Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79
Facts
Dunlop supplied tyres and related products to New Garage under terms restricting resale practices, including sales below specified prices. The agreement provided a fixed sum payable for each item sold or offered in breach. New Garage broke the restrictions, and Dunlop sought the stipulated payments. The garage argued that the clause was an unenforceable penalty. The dispute focused on damage to Dunlop's wider trade and distribution arrangements, rather than merely the immediate loss on a particular sale. The House of Lords considered whether the agreed amount represented a permissible damages provision.
Legal Issue
Was the stipulated sum payable for each breach of the tyre resale restrictions an enforceable agreed damages provision or an unlawful penalty?
Held
The House of Lords held that the agreed sum was enforceable liquidated damages rather than a penalty. The resale restrictions protected Dunlop's distribution system, goodwill and commercial interests. Loss from an individual underpriced sale was difficult to calculate, which did not prevent a reasonable agreed estimate.
Lord Dunedin offered guidance for distinguishing compensation from punishment, including whether a sum was extravagant compared with conceivable loss and whether the same amount covered breaches of widely differing seriousness. The label chosen by the parties was not conclusive. The decision concerned an agreed consequence of breach, not the privity and consideration issue in Dunlop v Selfridge. Its guidance now operates within the broader legitimate-interest framework stated in Cavendish.
⭐ Legal Principle
An agreed damages clause may be enforceable where it reasonably addresses loss that is difficult to quantify; the parties' label is not decisive. Dunlop's guidance distinguishes compensation from an extravagant breach sanction, subject now to Cavendish's broader test concerning secondary obligations and legitimate interests.
Significance
Dunlop remains important for straightforward agreed-damages clauses, but should not be presented as a complete statutory-style code. Cavendish explained that protecting an established commercial system can extend beyond readily measurable loss from one breach. The historical resale-price arrangement is the setting for the penalty issue, not a statement that such restrictions are generally lawful under modern competition rules. This case must also be kept separate from Dunlop v Selfridge, which concerns privity and consideration.
Common exam questions about this case
Why did difficulty estimating the loss support the clause?
Individual underpriced sales could damage a wider distribution system in ways difficult to quantify. A reasonable agreed sum could address that uncertainty. Difficulty measuring precise loss therefore did not itself show that the amount was punitive; it could explain why the parties adopted an agreed damages provision.
Does describing a clause as liquidated damages make it enforceable?
No. The court assesses its substance in the contractual circumstances rather than accepting the parties' label. Dunlop examined the relationship with the protected interests and potential loss. Modern analysis starts with the secondary-obligation question and Cavendish's legitimate-interest test, using Dunlop's guidance where appropriate.
Why must this case be distinguished from Dunlop v Selfridge?
They involve different contracts and legal questions. New Garage concerns the enforceability of an agreed damages provision for breach. Selfridge is used for privity and consideration. Confusing them produces the wrong issue and principle even though both involve tyres and commercial distribution arrangements.