Farage v Buttiegieg

In *Farage v Buttiegieg* [1998] NSWCA 77, the New South Wales Court of Appeal considered a dispute between the appellant, Farage, and the respondent, Buttiegieg, concerning the interpretation of a clause within a contract for the sale of a business. The core of the disagreement revolved around whether a specific payment constituted a penalty or a genuine pre-estimate of damages.

The primary legal issue before the Court was to determine the enforceability of a clause that stipulated a significant sum payable by the purchaser upon default. The Court was required to ascertain whether this stipulated sum was a penalty designed to punish the purchaser for non-performance, or a liquidated amount representing a reasonable assessment of the loss likely to be suffered by the vendor in the event of a breach.

The Court applied the principles established in *Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd* [1915] AC 79, which provides guidance on distinguishing between a penalty and liquidated damages. The Court examined the substance of the agreement, considering whether the stipulated sum was extravagant and unconscionable in comparison with the greatest conceivable loss that could realistically flow from the breach. The Court found that the clause in question did not represent a genuine pre-estimate of damages, but rather an attempt to secure performance through the threat of a disproportionately large payment, thereby constituting a penalty.

Consequently, the Court of Appeal found the penalty clause to be unenforceable.