"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."
"The penalty for late delivery shall be at the rate of£500 per week for each vessel"
"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 whole time for which the non-delivery of vessels beyond the contract time is delayed – then you infer that primậ facie the parties intended the amount to be liquidate damages and not penalty. I say "primậ 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."
"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 : "
"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"
"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: "
"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."
"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. "
"[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."
"…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 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, theindemnity 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 ofs 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 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."
"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 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 )."
"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 to8 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."
"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." iv) Colman J continued: "
"In general, a contractual provision that requires one party in the event of his breach of the contract to pay the other party a sum of money is unlawful as being a penalty unless the provision can be justified as a payment of liquidated damages, being a genuine pre-estimate of the loss that the innocent party will incur by reason of the breach."
"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"
"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."
"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 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"