Duffen v FRA.BO SpA

A contractual sum is an unenforceable penalty where, judged at the time of contracting, it is extravagant or unconscionable compared with the loss that could reasonably result from the breach. A fixed sum payable on termination for non-payment may be penal where it applies equally at the beginning and end of a long contract, permits recovery of a windfall, and bears no reasonable relationship to the loss sustained.

Commercial agents may rely on the compensation regime in the Commercial Agents (Council Directive) Regulations 1993 where an otherwise contractual liquidated-damages clause is unenforceable.

The claimant was appointed the defendants’ exclusive United Kingdom and Republic of Ireland sales agent under a four-year agreement. He terminated the agreement after alleged non-payment and obtained judgment for unpaid commission and £100,000 under clause 7.2.

Master Trench treated clause 7.2 as penal. On appeal, Mr Justice Popplewell held that it was not penal and entered final judgment for £100,000. The defendants appealed, alleging fraudulent misrepresentation and challenging the clause. The claimant served a respondent’s notice seeking unpaid commission in addition to the contractual sum.

The central issues were whether the alleged misrepresentations were established, whether clause 7.2 was an enforceable liquidated-damages provision, and what commission and regulatory compensation remained recoverable.

1. Misrepresentation. The court upheld the rejection of the defendants’ allegations. The evidence did not establish that the statement concerning the company’s debtors was fraudulent. The alleged statements concerning retention and sale of stock were, at most, threats or representations of law, and the evidence did not show that they were made wilfully or relied upon as alleged.
2. Penalty clause. The governing principles were those stated by Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79. Classification depended on construction of the agreement and its circumstances when made. Clause 7.2 imposed the same £100,000 sum whenever termination occurred, including shortly before expiry of the four-year term. It could therefore produce a substantial windfall, was potentially extravagant and unconscionable, and bore no necessary reasonable relationship to the loss caused by termination. It was also triggered by comparatively trivial non-payment. The clause was consequently a penalty and unenforceable.
3. Commercial-agent compensation. Since clause 7.2 could not be enforced, the claimant was entitled in principle to rely on the compensation provisions of the Commercial Agents (Council Directive) Regulations 1993. He sought only to use those provisions to supplement, if necessary, his common-law entitlement.
4. Commission. On construction of clauses 2.2, 4.1.6 and 5.3, commission was payable on the defendants’ direct United Kingdom sales. The defendants could not retain that commission for their own benefit.
5. The judgment for £100,000 was set aside. Judgment was entered for £31,799.11, comprising £27,934.65 and contractual interest. The action was remitted to the Central London County Court for determination of the outstanding issues. The specified costs orders were made, and leave to amend the defence and counterclaim was granted.

• Court of Appeal (Civil Division): Duffen v FRA.BO SpA [1998] EWCA Civ 748 allowed the appeal, set aside the judgment for £100,000, substituted judgment for £31,799.11, and remitted the action.
• High Court, Queen’s Bench Division: Mr Justice Popplewell allowed in part the appeal from Master Trench and entered final judgment for £100,000.
• Master Trench: entered judgment for unpaid commission of £27,115.81 and directed that damages be assessed.