunedin in the Dunlop case makes the
point that, although the issue is one of construction,
the court is not confined to the terms of the
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agreement and may look at the “inherent
circumstances of each particular contract, judged of
as at the time of the making of the contract, not at
the time of the breach …” (at page 87). In my
judgment, the inherent circumstances to which the
court may have regard extend beyond those which
may be adduced in evidence for the purposes of
determining the true interpretation of the agreement
under the well known test in the Investors'
Compensation Scheme Ltd v West Bromwich
Building Society [1998] 1 WLR 896 . But the
purpose of adducing that evidence is not so that the
parties can demonstrate that they agreed to opt out
of the remedies regime provided by the common
law but rather that the reasons that they had for
doing so constitute adequate justification for the
discrepancy between the contractual measure of
damages and that provided by the common law.
53 The parties in this case cited a number of further
authorities not cited by Mance LJ in the Cine case.
I need only deal with Abrahams v Performing
Right Society . In this case, the plaintiff was
employed for an indefinite period under a contract
by which his employer had agreed to give him two
years' notice of termination of his employment or
pay him a lump sum of two years' salary in lieu.
The employer failed to give notice and so the
plaintiff sued him for the lump sum. The employer
argued that the plaintiff had a duty to mitigate his
loss but this argument was rejected because the
payment of two years salary was a contractual
payment, viz one which the employer was bound to
make. Termination of the plaintiff's employment
was not a breach of the contract but if the employer
elected to terminate the contract, it had either to
give notice or to pay a sum equivalent to two years'
gross salary. Hutchinson LJ, with whom Aldous LJ
agreed, observed that the contractual sum could not
be impugned as a penalty. He did not give any
reasons for this conclusion. Accordingly it is not
clear whether Hutchinson LJ meant that the clause
was a genuine pre-estimate of the employee's loss
or whether he meant that since the sum was not
payable on breach but on the exercise of an option
to terminate the employment of the plaintiff with a
lump sum payment. In my judgment, he meant the
latter. In that case it is distinguishable from the
present case where the sum payable under clause
17 is payable on breach. There does not appear to
have been argument directed to the penalty
question in any event.
54 With the benefit of the citation of authority
given above, in my judgment, the following (with
the explanation given below) constitutes a practical
step by step guide as to the questions which the
court should ask in a case like this:—
• i) To what breaches of contract does the contractual damagesclause
• ii) What amount is payable on breach under that clause in thethe
55 A point that neither the Dunlop case nor the
Cine case considers is the position if either there is
no evidence at trial as to why the parties agreed a
particular clause, or if the evidence is that they did
consider it but took a wholly wrong view about
what damages would be payable under the general
law in the event of breach. In the Dunlop case, trial
had taken place and there had been evidence as to
why Dunlop needed the clause. In the Cine case,
trial had not take place but the court proceeded on
the basis that there would or could be evidence
about the reasons for the clause in question at the
trial to which the case was remitted. What happens
if there is no evidence about the reasons for the
clause? There would in my judgment be no reason
why the court could not draw inferences of fact as
to the reasons and as to the genuineness of those
reasons. What if it appears from the evidence that
is given (or from the inferences that the court
makes from the facts) that the decision to include
the damages clause was included on the basis of a
mistaken belief that the damages at common law
would be assessed on a materially more generous
basis than in fact would occur? This would be the
case if for example the parties failed to have regard
to the fact that a party would have to give credit for
a benefit that he obtained on breach, such as a tax
saving as a result of the receipt of damages for lost
income in the form of a lump sum payment of
damages. In my judgment, the good faith belief of
the parties is not the deciding factor here. The court
would look at the result and (bearing in mind that
the onus is on the party challenging the clause to
establish that it is a penalty) ask whether it is
satisfied that the parties could not, if they had had
the proper information or considerations in front of
them, genuinely have considered that the damages
payable under the contractual provision were a
realistic pre-estimate of the damages payable on
breach at common law. In other words, in the
context of Lord Dunedin's speech, the test of
genuineness is objective. A pre-estimate is genuine
if it is not unreasonable in all the circumstances of
the case.
56 I now turn to the facts of this case
• iii) What amount would be payable if a claim for damages for bre
law?
• iv) What were the parties' reasons for agreeing for the relevant cl
• v) Has the party who seeks to establish that the clause is a penalty
provision
was apply?
imposed in terrorem , or that it does not constitute a g
parties' agreement?
Dunlop case, and, if he has shown the latter, is there some oth
between i) and ii) above?
The first step —to what breaches of contract did
the contractual damages provision apply?
57 The provisions of the agreement are clear at
least in this respect, namely that Clause 17.1
applies whenever there is Wrongful Termination as
defined in the agreement. I deal below with the
effect on clause 17.1 where some notice, but less
than one year's notice, is given.
The second step — what amount did the
agreement provide should be payable on
breach?
58 It is common ground that, under clause 17.1 of
the agreement, if MFC gives no notice to terminate
the agreement, Mr Murray becomes entitled to a
year's gross salary, pension and other benefits in
kind. Is the position altered by the fact that MFC in
fact gave 7 ½ weeks notice?
59 Mr Salter submits that the effect of inadequate
notice is that MFC has to pay remuneration earned
in the period of notice and in addition the sum
payable under clause 17.1. He points out that that
indeed was Mr Murray's case at the trial. He points
to the literal working of clause 17.1 and to the fact
that the sum payable under clause 17.1 is payable
on Wrongful Termination, i.e. at the end of the
period of notice.
60 The parties did nor provide for what was to
happen if MFC gave (say) 364 and not 365 days
notice. It would, however, be remarkable if, as Mr
Salter contends, in that case the effect of the
agreement was that MFC was bound to pay a whole
years gross salary and other benefits under clause
17.1 in addition to the sums due during the period
of notice. There is no commercial logic in this
position and no suggestion that it was a result
which the parties expressly intended to achieve. As
drafted the agreement proceeds on the basis that
except where the agreement makes other express
provision MFC will either give the full 12 months'
notice or no notice. In my judgment the agreement
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must be construed as meaning that if less than one
year's notice is given the payment of gross salary
etc under clause 17.1 is reduced to the extent that
salary is duly paid in the notice period. Otherwise
the agreement would have the draconian effect for
which Mr Salter contends. In my judgment the
agreement should be construed to have the effect
which I have given it, rather than the potentially
extreme result for which Mr Salter contends.
61 The other issue of interpretation of the
agreement is whether the opening words of clause
17.2 mean that Mr Murray does not thereunder give
up his rights to amounts due to him by MFC for
arrears of pension contribution.
62 Again there is force in that submission as a
matter of the literal wording of the clause in
question, which speaks of rights accrued “under the
provisions of any pension scheme”. I have not seen
Mr Murray's pension scheme to which MFC
contributed on his behalf. I will assume that the
scheme itself imposed no obligation on MFC to
pay contributions to the scheme. On that basis Mr
Murray's right as against MFC to enforce payment
of any outstanding contributions would not be
rights accrued under the pension scheme. The
judge considered that the opening words of clause
17.2 referred to accrued rights of any kind, but he
did not develop his reasons for this and his
interpretation gives no effect to the words “under
the provisions of any pension scheme”. I consider
that the judge's interpretation was in error and that
the effect of the opening words is that Mr Murray
relinquishes any right to any arrears of
contributions to his pension scheme when a
payment is made under clause 17.1. but only if
MFC was obliged to make payments under the
scheme. The release of the right to such arrears
therefore forms part of the justification for the one
year's gross salary etc provided for in clause 17.1.
63 In the events which happened, MFC became
liable under clause 17.1 (if enforceable) to pay 44
½ weeks gross salary, pension contributions and
other benefits to Mr Murray.
The third step — What damages would have
been payable at common law?
64 This calculation falls to be made as at the date
of the signing of the contract, not at the date of
breach (see the Dunlop case) and accordingly it can
only be an approximate calculation.
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65 In the present case, however, it is clear that at
common law Mr Murray would have to mitigate his
damages by giving credit for remuneration he could
reasonably have earned from other sources in the
period of one year ( or in the events which
happened 44 ½ weeks) following notice. These
matters are common ground. On my interpretation
of the agreement, he would also have had to give
credit for what he earned in the 7 ½ weeks for
which he was given notice. There is no suggestion
that Mr Murray would not be able to obtain some
kind of alternative employment. On the contrary at
the time the agreement was executed he clearly had
other business interests in which he could be
gainfully employed. MFC submits that he would
also have to give credit for the fact that the first
£30,000 of his compensation package is tax free,
whereas if he had earned his salary in the usual way
he would have paid income tax on it. Mr Bannister
does not appear to challenge this, and we were not
taken to taxing provisions in point. It follows that
the sum payable under clause 17.1 was likely
greatly to exceed the damages which Mr Murray
could have claimed if he had brought an action for
breach of contract.
66 The fact that some of the damages may be
difficult to calculate as at the date of the contract
(for example, because they require a prediction as
to future interest rates) may lead the court to take
the view that there was good reason for the parties
to agree to a contractual provision for the payment
of damages in the event of breach so that they
would know for certain what the consequences of
breach would be. As Diplock LJ said in the
Robophone case:
“[Nevertheless,] the courts would be doing an ill-
turn to those whom the rule about “penalty clauses”
is designed to protect if they were to apply it so as
to make it impracticable for parties to agree at the
time when they enter into a contract on a fair and
easily ascertainable sum to become payable by one
party to another as compensation for the loss which
the latter will sustain as a consequence of its
breach. It is good business sense that parties to a
contract should know what will be the financial
consequences to them of a breach on their part, for
circumstances may arise when further performance
of the contract may involve them in loss. And the
more difficult it is likely to prove and assess the
loss which a party will suffer in the event of a
breach, the greater the advantages to both parties of
fixing by the terms of the contract itself an easily
ascertainable sum to be paid in that event. Not only
does it enable the parties to know in advance what
their position will be if a breach occurs and so
avoid litigation at all, but, if litigation cannot be
avoided, it eliminates what may be the very heavy
legal costs of proving the loss actually sustained
which would have to be paid by the unsuccessful
party. The court should not be astute to descry a
“penalty clause” in every provision of a contract
which stipulates a sum to be payable by one party
to the other in the event of a breach by the former.”
(at page 1447)
The fourth step — What were the parties'
reasons for introducing clause 17 into
agreement ?
67 I have already referred to the reason which Mr
Murray gave for his overall remuneration package
at trial. As to MFC's motivation, I have already
referred to the finding by the judge that Mr Murray
was able “within broad limits to determine the
terms of the service agreement …”([97]). For my
part I do not consider that it is possible to go
behind this finding, though it must of course be
read in the context of the judge's other findings.
There is no finding as to what justification the other
directors had for causing MFC to agree to this
clause. There is no evidence that they tried to
negotiate any better terms with MFC. I appreciate
that MFC was advised by a leading firm of
solicitors, but the question of what the terms of the
agreement should be was also one for commercial
negotiation. This case can be contrasted with the
Dunlop case where there was uncontroverted
evidence that Dunlop would be damaged if its tyres
were sold below list price.
68 The evidence to which I have referred in the
preceding paragraph is direct evidence as to the
parties' motivation. As I have explained above, the
fact that the parties do not express their aims in
agreeing a clause challenged as a penalty does not
prevent the clause from being found to be a
penalty. I have held above that in my judgment, the
relevant question in that event is whether the
parties could not, if they had had the proper
information or considerations in front of them,
genuinely have considered that the damages
payable under the contractual provision were a
realistic pre-estimate of the damages payable on
breach at common law. I deal with that question
that I turn under the next step.
The fifth step — Has MFC shown that the
amount payable under clause 17 was imposed in
terrorem , or that it did not amount to a genuine
pre-estimate of damage for the purposes of the
Dunlop case, and (if the latter) was there some
other justification for the payment of these
amounts?
69 The burden of showing that a clause for the
payment of damages on breach is a penalty clause
is on the party who seeks to escape liability under
it, not on the party who seeks to enforce it. I have
already made the point that there is no direct
evidence as to why the parties agreed to clause 17
rather than (say) a clause making some allowance
for mitigation. As explained above, this issue has to
be judged as at the date of the agreement. In this
case, there is no question of MFC showing that
clause 17 was imposed in terrorem .
70 The judge considered that the deciding issue
was the absence of an allowance for the failure to
mitigate. Any allowance, however, which the
parties could have made would of necessity have
been rough and ready. The judge was also
concerned by the lack of any evidence as to any
independent review of the clause by the other
directors. As against that, however, there was no
concealment of the terms from the board, who did
indeed approve them and MFC was advised by
solicitors. Furthermore, and perhaps of more
significance for the type of review that the court
makes on a penalty issue, the term agreed was not
out of line with market expectations. Particulars of
the directors' service agreements had been included
in the pathfinder prospectus issued by MFC's
financial advisers, Peel Hunt. The particulars
related to Mr Murray's agreement before the
reduction of the period under clause 17 to one year,
with three years only if there was an agreement to
acquire (for example) an insurance company. The
reaction of at least one investor was that the
provision for three years was excessive. No
objection was taken to the provisions disclosed for
other directors, providing for one year's gross
salary alone. The clause in the agreement was then
amended, and the offering of shares and admission
to trading on the Alternative Investment Market,
was successfully achieved. The inference to be
drawn from this sequence of events in my judgment
is that the clause as finally agreed did not cut across
market expectations. Indeed, though we have not
been referred to the various corporate governance
codes to which Lovell White Durrant made
reference in their general advice to MFC, it is well-
known that the upshot of those codes was that a
notice period of one year for directors was regarded
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as generally acceptable. Indeed the Hampel Report
published in January 1998 (which led to a number
of changes in the code of corporate governance
applicable to listed companies at least) specifically
recommended the use of pre-determined damages
clauses fixing the amount payable by companies on
breach of directors' service agreements. It noted
that the notice period in directors' service contracts
was “a fiction. Neither party seriously expects the
typical notice period … to be worked out.” It
referred to the payment of damages on breach of
contract as “inherently unsatisfactory … A solution
which brings certainty would be desirable … Such
a provision would be effective whether or not the
director found other employment …”(para.4.10).
This is part of the background against which clause
17 has to be judged. Since the context in which
clause 17 was agreed was commercial, the question
whether it is a penalty or not has to be assessed by
reference to commercial considerations.
71 The next point is that the agreement contains
some fierce restrictions on competition. During the
period of the agreement, Mr Murray was only due
to work for MFC for three days a week.
Nonetheless, as clause 12 of the agreement set out
above shows, Mr Murray could not after
termination of his agreement engage for one year in
any business which competed with MFC. The type
of business was restricted to the business of
acquiring building societies and other financial
institutions etc “being activities of a kind with
which [Mr Murray] was concerned to a material
extent during the period of one year prior to
termination of his contract”. It is to be noted,
however, that the purpose for which MFC has
raised money through the placing was that the
directors intended to establish the business of MFC
by the acquisition of a building society or financial
institutions. Under clause 13, Mr Murray could ask
for permission to engage in a competing business
but MFC were not obliged to give that permission
if it was not in the interests of MFC to do so.
Accordingly, the restrictions which Mr Murray
undertook to observe on termination of his contract
were important and significant. He had set out to
make his name in business though the acquisition
of building societies and so the restriction could
result in his not being able to pursue his business
plans during the year following termination,
leading to diminished earnings after that year was
up. If MFC wanted a restriction of this kind, it
would not be unreasonable for Mr Murray to
demand some recompense. Moreover if these
restrictions on their true construction apply to a
non-consensual termination of the agreement
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(which it is unnecessary for me to decide), they
would undermine any point that can be made about
Mr Murray being in the prime of his life and well
able to obtain employment, including employment
with one of his own business, if he was summarily
dismissed by MFC.
72 Clause 13 is also not without significance. It
meant that if MFC was taken over by another
company (a not uncommon experience for
companies whose shares are publicly traded on an
exchange in the UK) and he was offered
comparable terms by the acquirer, he would have
no claim for damages if he decided that his ideas
were not consistent with the ethos of the new
management. This again could be a significant
restriction on Mr Murray and one that he would not
necessarily be willing to undertake without
recompense.
73 Another factor which is relevant is that MFC
was content to take the right to elect to make a
payment of one year's salary etc in lieu of notice
under clause 3.1(set out above). It was clearly
prepared to do that without any discount for
mitigation.
74 There are other relevant points. Clause 17 gave
MFC the advantage that if it wanted to dismiss Mr
Murray it could effect a clean break and know the
measure of its financial exposure without what
might well be damaging publicity and lengthy
litigation. If MFC wanted to terminate the
agreement, it would no doubt be because Mr
Murray's continued connection with MFC was
damaging to MFC. In those circumstances as a
commercial matter it might well want to end the
relationship swiftly and without the glare of
publicity. Damages for breach of an employment
contract can be difficult to determine in advance
because of the difficulty of knowing what
alternative employment might be available. The
negotiation of clause 17 achieves the further
advantage of avoiding spending management time
and money on lawyers' fees to work such damages
out.
75 Other factors that can be take into account are:
the fact that if less than one year's notice of
termination of the agreement was given, then on
the interpretation of the agreement which I have
preferred above, the amount payable under clause
17 would be reduced in due proportion. In addition,
on the interpretation that I have preferred above,
Mr Murray could be relinquishing other claims for
arrears of pensions claims under the opening clause
of clause 17.2.
76 In the circumstances, I have come to a different
conclusion from the judge. On the facts of this
case, it is not shown that the parties could not
reasonably have come to the view that clause 17
was a genuine pre-estimate of damage or that it was
not otherwise justifiable. MFC was of course the
contract-breaker. In the considerations referred to
above, I have taken into account the disadvantages
to it of wrongful termination without a pre-
determined damages clause. I do not consider that
the court is precluded from taking such matters into
account. To do so is consistent with freedom of
contract, which the doctrine of penalties has so far
as possible to respect. Such considerations may
help explain why a party may wish to take on an
obligation which (without that explanation) might
be considered to be sufficiently onerous to be a
penalty within paragraph a) of Lord Dunedin's
guidance. Such considerations may indeed be best
described as justification for the clause said to be a
penalty, rather than elements of a genuine pre-
estimate of the damage. In my formulation of the
steps above, I do not intend to exclude such
considerations or the possibility that a clause could
be justified on this sort of ground alone.
The Amendment Issue
77 The judge dealt with this matter at length, but in
the circumstances that it does not now arise, it will
be sufficient if I deal with it briefly.
78 What happened was that on the first day of the
trial Mr Murray sought to amend his pleadings so
as to include a claim for damages at common law.
The judge rejected this application. He held that the
application was very late and wholly
unparticularised. He held that the application was
in effect for a split trial and that accordingly to
accede to the application would put the respondents
at a forensic disadvantage in view of the issues of
credibility that could arise. He proceeded on the
basis, however, that Mr Murray would probably not
be permitted to bring a separate claim for common
law damages.
79 It is the last point that causes me concern. The
modern practice is to allow amendments so that all
the matters in issue between the parties can be
adjudicated upon, unless the party against whom
the amendment is sought will be prejudiced in a
way that cannot be compensated in costs: this point
is made with particular clarity by Peter Gibson LJ
in Cobbold v London Borough of Greenwich
[1999] EWCA Civ 2074 :
“There can be no doubt but that Greenwich are late
in seeking the amendment which, they should have
realised at least as early as November of last year,
needed to be made in order to take the two new
points which they are wanting to argue. However, I
own to being unhappy with the way the judge
exercised his discretion, particularly in relation to
the application to amend. It is, of course, important
that trial dates, when they are fixed, should be
adhered to, but I fear that he may have let that
factor dictate his approach to the question of
amendment. The overriding objective is that the
court should deal with cases justly. That includes,
so far as practicable, ensuring that each case is
dealt with not only expeditiously but also fairly.
Amendments in general ought to be allowed so that
the real dispute between the parties can be
adjudicated upon provided that any prejudice to the
other party or parties caused by the amendment can
be compensated for in costs, and the public interest
in the efficient administration of justice is not
significantly harmed. I cannot agree with the judge
when he said that there would be no prejudice to
Greenwich in not being allowed to make the
amendments which they are seeking. There is
always prejudice when a party is not allowed to put
forward his real case, provided that that is properly
arguable”(transcript pages 4 to 5)
80 There would no real prejudice to the
respondents of a recognisable kind that could not
be compensated in costs if the amendment was
allowed, though I would accept that MFC should
have the option of having the issues arising from
the amendment tried before the same judge. I can
see no basis on which Mr Murray could object to
such of the issues raised by the amendment which
would normally be heard by a judge being tried by
Stanley Burnton J.
81 The only issue of prejudice relied on is the
delay. MFC is in difficulty making its business
plans for the future while this litigation is going on,
and it is holding a substantial sum in an escrow
account to meet its liabilities under any judgment
given in Mr Murray's favour. I do not consider that
those reasons are good enough. The escrow
account will no doubt be reduced so as to reflect
the maximum amount that Mr Murray can claim by
way of damages at common law. If MFC wins at
the end of the day it will be entitled to the interest
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earned on the account. MFC can take steps to
prevent the proceedings from being spun out by Mr
Murray improperly (I am not saying that he intends
to do so) by obtaining appropriate case
management directions. The prejudice relied on
thus pales into insignificance against the
probability that Mr Murray will if the amendment
is not allowed obtain no recompense at all from
MFC for its admitted breach of contract.
82 In my judgment the judge misdirected himself
as to the guiding principle on this issue. In the
circumstances, if this issue had been live, I would
have allowed the appeal on the amendment issue
and directed that the issues raised by the
amendment which are appropriate to be tried by a
judge, rather than a master, be listed before Stanley
Burnton J , unless MFC otherwise agreed.
The Section 320 Issue
83 Section 320 of the Companies Act 1985
(Substantial property transactions involving
directors, etc)(as amended) provides in material
part as follows;
“(1)With the exceptions provided by the section
next following, a company shall not enter into an
arrangement—(a)whereby a director of the
company or its holding company, or a person
connected with such a director, acquires or is to
acquire one or more non-cash assets of the requisite
value from the company; or(b)whereby the
company acquires or is to acquire one or more non-
cash assets of the requisite value from such a
director or a person so connected,unless the
arrangement is first approved by a resolution of the
company in general meeting and, if the director or
connected person is a director of its holding
company or a person connected with such a
director, by a resolution in general meeting of the
holding company.(2)For this purpose a non-cash
asset is of the requisite value if at the time the
arrangement in question is entered into its value is
not less than £2,000 but (subject to that) exceeds
£100,000 or 10 per cent of the company's asset
value …”
84 Section 322 of the Companies Act 1985
(Liabilities arising from a contravention of section
322 ) provides in material part as follows; —
(1)An arrangement entered into by a company in
contravention of section 320, and any transaction
entered into in pursuance of the arrangement
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(whether by the company or any other person) is
voidable at the instance of the company unless one
or more of the conditions specified in the next
subsection is satisfied.(2)Those conditions are that
—(a)restitution of any money or other asset which
is the subject-matter of the arrangement or
transaction is no longer possible or the company
has been indemnified in pursuance of this section
by any other person for the loss or damage suffered
by it; or(b)any rights acquired bona fide for value
and without actual notice of the contravention by
any person who is not a party to the arrangement or
transaction would be affected by its avoidance;
or(c)the arrangement is, within a reasonable period,
affirmed by the company in general meeting and, if
it is an arrangement for the transfer of an asset to or
by a director of its holding company or a person
who is connected with such a director, is so
affirmed with the approval of the holding company
given by a resolution in general meeting.(3)If an
arrangement is entered into with a company by a
director of the company or its holding company or
a person connected with him in contravention of
section 320, that director and the person so
connected, and any other director of the company
who authorised the arrangement or any transaction
entered into in pursuance of such an arrangement,
is liable—(a)to account to the company for any
gain which he has made directly or indirectly by
the arrangement or transaction, and(b)(jointly and
severally with any other person liable under this
subsection) to indemnify the company for any loss
or damage resulting from the arrangement or
transaction.(4)Subsection (3) is without prejudice
to any liability imposed otherwise than by that
subsection, and is subject to the following two
subsections; and the liability under subsection (3)
arises whether or not the arrangement or
transaction entered into has been avoided in
pursuance of subsection (1). If an arrangement is
entered into by a company and a person connected
with a director of the company or its holding
company in contravention of section 320, that
director is not liable under subsection (3) if he
shows that he took all reasonable steps to secure
the company's compliance with that section …”
85 By its counterclaim in these proceedings, MFC
sought to recover from Mr. Murray solicitors' and
accountants' fees in connection with the acquisition
of BPIM, and in addition the costs of engaging a
new director to supervise that acquisition. The first
step was the execution on 6 November 2001 of
heads of agreement between MFC and the
shareholders of BPIM. Thereafter the accountants
undertook an investigation into BPIM's financial
position. No point is taken is taken on the amount
of any such fees or their connection with the
arrangement made in breach of section 320 of the
Companies Act 1985 . The heads of agreement
envisaged that there would be a further agreement
by which the acquisition would be completed, but
the negotiations broke down in March 2002 before
this agreement was executed.
86 The judge held that section 320 applied to the
heads of agreement because it was an arrangement
to acquire a substantial non-cash asset from Mr
Murray. There is no appeal on that issue. At trial
Mr Murray argued that the execution of the heads
of agreement triggered his right to three year's
gross salary under clause 17.1. The judge rejected
that argument and there is no appeal on that point.
The judge further held that, if the heads of
agreement had enabled Mr Murray to claim three
year's gross salary under clause 17.1, the claim
would fail because the increase in his entitlement to
gross salary under clause 17.1 would itself be loss
for which he was liable to indemnify the company
under section 322(3)(a) .
87 The judge rejected MFC's claim to recover the
professional fees and costs of the additional
director. He held that he was bound by the decision
of this court in Re Duckwari plc (No.2) [1999] Ch
268 . In that case this court held that the acquiring
company's borrowing costs raised for the purpose
of acquiring a non-cash asset from a director were
not “loss or damage resulting from the transaction”
for the purposes of section 322(3)(b) . I refer to this
decision in more detail below.
Submissions under Section 320 Issue
88 Mr Salter submits that the decision of this court
in Re Duckwari plc (No.2) is distinguishable. This
court in Re Duckwari plc (No.1) drew an analogy
between liability for breach of fiduciary duty and
the liability under section 322 . As a matter of trust
law, loss is recoverable if such loss would not have
occurred but for the breach: Target Holdings Ltd v
Redferns [1996] AC 421 . Mr Salter submits that
the professional costs of preparing the due
diligence report and the director's fees would not
have been incurred but for the breach. The
company in general meeting was deprived of an
opportunity to consider the transaction. The
decision of this court in Re Duckwari plc (No.2) is
distinguishable because in the present case the
heads of agreement represented an arrangement in
breach of section 320 and the professional fees and
director's fees were a transaction pursuant to that
arrangement.
89 Mr Bannister submits that some of the costs
sought to be recovered by MFC pursuant to its
counterclaim were incurred before the heads of
agreement were signed. He submits that it is not
possible to say that such costs were incurred but for
the breach of section 320 . Mr Bannister further
submits that there is no clear finding by the judge
that the fees would not have been incurred but for
the heads of agreement.
90 Mr Bannister further submits that no loss is
recoverable under section 322(3)(b) because the
purpose of section 320 is to stop a director from
acquiring property from, or disposing of his
property to, his company. Here there was no
transaction which resulted in the acquisition of
property and accordingly these costs are not
recoverable from Mr Murray. The loss is restricted
to loss from completion.
91 Mr Bannister further submits that the costs of
due diligence are not costs within the mischief of
section 320 .
Conclusions on Section 320 Issue
92 In Re Duckwari plc (No.1) [1999] Ch 253 the
company in question entered into an arrangement
to acquire a property in which one of its directors
was interested and it was one of the terms of
acquisition that the director in question and a
nominee of his should share in the profits but not
the losses resulting from the acquisition. The
property was in due course acquired but it
depreciated in value due to a fall in the market. The
judge held that the loss to the company was to be
assessed as at the date of the acquisition and since
the fall in value had not occurred at that date the
director was not liable to indemnify the company
for that element of loss.
93 This court allowed an appeal against that ruling
and held that the loss had to be measured at the
date of trial so that the company should be
compensated for the difference between what it
paid for the property and the value of the property
at the date of trial.
94 This court held that the effect of section 322(3)
(b) was to provide the company with full protection
against loss it suffered as a result of the transaction,
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including a fall in property values:
“… by virtue of s 320(1)(b) Duckwari was
prohibited from entering into the arrangement with
Offerventure pursuant to which it purchased the
property unless the arrangement was first approved
by a resolution of Duckwari in general meeting.
Such approval not having been obtained, the
payment of £495,000, together with the other costs
of the acquisition, was a misapplication of
Duckwari's funds which, had s 320 stood alone, the
directors responsible would have been liable to
make good as if they were trustees.
The basis on which trustees would have been
liable to make good the misapplication is well
settled. If a trustee applies trust moneys in the
acquisition of an unauthorised investment, he is
liable to restore to the trust the amount of the loss
incurred on its realisation (see Knott v Cottee
(1852) 16 Beav 77, 51 ER 705 ). He is also liable
for interest. Where more than one trustee is
responsible for the acquisition their liability is joint
and several. If these rules were to apply to the
present case, the directors responsible would prima
facie appear to be jointly and severally liable to
restore to Duckwari the difference between the
gross acquisition cost, £505,923, and the £177,970
which has since been realised on the sale of the
property, plus interest, credit being given for the
amount of any rents and profits received before
completion of the sale.
That would have been the position if s 320 had
stood alone, which it does not. A company's
remedies for a contravention of that section are
spelled out in s 322, in this case in s 322(3)(b). So
the question is what loss or damage is
comprehended by that provision. The persons who
are rendered liable to indemnify Duckwari are not
only Mr Cooper and the other directors responsible
but also Offerventure, as a person connected with
Mr Cooper. Mr Richards' first submission was that,
subject to that point, there is on the face of the
provision nothing to suggest that it is intended to
give the company some different remedy from that
to which it would have been entitled by virtue of s
320 alone. He said that it cannot reasonably be
construed so as to give the company some lesser
remedy.
Secondly, Mr Richards attached great weight to
the interrelationship between sub-ss (3)(b) and (2)
(a) of s 322. He pointed out that one of the effects
of s 322(2)(a) is that the primary remedy of
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Page 19
rescission afforded by s 322(1) will not be available
if ‘the company has been indemnified in pursuance
of this section by any other person for the loss or
damage suffered by it’. Mr Richards submitted that
that provision is only explicable on the footing that
the indemnity against loss or damage under s
222(3)(b) will place the company in a position
equivalent to that in which it would have been if
rescission had been ordered. Had rescission been
possible here, the amount of the acquisition cost
would have been restored to Duckwari in full, plus
interest. Accordingly, submitted Mr Richards, the
indemnity must have been intended to have an
equivalent effect. His third principal submission
was that the liability under s 322(3)(a) to account to
the company for any ‘gain’ made directly or
indirectly by the arrangement or transaction, a
liability which in practice can only be quantified at
the date of judgment, confirms the view he
propounds of s 322(3)(b). He said that the judge's
differentiation between ‘gain’ and ‘profits’ was
mistaken (see [1997] 2 BCLC 729 at 735 , [1997]
Ch 201 at 209).
Mr Bannister submitted that the effect of ss 320
and 322 was to be ascertained from their wording
alone and without attempting to fit them into some
existing category of remedies available to
companies against their directors. In adopting the
judge's view of s 322(3)(b), he relied on further
passages in the judgment, in particular ( [1997] 2
BCLC 729 at 734 , [1997] Ch 201 at 209):
‘It is true that in the analogous case of an
unauthorised investment by a trustee he is liable to
make good to the trust any losses, and to account
for any profit, but there it is the nature of the
investment which leads to this conclusion. In the
case of a contravention of s 320 it is the terms of
the acquisition and not the attributes of the asset
acquired which both lead to and limit liability to
account for gain and to indemnify against loss and
damage’. and again ( [1997] 2 BCLC 729 at 734 –
735, [1997] Ch 201 at 209):
‘The loss or damage has to result from the
transaction, not from the holding of the property
acquired pursuant to it.’ Mr Bannister advanced an
argument which was not put to the judge. He
emphasised that the primary remedy of rescission
under s 322(1) is available simply for non-
compliance with the requirements of s 320 and that
no fraud or other impropriety need be found. From
that he argued that if there was an analogy
elsewhere in the law it was not the remedies against
a trustee who has made an unauthorised investment
but the right to rescind a contract for innocent
misrepresentation or mistake. He relied on the
decision of Farwell J in Whittington v Seale-Hayne
(1900) 82 LT 49 for the proposition that the losses
recoverable under s 322(3)(b) are limited to what
he called transactional losses and do not include
consequential losses such as a fall in the value of
the property. He placed particular reliance on the
word ‘indemnify’, which, in its natural sense,
would extend only to transactional losses. He
suggested that that was what the judge had had in
mind when he said that it was the terms of the
acquisition and not the attributes of the asset
acquired which both led to and limited liability to
indemnify against loss and damage (see [1997] 2
BCLC 729 at 734 , [1997] Ch 201 at 209).
In considering these rival submissions I return
once more to the wording of s 322(3)(b), which
provides for an indemnity ‘for any loss or damage
resulting from the arrangement or transaction’.
Plainly those words, if read in isolation, are capable
of including a loss incurred by Duckwari on a
realisation of the property, for less than the cost of
its acquisition. Such a loss can fairly be said to
result from the purchase, on the ground that if the
purchase had not been made the loss would not
have been incurred. But the loss can also fairly be
said to result from the fall in value of the property.
So it is necessary to look at the other provisions of
ss 320 and 322 and the general law in order to see
whether a loss of the former kind was intended to
be included.
I agree with Mr Richards that the judge was wrong
both in thinking that the general distinction
between the decision-making powers of directors
and trustees had some relevance to the question and
in restricting the mischief addressed by the
provisions to acquisitions at an inflated value or
disposals at an undervalue. It is obvious that there
will be many other circumstances in which it is
appropriate for the approval of shareholders to be
obtained. In the present case, for example, the
shareholders might well have declined to approve
the purchase either because it was a new kind of
venture or, more pertinently, because Offerventure
or Mr Cooper was to take 50% of any profits
arising from the development of the property but
was not to bear a share of any loss. A one-sided
arrangement thus favourable to the director would
seem to be an exemplar of the kind of arrangement
which was intended to be within the scope of s 320.
Bearing in mind the evident purpose of ss 320 and
322 to give shareholders specific protection in
respect of arrangements and transactions which will
or may benefit directors to the detriment of the
company, I am unable to construe s 322(3)(b) as
denying the company a remedy which appears to
flow naturally from a combination of s 320(1)(b)
and the general law. No doubt it is possible to cite
instances where Parliament has been held to take
away with one hand what it appears to give with
the other. But I cannot conceive that one would be
found where the result was to give a narrow effect
to provisions plainly intended to afford a protection
and equally amenable to being given some wider
effect.
This broad approach to s 322(3)(b) is entirely
consistent with the provisions of s 322(2)(a) and
(3)(a). Indeed, Mr Richards' submissions as to the
interrelationship between sub-ss (3)(b) and (2)(a)
are unusually compelling and would, if it were
necessary, be decisive. What could be the purpose
of denying the company its primary remedy of
rescission if the indemnity which was the occasion
for the denial was worthless, or at any rate worth
far less than the primary remedy? I do not think
that there is an answer to that question. I also
accept Mr Richards' submission as to the
confirmatory effect of s 322(3)(a).
Mr Bannister's suggested analogy of a right to
rescind a contract for innocent misrepresentation or
mistake is, I believe, misconceived. The true view
is that wherever the remedy of rescission is
available it operates to restore the status quo ante
so far as that is possible. But the consequences of
the remedy vary according to the nature of the
transaction. The consequences of the rescission of a
contract are different from the consequences of the
rescission of a transaction involving a
misapplication of trust moneys. There is no
justification for seeking to apply the consequences
of the former to the latter.
It is well recognised that the basis on which a
trustee is liable to make good a misapplication of
trust moneys is strict and sometimes harsh,
especially where, as here, there has been a huge
depreciation in the value of the asset acquired. I can
understand what I believe to have been the
reluctance of the judge to visit Mr Cooper (with
whom I include Offerventure) with the
consequences of the loss. But the loss has to fall
somewhere and, if a proposal to purchase the
property had been put to and rejected by the
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shareholders, it would have lain with Mr Cooper.
The approval of the shareholders not having been
obtained, it is not unfair that the loss should
continue to lie with Mr Cooper rather than
Duckwari.
For these reasons, subject to the effect of s 727 in
the case of Mr Cooper, I would hold that he and
Offerventure are, in broad terms, jointly and
severally liable to make good to Duckwari the loss
caused to it by the depreciation in value of the
property.”
95 In the course of its judgment, this court drew an
analogy between liability under section 322 and the
remedies for breach of fiduciary duty. It would thus
follow, Mr Salter submits, that the appropriate test
of causation was that applicable to claims for
breach of fiduciary duty and not to claims at
common law. That test is the “but for” test rather
than the test applying at common law. As Lord
Browne-Wilkinson, with whom the other members
of the House agreed, held in Target Holdings Ltd v
Redferns :
“The equitable rules of compensation for breach of
trust have been largely developed in relation to
such traditional trusts, where the only way in which
all the beneficiaries' rights can be protected is to
restore to the trust fund what ought to be there. In
such a case the basic rule is that a trustee in breach
of trust must restore or pay to the trust estate either
the assets which have been lost to the estate by
reason of the breach or compensation for such loss.
Courts of Equity did not award damages but, acting
in personam, ordered the defaulting trustee to
restore the trust estate (see Nocton v Lord
Ashburton [1914] AC 932 at 952, 958, [1914–15]
All ER Rep 45 at 51, 55 per Viscount Haldane LC).
If specific restitution of the trust property is not
possible, then the liability of the trustee is to pay
sufficient compensation to the trust estate to put it
back to what it would have been had the breach not
been committed (see Caffrey v Darby (1801) 6 Ves
488, [1775–1802] All ER Rep 507 and Clough v
Bond (1838) 3 My & Cr 490 , 40 ER 1016). Even
if the immediate cause of the loss is the dishonesty
or failure of a third party, the trustee is liable to
make good that loss to the trust estate if, but for the
breach, such loss would not have occurred (see
Underhill and Hayton Law of Trusts and Trustees
(14th edn, 1987) pp 734–736, Re Dawson (decd),
Union Fidelity Trustee Co Ltd v Perpetual Trustee
Co Ltd [1966] 2 NSWR 211 and Bartlett v
Barclays Bank Trust Co Ltd (No 2) [1980] 2 All
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ER 92, [1980] Ch 515 ). Thus the common law
rules of remoteness of damage and causation do not
apply. However, there does have to be some causal
connection between the breach of trust and the loss
to the trust estate for which compensation is
recoverable, viz the fact that the loss would not
have occurred but for the breach (see also Re
Miller's Deed Trusts (1978) 75 LS Gaz 454 and
Nestle v National Westminster Bank plc [1994] 1
All ER 118, [1993] 1 WLR 1260 ).”
96 In Re Duckwari plc (No.2) , the issue was
whether the director was also liable for the costs of
borrowing which the company incurred in order to
buy the asset in question. However, this loss was
held not to be within section 322(3)(b) . Nourse LJ,
in a judgment with which the other members of the
court agreed, held:
“The essence of the argument of Mr Richards QC,
for Duckwari, is that the transaction entered into in
pursuance of the arrangement was not simply
Duckwari's acquisition of the property but included
the means by which it was acquired, in particular
the borrowing of £350,000 from the bank and the
application of £155,923 from Duckwari's own
resources (see [1998] 2 BCLC 315 at 317, [1998] 3
WLR 913 at 917). He says, correctly on the
evidence, that the acquisition and the borrowing
were part and parcel of one transaction, in the sense
that the acquisition could not have been achieved
without the borrowing and the borrowing would
not have been incurred but for the acquisition.
Identifying the transaction in that way, Mr Richards
claims that the ‘loss or damage resulting from’ it
included, up to 8 May 1998, actual compound
interest paid or owing to the bank amounting to
£676,686 and notional compound interest lost on
the £155,923 amounting (at base rate less 0.5%) to
£183,632. On that footing, Duckwari's total claim
is put at £1,216,753. I should add that the rate of
interest charged by the bank was base rate plus 3%
with a minimum of 13%. Since base rate has been
9% or lower ever since September 1992 (it was 7%
or lower between November 1992 and November
1997), it is evident that the cost of the loan to
Duckwari (if it is to be charged in full) will, for
most of the time since November 1989, have been
exorbitant.
The essence of the argument of Mr Hoser, for the
respondents, is that, since the arrangement which
contravened s 320(1) was that Duckwari should be
at liberty to take over Offerventure's rights and
liabilities under the contract, the only transaction
falling within s 322 was Duckwari's acquisition of
the property pursuant to the contract. That, and that
alone, was the ‘substantial property transaction’
involving a director within the marginal note to s
320. Neither Duckwari's borrowing from the bank
nor the application of its own moneys in part
payment of the purchase price was part of the
arrangement between Offerventure and Duckwari
and neither was in contravention of s 320(1). A
fortiori, neither could be or be part of a transaction
entered into in pursuance of an arrangement for the
purposes of s 322. On the footing that the
transaction for those purposes was, as he contends,
Duckwari's acquisition of the property, Mr Hoser
accepts that the respondents are jointly and
severally liable on the basis stated in my earlier
judgment ( [1998] 2 BCLC 315 at 322, [1998] 3
WLR 913 at 921), ie to restore to Duckwari the
difference between £505,923 and £177,970, plus
interest on the amount for the time being
outstanding. (We were told on 30 July that no rents
or profits were received before completion of the
sale.)
While I have found the question to be one of some
difficulty, I have come to a clear conclusion that
the argument of Mr Hoser is to be preferred to that
of Mr Richards. Although it was at the heart of our
earlier decision that the effect of s 322(3)(b) was to
make the respondents liable as if they had been
trustees, we also held that that basis of liability
only arose because there had been a breach of s
320(1) (see [1998] 2 BCLC 315 at 322, [1998] 3
WLR 913 at 920). It necessarily follows that the
loss or damage recoverable under s 322(3)(b) is
limited to that resulting from the breach, in other
words from the acquisition itself.”
97 Mr Bannister focuses on the final paragraph of
that quotation. He submits that it is clear that this
court decided as a matter of construction that loss
or damage derived from transactions other than the
transaction in breach of section 322 were not
recoverable under section 322(3)(b) on its true
construction.
98 I agree. In Re Duckwari plc (no 2), this court
decided the issue of borrowing costs as a matter of
the interpretation of section 322(3)(b) . Section
322(3)(a) imposes a liability to account for any
gain made “directly or indirectly” by the
arrangement or transaction in question. By contrast,
the liability to indemnify the company is only for
any loss or damage “resulting from the
arrangement or transaction”. In my judgment this
court essentially took the view that loss or damage
within section 322(3)(b) could not include loss or
damage which resulted indirectly from the
arrangement or transaction in question. It is open to
question whether this interpretation is consistent
with this court's previous conclusion in the earlier
Duckwari case that a parallel was to be drawn
between the liability imposed by section 322 and
the liability imposed as a matter of trust law on the
trustees. However, its interpretation of section
322(3)(b) in this way is binding on us. It cannot be
said to be per incuriam. This court allowed the
costs of the acquisition to be recovered from the
director made liable under section 322(3) .
However, unlike the borrowing costs, these costs
were a direct result of the agreement for acquisition
of property from the director. In this case, the costs
of obtaining a due diligence report were also a
direct result of the arrangement for acquiring BPIM
since the parties agreed that a satisfactory due
diligence report was a necessary pre-condition of
that acquisition. However, the costs of hiring an
additional director were not foreshadowed by the
acquisition agreement and so cannot be recovered
under section 322(3)(b) . It may, however, be
possible to recover them in an action for breach of
fiduciary duty : see section 322(4) .
The Section 727 issue
99 Section 727 of the Companies Act 1985 (Power
of court to grant relief in certain cases) provides in
material part;—
“(1)If in any proceedings for negligence, default,
breach of duty or breach of trust against an officer
of a company or a person employed by a company
as auditor (whether he is or is not an officer of the
company) it appears to the court hearing the case
that that officer or person is or may be liable in
respect of the negligence, default, breach of duty or
breach of trust, but that he has acted honestly and
reasonably, and that having regard to all the
circumstances of the case (including those
connected with his appointment) he ought fairly to
be excused for the negligence, default, breach of
duty or breach of trust, that court may relieve him,
either wholly or partly, from his liability on such
terms as it thinks fit.”
100 The judge did not decide whether the court
should grant Mr Murray any relief under section
727 in respect of the liability which he had incurred
for professional fees. Section 727 was referred to in
Mr Murray's pleadings, but no particulars were
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given of the grounds on which it was said that he
had acted reasonably and ought fairly to be
excused.
101 Mr Bannister submits that this court should
remit the issue of relief under section 727 to the
trial judge. It was not clear who was the driving
force behind the BPIM acquisition and whether
legal advice was taken on the transaction which
should have revealed the obligation to comply with
section 320 .
102 Mr Salter submits that it is plain that Mr
Murray did not act reasonably. He ought to have
appreciated that he was interested in the transaction
not only by virtue of his interest as a vendor
shareholder but also because of clause 17.1 of the
agreement. It was up to Mr Murray to bring those
matters to the attention of the legal advisers to
MPC. As a fiduciary, he should have realised that
the potential conflict of interest was all the more
important.
Conclusions on the Section 727 Issue
103 In order to determine whether any relief should
be given under section 727 this court would have to
make findings on a number of issues, including
whether MFC's solicitors legal adviser should have
advised MFC and its directors on the provisions of
section 320 of the Companies Act 1985 . This court
is not well placed to make findings of fact on such
issues. In those circumstances, despite desirability
in the interests of time and costs of this court
dealing with all the outstanding issues, in my
judgment this question has to be remitted back to
the trial judge.
Disposition
104 For the reasons given above, I would allow the
appeal on the penalty issue, allow the cross-appeal
in part on the section 320 issue and allow the
appeal on the section 727 issue. As to the section
727 issue, I would remit to the judge the question
whether Mr Murray is entitled to relief under
section 727 of the Companies Act 1985 in respect
of the amounts due from him pursuant to section
322(3)(b) of the Companies Act 1985 .
Lord Justice Clarke:
105 I have had the benefit of reading the judgments
of Arden LJ and Buxton LJJ in draft. I agree with
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Page 23
them that the appeal on the penalty issue should be
allowed. In so far as there is a difference of
approach between them, I prefer the broader
approach of Buxton LJ.
106 The essential reasons which have led me to the
conclusion that clause 17.1 is not a penalty are
these:
• i) Given the general principle that pacta sunt servanda , the courts
clause in a contract of this kind is a penalty.
• ii) The modern approach to Lord Dunedin's test in Dunlop Pneum
Ltd [1915] AC 67 at 86 is to be found in Lordsvale Finance plc v
at page 762G and Cine Bes Filmcilik Ve Yapim Click v United In
1699 .
• iii) It is perhaps no longer entirely appropriate to ask whether a p
of the offending party but, as Colman J put it in the Lordsvale cas
Arden and Buxton LJJ):
“whether a provision is to be treated as a penalty is a matter of co
the time the contract was entered into the predominant contractua
from breaking the contract or to compensate the innocent party fo
• iv) Colman J continued:
“That the contractual function is deterrent rather than compensato
that would be payable on breach with the loss that might be susta
Colman J as saying there that, if that comparison discloses a discr
It seems to me that the comparison is relevant but no more than a
the clause is penal: se eg Philips Hong Kong v A-G of Hong Kon
• v) In paragraph 15 of his judgment in the Cine case (set out by A
further passage from the judgment of Colman J in the Lordsvale c
particular clause might be commercially justifiable, provided that
other party from breach.
• vi) As I see it, each case depends upon its circumstances and, in c
should have in mind the warnings to which Arden and Buxton LJ
to the parties both of knowing what will be the financial conseque
Robophone v Faciliites v Blank [1966] 1 WLR 1428 per Diplock
Kemble v Farren (1829 6 Bing 141 per Tindal CJ at 148). They a
clause will only be held to be a penalty if the sum payable on bre
the Philips Hong Kong case per Lord Woolf at page 59 and Dunl
• vii) It is important to have in mind that the onus of showing that c
(see eg per Diplock LJ in the Robophone case at page 1447F). In
case the judge quoted this passage from the judgment of Lord Bro
Dofap Ltd [1993] AC 573 :
“In general, a contractual provision that requires one party in the
other party a sum of money is unlawful as being a penalty unless
liquidated damages, being a genuine pre-estimate of the loss that
breach.” I am concerned that the judge has taken that passage out
justify the payment but for the defendant to show that the paymen
genuine pre-estimate of loss.
• viii) On the facts I do not think that clause 17 was extravagant or
respondent failed to discharge the burden of showing that it was.
 • ix) The judge regarded the fact that clause 17 takes no account contract
of Mr Murray's
was madedutybetween
to mitigate
equal parties
his lossatatarm's length. That con
common law as sufficient to lead to the conclusion that the clause
directors
is a who
penalty.
approved
I respectfully
the agreements.
disagree,Moreover that is so, even
essentially for the reasons given by Buxton LJ. LJ has referred, that Mr Murray was within broad limits able to d
• remainedatthe
x) I also agree that it must have been difficult to say with confidence thedirectors' responsibility
time of making to agree
the contract what a clause which was
might happen to Mr Murray if he were dismissed. I see no• reasonxi) It why
is in amy
company
opinionshould
importantnot, to
as avoid
Buxtonnice
LJcalculations
put but to
it, include in his ‘package’ generous reassurance against the eventuality
for Mr Murray of dismissal.
to justify Itthewas
clause
in both
but parties'
for the respondent to show
interests to know the position and to avoid dispute in the future.
sufficient
The respondent
evidence was
that the
advised
clausebywassolicitors
unconscionable.
and I
would accept Mr Bannister's submission that there was no• inequality of bargaining power. The directors were
xii) Finally, although the question for decision is a broad one, I ag
people with substantial experience and reputations and the service
whichagreements
she has set were
out inapproved
paragraphs by 69
resolutions of judgment und
to 76 of her
the board of directors. In these circumstances I do not agree with the judge that this
clause 17.1 is not a penalty is not a case in which the

107 For these reasons I too would allow the appeal
on the penalty point. I do not wish to add anything
on the remaining issues, upon which I agree with
Arden and Buxton LJJ for the reasons they have
given.
Lord Justice Buxton:
108 I agree with my Lady that the appeal should be
allowed on the penalty point, but since my
approach differs from hers I need to explain my
conclusions in some detail; as well as adding some
words of my own on the other issues.
Penalty or liquidated damages
109 I respectfully agree with my Lady in her
paragraph 47, citing the observations of Mance LJ
in the Cine case, that the language of stipulations in
terrorem sounds unusual in modern ears; and
particularly when applied to a contract such as the
present, where a company well able to look after
itself employed to play a leading and
entrepreneurial role in its affairs a Chief Executive
who, as his evidence cited by my Lady
demonstrates, was motivated by a desire to protect
his own interests.
110 That insight requires a recasting in more
modern terms of the classic test set out by Lord
Dunedin in Dunlop [1915] AC at p86 :
“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” That recasting
is to be found in the judgment of Colman J in
Lordsvale Finance plc v Bank of Zambia [1996]
QB 752 at 762G, a passage cited with approval by
Mance LJ in paragraph 13 of his judgment in the
Cine case [2003] EWCA Civ 1699 :
“whether a provision is to be treated as a penalty is
a matter of construction to be resolved by asking
whether at the time the contract was entered into
the predominant contractual function of the
provision was to deter a party from breaking the
contract or to compensate the innocent party for the
breach. That the contractual function is deterrent
rather than compensatory can be deduced by
comparing the amount that would be payable on
breach with the loss that might be sustained if the
breach occurred.”
111 It is important to note that the two alternatives,
a deterrent penalty; or a genuine pre-estimate of
loss; are indeed alternatives, with no middle ground
between them. Accordingly, if the court cannot say
with some confidence that the clause is indeed
intended as a deterrent, it appears to be forced back
upon finding it to be a genuine pre-estimate of loss.
That choice illuminates the meaning of the latter
phrase. “Genuine” in this context does not mean
“honest”; and much less, as the argument before us
at one stage suggested, that the sum stipulated must
be in fact an accurate statement of the loss. Rather,
the expression merely underlines the requirement
that the clause should be compensatory rather than
deterrent.
112 That at first sight produces a simple solution in
this case. It is agreed, or at least it is fairly clear,
that Mr Murray's intentions were not of a deterrent
nature. Does it therefore follow of necessity that
this clause cannot be penal? The authorities
demand a more complex approach. In particular,
the respondents pointed to the last part of the
citation from Colman J, that a guide as to the
existence of penalty is to be found in the
comparison between the stipulated amount and the
possible loss that might be sustained in the event of
breach. Applying that test to this case, even if Mr
Murray did no work at all during the year after his
dismissal he would be better off with the stipulated
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sum rather than with liquidated damages, because
the latter would be subject, as the former would
not, to deductions in respect of tax and National
Insurance contributions. The judge, in his
paragraphs 102(e) and 103, appears to have
regarded that factor as conclusive in favour of the
liquidated damages provision being a penalty. I
would make the following observations.
113 First, Colman J said no more than that the
comparison was a guide to the assessment of a
provision as deterrent rather than compensatory.
That also, in my view, is as far as this court went in
the Cine case itself. That was a summary judgment
case, involving no more than the identification of a
triable issue: I would draw attention in that
connexion to the observations of Thomas LJ in his
paragraph [50] and of Peter Gibson LJ in his
paragraph [54]. The approach that should be
applied at trial would be in more general terms than
that suggested by my Lady in her paragraph 42,
that always requires a comparison between the
liquidated and the common law damages to see if
the comparison discloses a discrepancy; and then
requires that discrepancy to be justified as a
genuine pre-estimate of damages, or by some other
form of justification.
114 I venture to disagree with that approach
because it introduces a rigid and inflexible element
into what should be a broad and general question. It
is also inconsistent with warnings by judges of high
authority that, at least in connexion with
commercial contracts, great caution should be
exercised before striking down a clause as penal;
and with the tests that they have postulated to that
end. My Lady has cited in her paragraph 66 the
observations of Diplock LJ in Robophone v Blank
[1966] 1 WLR 1428 at p 1447. I would add the
well-known passage of Lord Woolf in Philips Hong
Kong v A-G of Hong Kong (1993) 61 BLR 49 at
pp 58–59:
“Except possibly in the case of situations where
one of the parties to the contract is able to dominate
the other as to the choice of the terms of a contract,
it will normally be insufficient to establish that a
provision is objectionably penal to identify
situations where the application of the provision
could result in a larger sum being recovered by the
injured party than his actual loss. Even in such
situations so long as the sum payable in the event
of non-compliance with the contract is not
extravagant, having regard to the range of losses
that it could reasonably be anticipated it would
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have to cover at the time the contract was made, it
can still be a genuine pre-estimate of the loss that
would be suffered and so a perfectly valid
liquidated damages provision” And exclusive
concentration on the factual difference between the
liquidated and the contractual damages overlooks a
principal test formulated by Lord Dunedin to
identify a penalty, [1915] AC at p 87 , that
“It will be held to be a penalty if the sum stipulated
for is extravagant and unconscionable in amount in
comparison with the greatest loss that could
conceivably be proved to have followed from the
breach”
115 Neither the literal wording of that test nor the
spirit of it applies here. Mr Murray's terms were
generous, but they were not unconscionable. As to
the absence of any requirement of mitigation in
clause 17.1, to which as we have seen the judge
attached determinative importance, two comments
have to be made. First, it must have been difficult
to say with confidence at the time of entering into
the contract what might happen to Mr Murray were
he to be dismissed: provisions protecting an
employee in the case of wrongful termination may
take the form that they do because such an event
can damage his future employability, at least in the
short term. Second, in order to meet this criticism a
pre-estimate of damages clause would have to be
drafted to encompass not only the fact of mitigation
in terms of income from other sources but also the
duty to seek such mitigation Such a clause would
directly invite disputes about the reasonableness of
Mr Murray's behaviour after termination, of the
kind that clauses stipulating the amount of
compensation are precisely designed to avoid. As
Tindal CJ put it in Kemble v Farren (1829) 6 Bing
141 at p 148, a dictum approved in the Dunlop
case, even where damages accruing from a breach
can be accurately ascertained, a liquidated damages
clause “saves the expense and difficulty of bringing
witnesses to that point”. And a clause that made
reference to the duty to mitigate would also
inevitably postpone payment under the clause well
beyond the termination date: again, something that
the inclusion of such a clause in the contract must
have been intended to avoid. This last consideration
strongly reinforces the general impression created
by this case, that the traditional learning as to
penalty clauses is very unlikely to fit into the
dynamics of an employment contract, at least when
the penalty is said to be imposed on the employer.
116 It is therefore necessary to stand back and look
at the reality of this agreement. Although I agree
that evidence about it is sparse, I am prepared to
take judicial notice of the fact that an
entrepreneurial company such as MFC, promoting
a product conceived by one man, will often place a
high value upon retaining the services, and the
loyalty and attention, of that one man as its chief
executive: to the extent of including in his
“package” generous reassurance against the
eventuality of dismissal. That such reassurance
exceeds the likely amount of contractual damages
on dismissal does not render the terms penal unless
the party seeking to avoid the terms can
demonstrate that they meet the test of extravagance
posited by Lord Dunedin and by Lord Woolf. I
regard that as a comparatively broad and simple
question, that will not normally call for detailed
analysis of the contractual background. Applying
that test, which I accept differs from that adopted
by my Lady, I would accordingly allow the appeal
on the penalty issue.
117 I would add this. The difficulty that the court
has in identifying a penalty in an orthodox
commercial contract is demonstrated by the
outcome of the Dunlop case itself. The clause in
question was a standard form, imposed on all of
Dunlop's customers, that required the payment of
five pounds by way of “liquidated damages” if the
customer did any one of the acts of tampering with
marks on the goods; selling at under list price;
supplying to persons blacklisted by Dunlop; or
exporting without Dunlop's consent. Contrary to
what would be thought today, the House did not
view the fact that the clause was part of a contract
of adhesion as undermining its status as an
agreement freely bargained for: see for instance the
opening paragraphs of the speech of Lord Dunedin
in Dunlop v Selfridge [1915] AC 847 at p854, a
case that addressed that same clause. The clause
imposed a single payment for any of a varied series
of breaches; but assisted by Dunlop's evidence as to
the benefits to the company of the price
maintenance policy (expressly so described) that
the clause imposed, as set out in particular by Lord
Atkinson in both the Dunlop cases, the House
concluded that an explanation of the clause in
commercial rather than deterrent terms was
available. That commercial explanation lay in
Dunlop's desire enforce its commercial policy
without the difficulty and burden of proving the
quantum of damage accruing from every particular
breach of that policy.
118 Dunlop differed from the present case in that
the House was impressed by the difficulty of
proving an exact loss in every, or any, of the many
cases of breach to which the clause extended. That
particular problem does not affect our case. But the
cautious approach of the House, and its willingness
to look at the clause in its commercial context, does
at least underline the importance stressed by Lord
Woolf of not moving automatically from the fact
that a clause could result in greater recovery than
the amount of the actual loss to an assumption that
without further justification the clause must be
penal in nature.
Amendment
119 This issue does not now arise since Mr Murray
has the relief that he seeks by way of the liquidated
damages clause. If the issue were live, I would
respectfully agree with the approach to it set out by
my Lady in her paragraphs 70–75.
Section 320
120 The prohibition relates to an arrangement
whereby the company “acquires or is to acquire” a
director's assets. It is therefore broken by the
making of an agreement to do that, even if the
agreement is not acted on. The BPIM Heads of
Agreement fell squarely into that category. By
contrast, this court in Re Duckwari (No 2) saw the
relevant transaction as being the acquisition itself:
see [1999] Ch at p 272B . The court then seems to
have held that transactions prior to that acquisition,
including the funding arrangements, could not
result from the acquisition : in contrast to costs
attaching to the property once acquired, such as the
costs of holding and realising it, including the costs
of applying for a planning permission that
significantly increased the property's value (see
[1999] Ch at pp 272G–273B ). Under such a
distinction, there can be no doubt that the fees
incurred after, and in an attempt to implement, the
BPIM Heads of Agreement did result from the
existence of those Heads: which very existence
entailed a breach of section 320 . I respectfully
understand why the judge felt himself constrained
by Duckwari(No 2) . The case undoubtedly causes
difficulty in interpreting section 322 . However,
understood as I have ventured to suggest I do not
think that it enunciates a general principle such as
to exclude the conclusion that my Lady proposes.
121 I also agree that the issue therefore arising
under section 727 will, regrettably, have to be
remitted to the judge. Such potentially relevant
2005 WL 2003216 Page 27
[2005] EWCA Civ 963 [2005] I.R.L.R. 946 Official Transcript [2005] EWCA Civ 963 [2005] I.R.L.R. 946 Official
Transcript
(Cite as: 2005 WL 2003216)

findings as he did make were based upon

assumptions different from those required by the
decision of this court, and it could not be fair for us
now to speculate on how the judge might have
viewed the matter if it had been more fully before
him.
END OF DOCUMENT

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