Mistake

• 3. What are the prerequisites to obtaining

relief under the Contractual Mistakes Act
1977?
 3
• Section 6(1) of the Contractual Mistakes Act 1977 sets
out the test that an applicant must satisfy before it can
be said he or she is a party to a mistaken contract and
eligible for relief.
• The three parts of s 6(1) that must be satisfied are:
• (a)A mistake satisfying para (a) common , mutual or
unilateral mistake; and
• (b) An unequal exchange of value (para (b)); and
• (c)The party seeking relief is not obliged by a term of the
contract to assume the risk of the mistake (para (c)).
 4. What is a plea of “non est factum” and what is its effect?

• “this is not my deed

• If a party succeeds the contract will be void

• 5. What conditions must be satisfied before a plea of non est factum will
succeed?

• To succeed in a plea of non est factum, a defendant has to prove the:

• (a)Signatory believed that the document signed had one character or effect,
whereas in fact it had a character or an effect that was radically different from
that which was expected.
• (b) Proponent’s mistaken belief must have resulted from an erroneous
explanation or description of the document given to him or her by someone
else.
• (c)Signatory was not careless in signing without checking the contents.
 Gallie v Lee [1969] 2 Ch 17, affirmed
Saunders (Executrix of the Will of Rose Maud Gallie (dec’d)) v
Anglia Building Soc [1971] AC 1004

• Facts: Gallie owned a house on long leasehold.

• She had made a will leaving it to her nephew, Parkin, and had handed
over the deeds to him.
• Parkin and a friend, Lee, visited Gallie and asked her to sign a document
which she believed was an assignment of the leasehold by gift from
herself to Parkin.
• In fact it was an assignment from Gallie to Lee. Lee subsequently
mortgaged the house to a building society and used the proceeds to pay
his own personal debts.
• When he defaulted under the mortgage the building society sought to
obtain possession of the house.
• Gallie sued for a declaration that the assignment was void, arguing non
est factum.
• Held: Gallie’s argument failed.
• The plea of non est factum could not assist because what Gallie had
actually signed and what she believed she had signed were not totally
different from what she had in mind.
• Both were transfers and the sole difference was the beneficiary of the
assignment.
• The House of Lords considered the distinction between character and
the contents of the document, and expressed dissatisfaction with the
distinction.
• Lord Reid stated (at p 1016): “The essence of the plea non est factum is
that the person signing believed that the document he signed had one
character or one effect whereas in fact its character or effect was quite
different.”
 Landzeal Group Ltd v Kyne [1990] 3 NZLR 574

• Facts: The Landzeal Group was a vehicle decorating company.

• The first defendant, Kyne, approached the company’s manager, and following
an interview was given a contract form to take home.
• At the next meeting, Kyne discussed the contract, drew attention to some
omissions and inconsistencies and was given another document.
• It was substantially similar but contained a restraint of trade clause on a
separate page which had not been included in the first contract. Kyne signed
the contract without reading it.
• He believed the document set out the terms he had already studied.
• Months later Kyne discovered the restraint of trade clause. Kyne wished to set
up on his own and advised the manger, who ultimately terminated his
contract.
• Landzeal Group sought an injunction in reliance on the restraint of trade clause
in the agreement.
• Held: The plea of non est factum succeeded
and the contract was void.
• Kyne had a limited legal background and
Gallen J, “with some hesitation”, concluded (at
p 580)
• that he was not careless in not reading in
detail the second document presented for his
signature.
Written Contracts and the ‘Parol Evidence
Rule’
When a contract is reduced to writing the contract
is proved by production of the written contract.

Other evidence which would have the effect of

adding to or varying the contract in any way is
not admissible.

This is especially so if the contract contains an

‘entire agreement’ clause.

9
Henderson v Arthur [1907] 1 KB 10 [Text: p.191]

An oral agreement for the lease of a theatre was followed

by a formal contract under seal.

The formal contract provided for payment of rent in

advance; the defendant argued that it had been orally
agreed that the plaintiff would accept payment by post-
dated bill of exchange.

The defendant was not permitted to give evidence of the

previous oral agreement. It contradicted the express terms
of the written lease and the later, written expression of
intention had to be preferred.
10
Tak & Co Inc v AEL Corp Ltd [Text p191]
Facts:
• Tak imported livestock into Japan under terms
set out in a pro forma invoice.
• AEL alleged the invoices not what was agreed to;
there were “understandings” which were not
confirmed in the invoices.
• Held: The invoices were the entire relevant
contract.

per Hammond J “It is hard to think of a clearer

illustration of the appropriateness and application of
the parol evidence rule”.

11
Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307

• Facts: Mr K guaranteed a debt to Hanover

Finance Ltd
• Two debtors defaulted and Hanover
obtained summary judgment against
Mr Kr for $4,159,386.61.
• Argued that it had been orally agreed that
the loan could not go into default until six
months after the commercial
development was completed.
12
 Held
• Held: Parol evidence was inadmissible to
prove the term which was inconsistent
with the agreement.
• The defence of collateral contract was not
arguable because the agreement
Mr Krukziener alleged was far from
unequivocal and would contradict central
terms of loan agreement.

13
 Conditions Suspending Performance of
a Binding Contract
• In this category there is a binding contract but the
condition suspends the contractual obligation until
the condition is fulfilled.
• The most common examples are found in contracts
for the sale of land:
a. ‘subject to my solicitor's approval’;
b. ‘subject to finance’;
c. other clauses.
14
(a) ‘Subject to solicitor's approval’
Generally, such clauses do not prevent
formation of the contract.
The parties are bound by the contracts but,
until approval is given, performance need not
occur.
The solicitor’s approval must be sought and the
approval must not be unreasonably withheld.

15
Provost Developments Ltd v Collingwood Towers Ltd [1980] [Text: pp
215-6]
Facts: Contract for the sale of property ‘subject to solicitors
approval by Friday, 30 June 1978 by 5 pm.’
Purchaser’s solicitor approved but the vendor’s solicitor advised
he would not approve the transaction and that the contract was
at an end. Purchaser sued for specific performance.
Held (on appeal) : There was a binding contract.
The approval was not designed as a prerequisite to formation of
the contract itself, but to ensure the contract would be
suspended pending the necessary approval on each side.
That approval was limited in scope.
Per Richardson J: ‘it seems to me that the role of the solicitor under cl. 19 was to be limited
accordingly to consideration of what might loosely but conveniently be termed the legal
implications of the transaction.’

16
 (b) Subject to Finance
 Again, there is a binding agreement until the
condition cannot be fulfilled.
 A party must make reasonable efforts to ensure that
a condition is fulfilled.
 This can be assessed by the objective test of
reasonableness.

17
Connor v Pukerau Store Ltd [1981] 1 NZLR 384

Facts: The appellant agreed to purchase the respondent’s shop.

- The agreement was conditional on the finding of finance by 24
October.
- Purchaser made one unsuccessful attempt to arrange finance but did
not wish to proceed when he learnt the impact of the town planning
regulations.
- He terminated the contract.

Held: (Court of Appeal)

- The contract was binding unless and until finance could not be
obtained.
- The purchaser had not made reasonable efforts to obtain finance.
- He was liable for damages for breach of contract.
18
 VITIATION OF CONSENT

Duress, Undue Influence &

Unconscionability

19
• a) duress, insofar as it is relevant to contracts, is
pressure exerted by
• one party to coerce another to contract on
particular terms. It consists of such
• pressure as would cause a reasonable person
(exercising that ordinary
• degree of firmness which the law demands of us
all), to do something which
• he or she would not do otherwise.
 Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 3
WLR 389

• Kafco imported basketware into the U K.

• Contract with Atlas for delivery of its baskets to the
various stores it supplied -£1.10s per carton. Atlas
subsequently demanded a minimum charge per load
of £440.
• Kafco refused, next load - £440 minimum charge. If it
were not signed he had orders to drive away
unloaded. Signed but Kafco subsequently refused to
pay the new charges- duress?

21
• Kafco could not be forced to pay on the substituted higher
rate.
• It was essential to its commercial survival that the goods
be delivered, and it was unlikely that it could have
arranged for a substitute road haulier had Atlas carried
out its threat and Atlas was fully aware of this.
• Agreement was signed unwillingly and under compulsion
— the pressure was illegitimate - consequences for Kafco
were so serious that it constituted economic duress.
• The contract was voidable.

22
 Undue influence
• is a plea available to a party who contracts
with someone who is in a position to exercise
influence over him or her on terms that are
• favourable to that other party and which, it
must be presumed, were agreed
• to, at least largely, because of the influence
and not because of any exercise
• of a free and independent judgement.
Re Craig [1971] [Text: p 315]
Facts: Craig, aged 84, employed Mrs Middleton as his
secretary and companion, two months after his wife’s
death. Over the next 6 years he gave her
approximately £28,000 in gifts. Following Craig’s
death, his beneficiaries sued to have the gifts set
aside on the grounds of undue influence.
Held: While the relationship between Craig and Mrs
Middleton was not within the categories of ‘special
relationship’, the court found it was clearly one
involving trust and confidence of a high order.

24
 Unconscionability
For unconscionability to be pleaded it is necessary to
show that a stronger party took some undue
advantage of the weaker’s position.

The weaker party must be able to show:

1. That an unfair bargain was struck; and
2. It was reached by the stronger party taking
unfair and improper advantage of some
disability by which the weaker was affected.

25
 Unconscionability v Undue Influence
• Undue influence is usually pleaded where the
stronger party has played some part in influencing
the will of the weaker party so the weaker party
does not reach a fully independent decision (ie it
relies on the ‘sufficiency of consent’).
• Unconscionability merely requires that the stronger
party took undue advantage of a ‘special disability’
suffered by the weaker.
See Contractors Bonding v Snee (1992) per Richardson J

26
 The Elements of Unconscionability
1. The weaker party is under a significant disability;
2. The stronger party knows, or ought to know, of that
disability ;
3. The stronger party has victimised the weaker in the sense of
taking advantage of the weaker’s disability, either by
(i) active extortion of the bargain; or
(ii) passive acceptance of it in circumstances
where it is contrary to conscience that the bargain should
be accepted;
4. There is a marked inadequacy of consideration and the
stronger party either knows or ought to know that to be so;
and
5. There is some procedural impropriety either demonstrated or
presumed from the circumstances.
See Bowkett v Action Finance [1992] [Text: p.335] per Tipping J
27
 The Critical Elements

1. The weaker party is under a significant disability;

2. The stronger party knows, or ought to know, of

that disability ;

3. The stronger party has victimised the weaker in

the sense of taking advantage of the weaker’s
disability.
Bowkett v Action Finance [1992] [Text: p.335] per Tipping J

28
Bowkett v Action Finance [1992] p.335 text
Facts: Mr and Mrs Bowkett, were approached by their son for
assistance to purchase a house.

The defendant lenders required a mortgage over their property as

collateral security.

A legal executive of the lenders, knowing that the Bowketts could

not meet the mortgage repayments should the need arise, advised
them to seek independent advice; she also advised them of the
possible consequences of losing their home.

The son defaulted under the mortgage and the defendant lenders
purported to sell the parents’ property.

The Bowketts obtained an interim injunction and Action Finance

moved for its rescission.
29
Held: The Bowketts were under a ‘special disability’ in
that they were elderly, unversed in business matters
and under pressure from their son.
– Action Finance, through their legal executive, knew or
ought to have known of their disability.
– It victimised them by passively accepted the benefit of
the collateral security in circumstances where it was
against good conscience for them to have done so.
– There was also a serious inadequacy of consideration
in that the Bowketts received nothing personally from
the transaction.

30
‘Special Disability’ or ‘Special Disadvantage’

• Not satisfied by proof of ‘mere disadvantage’ or

‘inequality of bargaining power’;
• There must be some disabling condition or
circumstance which significantly diminishes the
affected party’s ability to make rational decisions in
his or her own best interests;
• It can take the form of ignorance, lack of education,
illness, age, mental or physical infirmity, stress or
anxiety – and other disabilities depending on the
circumstances (see Gustav & Co v Macfield)
31
• Moffat v Moffat [1984] 1 NZLR 600
• The husband and wife, who separated after 18
years of marriage, instructed a solicitor to prepare
a separation agreement.
• The agreement provided, among other things, that
the husband was to have custody of the four
children and the matrimonial home and effects
were to be the sole property of the husband.
• Before signing the agreement, the wife signed an
acknowledgment that she had been advised by
the solicitor that she should seek independent
advice but she had failed to do so.

32
• The combination of circumstances resulted in a
situation of serious disadvantage. The wife was
anxious to have the separation finalised. She was
unwell and may have been pregnant to the man with
whom she was having an affair.
• She did not know the true value of her interest in the
matrimonial home, and had not taken independent
legal advice.
• The husband was aware of her condition and had
taken an unconscientious advantage of the situation.
• The Court of Appeal upheld the High Court’s decision
that the agreement should be set aside.

33
 Knowledge of the Special Disability

• The stronger party must or should have known of

the ‘special disability’;
• It is enough that he or she was aware of
circumstances that would put a reasonable person
involved in the transaction on enquiry;
• The knowledge may be that of principal or agent and
can be actual or constructive (as where there is a
marked imbalance in consideration, especially if
coupled with a failure to obtain independent advice).
34
 Nichols v Jessup [1986] p.336 text
• Defendant’s property had full frontage to the road.
• The plaintiff real estate agent owned a section behind the
defendant’s property but had poor access to it – by a 3.66
m strip alongside the defendants property
• He proposed amalgamating the defendant’s drive with this
strip.
– This increased the value of his property by $45,000; and
– Decreased the value of the defendant’s property by $3,000.
• The trial judge described the defendant as ‘unintelligent
and muddle-headed’ and ‘ignorant about property matters’.

35
Held by CA:
The transaction should be set aside.
– per Cooke P (at 231):
“the plaintiff, although not setting out
intentionally to exploit her, must have realised at
some stage that there was a real imbalance in the
arrangement. Or that at the very least, especially
in light of his work as a real estate agent, he ought
to have realised that there was such an
imbalance.”

36
 Victimisation
In O’Connor v Hart [1985] the Privy Council held that
victimisation consists of either:
1. active extortion; or
2. the passive acceptance of a benefit in unconscionable
circumstances.
per Tipping J in Bowkett v Action Finance [1992]:
‘…there must be circumstances which are either known or which
ought to be known to the stronger party in which he has an obligation
in equity to say to the weaker party: ‘no, I cannot in all good
conscience accept the benefit of this transaction in these
circumstances either at all or unless your have full independent
advice’.”
37
 The Effect of Unconscionability
a. The contract is voidable at the instance of the
weaker party.
b. In appropriate cases the court may simply reduce
that party’s liability instead of extinguishing it
completely.
c. The right to relief can be lost through ratification,
affirmation, delay, intervention by a third party or
even unconscionable conduct by the weaker
party.

38
Misrepresentation and
Breach©

39
 2.3.1 Four Essentials

The essentials can be summarised:

(a) there was a misrepresentation;

(b) made by or on behalf of another party;
(c) made to him; and
(d) it induced him to enter the contract.

40
 Section 7(4)(a)

Section 7(4)(a) deals with the importance of the

term which has been broken.
Both parties must have agreed that the term is
essential to the cancelling party.

41
Section 7(4)(a) was not satisfied

Young v Hunt [1984]

Holland J. stated: “The use of the word

‘essential’ in subs 4(a) must mean that the
party would not proceed with the contract
unless the representation were accurate.”

42
 Pearson v Wynn (1986)
p 415
• Facts: The plaintiff signed an unconditional contract
with the defendant for the sale and purchase of
horticultural land including “irrigation equipment
overhead supply lines, risers etc”.
• The plaintiff had, during negotiations misrepresented
that the property was fully irrigated.
• The defendants cancelled the contract.

43
 Pearson v Wynn cont’d

Held: The defendants were entitled to cancel.

•The contract price was $159,000.
•$9,500 - $10,000 to obtain a proper water supply,
and
•Inconvenience of having the work done

•Misrepresentation satisfied either s. 7 (4)(b)(i) or

(ii).
44
 Section 7(4)(b)(iii)

• Sharplin v Henderson [1990]

• The parties agreed to sell and purchase a property on
the outskirts of Tauranga.
• The purchasers cancelled when they discovered a
grove of citrus trees on an area of about 900 sq.
metres was not in the boundaries.
• They alleged the agent misrepresented the position.
• The area of land was 25% less than was represented
to them.

45
 Held: (by the Court of Appeal).

• The real estate agent was negligent in

misrepresenting the boundary.
• The grove of citrus trees was a significant feature of
the property sold resulting in a benefit to the
purchasers which was substantially different from
that represented.
• The purchasers were entitled to cancel.

46
 Sharplin v Henderson cont’d

Cooke P. : “[Counsel] submitted, in short, that s. 7(4)

(b)(iii) of the Contractual Remedies Act requires an
assessment taking into account both subjective and
objective factors.

We accept that proposition.” The grove of citrus

trees appeared to be a significant contribution to or
feature of the property sold and therefore, the
misrepresentation satisfied s. 7(4)(b)(iii).

47
 The Object of Damages
The principle dates back to the case of Robinson v
Harman (1848)

“Where a party sustains a loss by reason of a

breach of contract, he is, so far as money can do it, to
be placed in the same situation, with respect to
damages, as if the contract had been performed.”

48
 Principles Underlying an Award of
Damages

The major rules include:

damages may not be too remote

damages are only compensatory
damages must be mitigated and
damages may be pre-agreed by the parties.

49
Hadley v Baxendale (1854)- recoverable
losses
(a) arise naturally from the breach; or in the
usual course of things, that is, normal
loss, or
(b) are reasonably contemplated by both
parties through knowledge of special
circumstances at the time when they
made the contract, that is, abnormal
loss.
NZ - McElroy Milne v Commercial Electronics

50
 2 -Damages are compensatory
Quantification problems no bar to relief

• If damages are difficult to assess the court will

still grant recovery even if it has to “crystal ball”
the amount.

51
 Chaplin v Hicks
Hicks advertised a beauty competition in which
newspaper readers were to select 50 young ladies
whom he would then interview to select a final 12
who would be provided with theatrical engagements.
Chaplin was selected and promised an interview.
She was not given a reasonable opportunity to
attend the interview. She sued.
Hicks argued that she could only be entitled to
nominal damages as she had had less than a one in
four chance of being selected anyway.
Held: She was awarded £100 damages for the loss of
chance of being successful.
52
 Ruxley Electronics and Construction Ltd v
Forsyth
• The appellants contracted to construct a pool with a
diving area 7 feet 6 inches deep.
• When the pool was finished it was suitable for diving
but it was only 6 feet 9 inches deep.
• This had no adverse effect on the pool’s value but the
landowner sued for £21,560, the cost of completely
rebuilding it in accordance with the original
specifications.

53
 Held: In the circumstances it was unreasonable to
insist on complete reinstatement.

 The cost of the work involved was out of all

proportion to the benefit that the owner would
obtain, so the court awarded him £2,500 damages for
the resulting “loss of amenity”.
 “There is no question of punishing the contract
breaker.”

54
 Tabcorp Holdings v Bowen Investments Pty
Ltd [2009] HCA 8
• Facts: The tenant Tabcorp rented office premises from Bowen
Investments.
• Under the lease the tenant was prohibited from making
substantial alteration or addition to the leased premises
without first obtaining the landlord’s written consent.
• In breach of the lease, and with “contumelious disregard” for
the landlord’s rights.
• Tabcorp destroyed the foyer and replaced it and Bowen sued.
• Lower court held that the appropriate measure of damages
was the difference in value of the property with the old foyer
and its value with the new foyer, which totalled AUD 34,820.
55
• On appeal the full Federal Court awarded damages on a cost-of-
cure basis.
• This was the cost of reinstatement of the foyer to its original
condition (AUD 580,000) and the rental loss during the
restoration period (AUD 800,000), which increased the damages
to AUD 1,380,000 . Tabcorp appealed.
• Held: The Court was unanimous that in the absence of its giving
written consent to any alterations, the appropriate measure of
damages was cost of cure damages or the cost of restoring the
foyer to its former condition (AUD 1,380,000).
• The exceptional facts of Ruxley were held to be plainly
distinguishable.

56
• The tenant relied on Ruxley Electronics and
Construction Ltd v Forsyth.
• The difference between the Ruxley Electronics award
and that in Tabcorp Holdings Ltd seems to turn on
whether in the particular circumstances it is
reasonable for the plaintiff to require complete
replacement or reinstatement.
• Tabcorp Holdings Ltd highlights the importance of
performance of contracts which is a feature of the
expectation interest.
57
 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11

• Facts: Vining Realty Group Ltd, the agents for the vendors,
misrepresented to the purchasers Altimarloch the quantity of
available water rights which were to be transferred on purchase.
Vendors, Mr and Mrs Moorhouse sold for $2,675,000.
• Once planting of the vineyard started situation was apparent.
• Altimarloch sued the vendors, who joined the real estate agents
Vining Realty and their solicitors Gascoigne Wicks for
misrepresentation under the CRAct 1979.
• HC and the C A damages were cost-of-cure $1,055,907.
• Solicitors and the real estate agent appealed on the basis that the
appropriate measure should be the difference in value of the land
with and without the represented water rights ($400,000).

58
• Held: The majority of the Supreme Court dismissed the appeal.
Tipping J adopted the view that
– “[t]he question of reasonableness must be assessed against the
premise that parties enter into contracts with the expectation of
performance, not with the expectation of compensation for breach”.
The fact that the “performance measure was substantially more
than the compensation measure” did not mean that the award was
an unreasonable response to the vendors’ breach.
• Minority considered that the usual measure of damages was
the correct measure and was adequate to meet the parties’
expectations under the contract.

59
 Non - pecuniary loss

Damages for non pecuniary loss cover situations where

the plaintiffs’ loss is not immediately apparent in
financial terms.

Under this head damages include injured feelings,

inconvenience, annoyance, vexation, frustration,
anxiety, distress or disappointment.

60
 Object of the contract

Where the object of the contract is to provide some

form of enjoyment or freedom from anxiety then
damages for mental distress are recoverable.
Addis does not apply where the object of the contract
is the provision of enjoyment or the prevention of
distress

61
 Jarvis v Swan’s Tours Ltd [1973]
The Court of Appeal recognised that the essence of the contract
was the provision of an enjoyable holiday.
• Skiing holiday in Switzerland - a house party of some 30 people
or so.
• First week there were only 13 and in the second week J was the
only person there.
• No ordinary-length skis — the only ones available were 3 feet
long. No yodler.
•The holiday was a disaster.
•Plaintiff was entitled to damages not only for the company's
failure to provide the physical items but also for their failure to
supply the enjoyment the physical items should have engendered.

62
 King v Wilkinson

Mr Justice Holland held the purchasers were entitled to

a “modest award” of general damages of $3,000.
His Honour emphasised that the contract was not a
commercial one, but “relating to a private resident”
which “was not the dream house they thought it would
be.”

63
 3 Mitigation

• The law imposes a duty on those claiming damages

to take all reasonable steps to mitigate (minimise)
their loss. As an incentive, plaintiffs cannot recover
any part of that loss that is attributable to a failure to
mitigate. All that is required is that the parties act
reasonably.

64
• Pilkington v Wood [1953] Ch 770
• Facts: The plaintiff had instructed the defendant, a solicitor, to act
in the purchase of a house. Title not good.
• The defendant argued that the damages should be reduced
because the plaintiff, in not having first taken proceedings against
the vendor, had failed to mitigate his loss.
• Held: The argument failed.
• The duty to mitigate did not oblige the plaintiff to “embark on a
complicated and difficult piece of litigation against a third party”.
• The solicitor was responsible for the full extent of the plaintiff’s
loss and damages were awarded accordingly.

65
• Plaintiffs are only required to act reasonably;
• they are not required to take undue steps,
• to expose themselves to risk or to expend money
where their resources do not allow such expenditure

66
 4 Liquidated damages
Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage
and Motor Co Ltd [1915] summarised the principles which are
relevant in ascertaining whether a particular stipulation is a
penalty or merely liquidated damages:
• “(a) 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 . . .
• “(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 . . .
• “(c) There is a presumption (but no more) that it is a penalty when ‘a single lump
sum is made payable . . . on the occurrence of one or more or all of several events,
some of which may occasion serious and others but trifling damage’ . . .
• “(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.”
67
• In Murray v Leisureplay plc [2005] the English Court of
Appeal agreed that it was no longer appropriate to ask
whether a payment on breach was stipulated in terrorem
of the offending party.
• The Court was unanimous in adopting a modern
interpretation of Lord Dunedin’s test but different
approaches were adopted.
• Arden LJ concentrated on the factual difference between
the liquidated damages and the contractual damages. “A
pre-estimate is genuine if it is not unreasonable in all the
circumstances of the case.”
68
• Buxton LJ disagreed with that approach adopted Dunlop’s test
as recast in modern terms by Colman J in Lordsvale Finance plc
v Bank of Zambia and approved by Mance LJ in Cine Bes
Filmcilik Ve Yapim Click v United International Pictures:
– “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.”

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• Clarke LJ preferred the broader approach of Buxton LJ. At
first instance it was held that the fact the clause took no
account of the duty to mitigate the damages was sufficient
to render it a penalty.
• The clause provided for a full year’s salary in the event of a
wrongful dismissal, greatly exceeding the damages that
would have been payable in an action at common law but
other justifications such as market expectations, restraint of
trade clause, a clean break, avoiding lengthy litigation and
damaging publicity meant it was not a penalty clause.
• The clause while “generous” was not “unconscionable” or
“extravagant”.
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