Lombard North Central Plc v Butterworth

An express stipulation that time is of the essence makes punctual performance a contractual condition. Any late performance then permits the innocent party to terminate and recover damages for loss of the bargain, regardless of the breach’s apparent gravity.

Such a stipulation defines the character of a primary obligation. It does not itself fix damages and is not invalid as a penalty. By contrast, a clause requiring payment of future instalments after an owner elects to terminate for a non-repudiatory default is penal insofar as it exceeds damages for accrued breaches.

A finance company leased a computer to an accountant for five years, payable by quarterly instalments. The agreement made punctual payment of rent of the essence and allowed the owner, following default, to retake the goods and claim arrears, future rentals and damages.

After repeated late or recalled payments, the company withdrew consent to possession, recovered and resold the computer, and claimed the balance of the rentals. Master Lubbock awarded damages on the basis that the hirer had repudiated the agreement. The hirer appealed, contending that the future-rental provision was a penalty and that neither his conduct nor the time stipulation justified damages for the whole transaction.

1. The appeal was dismissed unanimously. Lord Justice Lawton agreed with the judgments of Lord Justice Mustill and Lord Justice Nicholls.

2. Lord Justice Nicholls held that, absent repudiation, clause 6(a) was a penalty insofar as it required payment for rentals not due when the owner terminated the hire. The omission of a resale-price allowance was not decisive. The clause was penal because it required the hirer to compensate the owner for the consequences of both the breach and the owner’s election to terminate, even for a trivial default. In the absence of repudiation, the ordinary remedy was limited to accrued instalments and interest, consistently with Financings Ltd v Baldock (1963) 2 Queen's Bench 104.

3. The evidence did not independently establish repudiation. Repeated late payments could be commercially serious, but the company had not proved communications or other facts showing that the hirer had evinced an intention no longer to be bound. At termination, only one instalment remained unpaid and previous late payments had been accepted.

4. Lord Justice Mustill held that the express statement in clause 2(a) that punctual payment was of the essence made timely payment a condition. A breach of condition allows the innocent party to terminate and claim damages for the loss of outstanding performance, without inquiry into the magnitude of the late payment. That conclusion also followed on the construction adopted by Lord Justice Nicholls.

5. A clause which makes an obligation a condition does not prescribe a measure of damages. It is therefore not itself subject to the penalty doctrine, although a separate damages clause may be penal. The company could accordingly terminate for the late payment under clause 2(a) and recover loss-of-bargain damages, including the future rentals as correctly calculated by the Master. The court noted that a waiver argument might have required factual investigation, but it could not be determined on the material before it.

• Court of Appeal (Civil Division): The hirer’s appeal was dismissed. The court upheld the damages award, but on the basis that time was expressly of the essence rather than on an independently established repudiation.
• High Court, Queen’s Bench Division: Master Lubbock assessed damages after judgment for damages to be assessed. He found repudiation and awarded damages for the future instalments, subject to the stated credits.