Clydebank Engineering Co v Castaneda

Lord Chancellor.—This is a case in which a party to an agreement has admittedly broken it, and an action was brought for the purpose of enforcing the payment of a sum of money which, by the agreement between the parties, was fixed as that which the defenders were to pay in the event that has happened.

Two objections have been made to the enforcement of that payment. The first objection is one which appears upon the face of the instrument itself, namely, that it is a penalty, and not, therefore, recoverable as a pactional arrangement of the amount of damages resulting from the breach of contract. It cannot, I think, be denied—indeed, I think it has been frankly admitted by the learned counsel—that not much reliance can be placed upon the mere use of certain words. Both in England and in Scotland it has been pointed out that the Court must proceed according to what is the real nature of the transaction, and that the mere use of the word “penalty” on the one side or “damages” on the other, would not be conclusive as to the rights of the parties. It is, I think, not denied now that the law is the same both in England and in Scotland. The different form of its administration gave rise doubtless to the Act of William III. (8 and 9 Will. III. c. 11), sec. 8, which, of course, is that upon which English lawyers rely when this question occurs; but that difference only arises from a difference in the mode of administering in this country the two branches of jurisprudence which we call law and equity, while the Scotch Judges had full jurisdiction in each of the Courts to administer justice, and in administering justice to administer it according to both branches of jurisprudence.

We come then to the question, What is the agreement here? and whether this sum of money is one which can be recovered as an agreed sum as damages, or whether, as has been contended, it is simply a penalty to be held over the other party in terrorem—whether it is, what I think gave the jurisdiction to the Courts in both countries to interfere at all in an agreement between the parties, unconscionable and extravagant, and one which no Court ought to allow to be enforced.

It is impossible to lay down any abstract rule as to what it may or may not be extravagant or unconscionable to insist upon without reference to the particular facts and circumstances which are established in the individual case. I suppose it would be possible in the most ordinary case, where people know what is the thing to be done and what is agreed to be paid, to say whether the amount was unconscionable or not. For instance, if you agreed to build a house in a year, and agreed that if you did not…