Hi Linford


This was posted by me on another thread but is equally valid to explain.



1) References

Charges are Unlawful as stated in Unfair Terms in Consumer Contracts Regulations 1999. Schedule 2 (e) of the said regulations gives a non-complete list of terms, which may be regarded as unfair, such as a term that requires a consumer who fails in his obligation, to pay a disproportionately high sum in compensation. Unfair clauses are unlawful and cannot be enforced.


They are also unlawful as they are a penalty charge, and penalty charges can only reflect a companies actual loss, they are not allowed to make a profit from a default by the other party.

Common law Principles (Penalty charges are irrecoverable at common law)
The precedent for this was:


Dunlop Pneumatic v New Garage [1915] AC 79.


Lord Dunedin set out some tests that are considered even in modern cases when the court is asked to rule on penalty charges.

They are;
a) If it is "extravagant and unconscionable" i.e. that the cost incurred by the business because of the breach is lower than what the consumer is being expected to pay because of the breach.

b) It is also a penalty where the consumer is to pay a larger sum due to failure to pay a smaller sum.

It was held that a contractual party can only recover damages for an actual loss or liquidated losses

Further more recent examples of where this has been applied include

Murray v. Leisure play [2005] EWCA Civ 963


“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”


CMC Group Plc And Others V Zhang [2006] EWCA Civ 408.


“'Whether a provision is to be treated as a penalty as a matter of construction to be resolved by asking whether at the time that 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.”


Kirky1969 (penaltycharges.co.uk moderator)