Jeancharm Ltd (t/a Beaver International) v Barnet Football Club Ltd.

A contractual payment on default is unenforceable as a penalty where, construed at the time of contracting, it is intended to deter breach rather than to compensate by a genuine pre-estimate of loss. The court examines substance, not the parties’ label or their relative bargaining strength. A counterpart provision imposing a penalty on the other party does not justify an otherwise penal clause.

The established approach in [1915] AC 79 remains applicable. A default interest rate which is extravagant and unsupported by evidence of a genuine pre-estimate of loss is penal, even in a commercial contract between parties of equal bargaining power.

Jeancharm agreed to supply Barnet Football Club with football kit and replica shirts. The contract required Barnet to pay correct invoices within 45 days. It provided for interest at 5% per week after that period. It also provided for late-delivery payments by Jeancharm at 20 pence per garment per day.

Following disputes over performance and a running account, the Leeds County Court awarded Jeancharm about £5,142 after credits, set-off and counterclaim. The judge enforced the late-payment interest clause, increasing Barnet’s liability to about £20,000. Barnet appealed, contending that the interest clause was an unenforceable penalty.

1. Appeal allowed unanimously. Jacob J, with whom Keene and Peter Gibson LJJ agreed, held that the 5% weekly late-payment interest clause was an unenforceable penalty.

2. The governing inquiry remained that stated by Lord Dunedin in Dunlop v New Garage, [1915] AC 79. The court must construe the clause in its contractual setting at the time of agreement. It must determine whether the stipulated payment is a genuine pre-estimate of loss, and thus compensatory, or is imposed in terrorem to deter default. A payment extravagant and unconscionable when compared with the greatest conceivable loss is penal.

3. Jacob J rejected the submission that later authority had replaced that approach with a general assessment of the whole bargain, the parties’ reciprocal risks and their relationship. Phillips Hong Kong Ltd v The Attorney General of Hong Kong, [1993] 61 BLR 41, did not introduce such a discretionary approach. Equal bargaining power requires caution before a clause is struck down, but it does not prevent a commercial term from being a penalty.

4. Keene LJ held that absence of oppression or dominance was not decisive. The relevant distinction remained between compensatory payment and punitive deterrence. Peter Gibson LJ added that the late-delivery provision could not operate as a quid pro quo which justified penal late-payment interest; the inquiry concerned the particular impugned clause.

5. The annualised rate of about 260% was plainly far beyond any genuine pre-estimate of loss. There was no evidence supporting the suggested administrative-cost justification, and the rate applied to substantial as well as small debts. Its only realistic function was deterrence. The appeal was allowed with costs, and the costs below were remitted to the Circuit Judge if not agreed.

• Court of Appeal (Civil Division): Allowed Barnet’s appeal in [2003] EWCA Civ 58 and held the late-payment interest clause unenforceable as a penalty.
• Leeds County Court (His Honour Judge Hawksworth): Held the interest clause enforceable and awarded the contractual interest.