Inner House case considering whether a contractual clause constituted a penalty and was therefore unenforceable.

The clause in question was contained in an agreement between Stewart Milne Group, Bett Limited and Stewart and Robert Hill which related to the development of two sites in Wishaw.  Basically, the agreement provided that Stewart Milne and Bett would install sewerage and surface water drainage systems at the site they were developing which the Hills would be able to connect their site to the systems at no cost. If the drainage systems were not completed by the 28 March 2008 the Hills were entitled to receive payment from Bett and Stewart Milne of a penalty of £5,000 per calendar month until the systems were completed.

The works were not completed by 28 March 2008 and payments were made to the Hills until December 2008 but then stopped leading to the court action being raised by the Hills.

The temporary sheriff principal held that the clause imposed a liability to make payment on the occurrence of what was a breach of contract.  Whilst it was for the party seeking to show that the clause is a penalty to raise the issue, it was then for the party relying on the clause to demonstrate that it was a genuine pre-estimate of losses and damage caused by the breach.  In this case Stewart Milne and Bett had raised the issue and the Hills had put themselves in a position to show that the provision was a genuine pre-estimate of their loss. However, as the Hills had not shown that, but for the failure to complete the system by 28 March, they would have been able to complete their site, sell it and realise the return, they could not succeed.

However an Extra Division of the Inner House agreed with the submissions made on behalf of the Hills to the effect that it was for Stewart Milne and Bett as the parties claiming that the provision was an unenforceable penalty clause to show that this was the case and they had failed to do so.

In coming to his decision, the key question the sheriff principal had failed to consider was whether Stewart Milne and Bett had provided any argument in support of their contention that the provision was an unenforceable penalty. It appeared from the sheriff principal’s decision that he considered that it was not only for the Hills to show that the provision was a genuine pre-estimate of damages but also that the supposed breach of contract had given risen to a loss of the sort that the pre-estimate had been directed at quantifying.  There was no such requirement. The whole purpose of a provision such as the one used in this case is to avoid the need for proof; not only proof as to quantification of the loss but also proof that the loss had occurred.

The Inner House therefore allowed the appeal against the sheriff principal’s decision.

The full judgement is available from Scottish Courts here.

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