[COURT OF APPEAL]

JOBSON v. JOHNSON

[1985 J. No. 4023]

Contract - Construction - Penalty clause - Sale of company shares - Payment of purchase price by instalments - Buyer to re-transfer shares on default of payment and vendor to retain instalments - Whether provision penal - Whether provision enforceable - Nature of relief to be granted

By a sale agreement in writing dated 12 August 1983 two brothers agreed to sell 62,666 ordinary shares of 25p each in a football club, a limited company, to the defendant's nominee for £40,000. By a side letter of the same day, written by the defendant to the brothers and countersigned by them, it was stated in paragraph 3 that the defendant agreed to pay the brothers an additional sum of £311,698 by six equal half-yearly instalments of £51,948 beginning on 12 February 1984. Paragraph 6 of the letter provided (a) that if the defendant defaulted in payment of the first instalment he would transfer, or procure the transfer of, the shares amounting to not less than 44.9 per cent. of the issued share capital of the club to the brothers subject to the payment to him of £15,666.50; and (b) that if the defendant defaulted in respect of any subsequent instalment he would transfer, or procure the transfer of, the shares in the club to the brothers jointly subject to the payment to him of £40,000. The defendant paid the £40,000 and the shares were transferred. But he defaulted in paying the first instalment which was due on 12 February 1984. On 1 June a variation agreement was entered into between the brothers and the defendant substituting £300,000 for the £311,698, and providing for that sum to be paid by instalments. The defendant paid the brothers the first £100,000 under the variation agreement but failed to make any further payments. In July 1985 the brothers assigned their rights to the plaintiff for value. The plaintiff sought to enforce the re-purchase of the shares under paragraph 6(b) of the side letter. On 23 January 1987 Harman J. decided that although paragraph 6(b) was a penalty clause it was enforceable.

On appeal by the defendant: -

Held, (1) that whether a clause was a penalty clause was a question of construction to be decided on its terms in the light of the circumstances at the time of the making of the contract; and that, in the circumstances, notwithstanding that the repurchase provisions under paragraph 6(b) of the side letter were alternative, not additional, to recovery of the unpaid instalments under the variation agreement so that it was a security for the payment of the unpaid instalments and interest, since paragraph 6(b) provided for repurchase of the shares at a fixed price regardless of the extent of the defendant's default, it was a penalty clause (post, pp. 1031H - 1032A, H, 1033B-C, 1039H - 1040A,1047B-D).

Per Nicholls and Kerr L.JJ. Paragraph 6(b) possesses the essential characteristics of a penalty clause in a contract and also possesses features which resemble those of a forfeiture provision. It is a clause in respect of which the judge had jurisdiction to grant relief (post, pp. 1043A, 1044F, 1047E-F).

(2) That (Kerr L.J. dissenting) a penalty clause was unenforceable to the extent that it provided for compensation

for the innocent party in excess of his loss, whether it provided for such compensation by the payment of money or by a transfer of property; that the defendant's claim for relief, having been struck out, no longer fell to be considered; and that, accordingly, in the circumstances, the appropriate course was either to order a sale of the shares with payment to the plaintiff of the amount of the unpaid instalments and interest or to direct an inquiry to ascertain the current value of the shares, the aggregate of the unpaid instalments and the outstanding amounts charged on the shares and to make an order in the terms of paragraph 6(b) if such value were to be less than the sum presently due from the defendants (post, pp. 1034H - 1035B, 1037E-G, 1040F-G, 1041E-F, 1045B-E).

In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) L.R. 8 Ch. App. 1022 and Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, H.L.(E.) applied.

Clydebank Engineering and Shipbuilding Co. Ltd. v. Yzquierdo y Castaneda [1905] A.C. 6, H.L.(Sc.); Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79, H.L.(E.) and Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, H.L.(E.) considered.

Per Kerr L.J. The combined effect of law and equity on penalty clauses is simply that they will not be enforced in favour of a plaintiff without first giving to the defendant a proper opportunity to obtain relief against their penal consequences (post, p. 1047D).

Decision of Harman J. reversed.

The following cases are referred to in the judgments:

Alder v. Moore [1961] 2 Q.B. 57; [1961] 2 W.L.R. 426; [1961] 1 All E.R. 1, C.A.

Astley v. Weldon (1801) 2 Bos. & P. 346

Beckham v. Drake (1849) 2 H.L.Cas. 579, H.L.(E.)

Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600; [1962] 2 W.L.R. 439; [1962] 1 All E.R. 385, H.L.(E.)

Clydebank Engineering and Shipbuilding Co. Ltd. v. Yzquierdo y Castaneda [1905] A.C. 6, H.L.(Sc.)

Cooden Engineering Co. Ltd. v. Stanford [1953] 1 Q.B. 86; [1952] 2 All E.R. 915, C.A.

Craig v. M'Beath (1863) 1 M. 1020

Dagenham (Thames) Dock Co., In re, Ex parte Hulse (1873) L.R. 8 Ch. App. 1022

Dixon, In re, Heynes v. Dixon [1900] 2 Ch. 561, C.A.

Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79, H.L.(E.)

Gerrard v. Clowes [1892] 2 Q.B. 11

Kemble v. Farren (1829) 6 Bing. 141

Kreglinger (G. & C.) v. New Patagonia Meat and Cold Storage Co. Ltd. [1914] A.C. 25, H.L.(E.)

Peachy v. Duke of Somerset (1721) 1 Stra. 447

Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827; [1980] 2 W.L.R. 283; [1980] 1 All E.R. 556, H.L.(E.)

Public Works Commissioner v. Hills [1906] A.C. 368, P.C.

Reynolds v. Pitt (1812) 19 Ves. 134

Roles v. Rosewell (1794) 5 Durn. & E. 538

Shiloh Spinners Ltd. v. Harding [1973] A.C. 691; [1973] 2 W.L.R. 28; [1973] 1 All E.R. 90, H.L.(E.)

Sloman v. Walter (1784) 1 Bro. C.C. 418

Stockloser v. Johnson [1954] 1 Q.B. 476; [1954] 2 W.L.R. 439; [1954] 1 All E.R. 630, C.A.

Thompson v. Hudson (1869) L.R. 4 H.L. 1, H.L.(E.)

Wall. v. Rederiaktiebolaget Luggude [1915] 3 K.B. 66

Wallingford v. Mutual Society (1880) 5 App.Cas. 685, H.L.(E.)

Wallis v. Smith (1882) 21 Ch.D. 243, C.A.

Wyllie v. Wilkes (1780) 2 Doug. K.B. 519

The following additional cases were cited in argument:

Anglo-Auto Finance Co. Ltd. v. James [1963] 1 W.L.R. 1042; [1963] 3 All E.R. 566, C.A.

Barton Thompson & Co. Ltd. v. Stapling Machines Co. [1966] Ch. 499; [1966] 2 W.L.R. 1429; [1966] 2 All E.R. 222

Preston v. Dania (1872) L.R. 8 Ex. 19

United Dominions Trust (Commercial) Ltd. v. Ennis [1968] 1 Q.B. 54; [1967] 3 W.L.R. 1; [1967] 2 All E.R. 345, C.A.

APPEAL from Harman J.

By a writ issued on 5 August 1985 the plaintiff, Victor Thomas Jobson, sought, inter alia, specific performance of an agreement made between the defendant, Anton Leslie Johnson, and Mark Daniel Rubin and Anthony Robert Rubin ("the Rubins") and contained in, and evidenced by, a side letter dated 12 August 1983 from the defendant to the Rubins for the transfer, or procuring of the transfer, by the defendant to the Rubins of 62,646 or alternatively 62,566 ordinary shares of 25p each in Southend United Football Club Ltd. The benefit of that agreement had been duly assigned to the plaintiff by the Rubins.

On 5 February 1987 the judge ordered that the agreement should be specifically performed and carried into execution and that consequential inquiries should be made.

By a notice of appeal dated 17 February 1987 the defendant appealed on the grounds that (1) the judge, having correctly held that paragraph 6(b) of the side letter was penal in character, erred in law in ruling that that paragraph was not in the result unenforceable and in ruling that the paragraph remained enforceable unless the defendant should succeed in an application for the grant of relief in equity; (2) the judge failed to consider or make any finding upon the submission on behalf of the defendant that damages would in any event be an adequate remedy for the plaintiff; and (3) the judge, having found that he was unable to accept the evidence of the Rubins, the vendors under the side letter, and having received uncontested evidence and having found that at the time of the making of the agreement, the Rubins did not wish to have the shares re-conveyed to them, failed to consider or make any finding upon whether they would have been entitled to the equitable remedy of specific performance and whether the plaintiff, as their assignee, could in law be in a better position.

The plaintiff, pursuant to R.S.C., Ord. 59, r. 6(1), gave notice by a respondent's notice dated 21 August 1987 of his intention to contend that the judge's decision should be affirmed on the additional or alternative ground that paragraph 6(b) of the side letter constituted a forfeiture provision as opposed to a penalty.

The facts are stated in the judgment of Dillon L.J.

Leslie Joseph Q.C. and Victor Levene for the defendant.

James Munby Q.C. and Guy Newey for the plaintiff.

25 May. The following judgments were handed down.

DILLON L.J. The defendant, Mr. Johnson, appeals against an order of Harman J. of 5 February 1987 whereby the judge ordered, in favour of the plaintiff, Mr. Jobson, as assignee of two brothers named Rubin ("the Rubins") specific performance of an agreement in writing of 12 August 1983 whereby the defendant agreed, in the events which have happened, to sell 62,566 ordinary shares of 25p each in Southend United Football Club Ltd. ("the club") to the Rubins for a sum of £40,000. The appeal raises a narrow point of considerable difficulty, which only arises because of the unusual course these proceedings have taken.

Briefly the origin of this matter is that in August 1983 the Rubins were, by inheritance from their father, entitled to 62,666 ordinary shares in the club, which constituted 44.914 per cent. of the issued share capital of the club. By two documents, both dated 12 August 1983, which have to be read together to get the full terms of the contract, the Rubins contracted to sell the 62,666 shares to the defendant.

The first of these two documents was a sale agreement made between the Rubins and a Mr. Machutchon who was a nominee for the defendant. It provided for the sale by the Rubins to Mr. Machutchon of the 62,666 shares for a price of £40,000 in cash, and for completion to take place immediately after the signing of the agreement. The sale agreement contained many other provisions but none is relevant to this appeal.

The second of the two documents was a side letter of the same date. It was written by the defendant to the Rubins and was countersigned by them and was expressed to be agreed in consideration of the Rubins' entering into the sale agreement with Mr. Machutchon.

Paragraph 2 of the side letter provided for the Rubins, without extra consideration, to procure the transfer to Mr. Machutchon of extra shares in the club to bring the total sold to over 50 per cent. of the share capital, but that did not happen and an option given to the defendant by paragraph 5 of the side letter to require the Rubins to re-acquire the shares for £40,000 if the extra shares were not acquired was never exercised. The provisions can therefore be ignored. What is important about the side letter is however: (1) that by paragraph 3 and the last three lines of paragraph 2 the defendant agreed to pay the Rubins, in addition to the £40,000 under the sale agreement, a sum of £311,698 by six equal half-yearly instalments of £51,948 commencing on 12 February 1984 - the £311,698 represented £260,000 plus interest at 12 ½ per cent. per annum on a reducing balance; and (2) that by paragraph 6 there were alternative provisions for the re-transfer to the Rubins of 44.9 per cent. of the issued share capital of the club in the event of default by the defendant as follows:

"6(a) In the event of any default by me in payment of the first instalment of the sum referred to in paragraph 3 of this letter for a period of seven days from the due date of payment I shall transfer (or procure the transfer) of ordinary shares of 25p each in the [club] amounting to not less than 44.9 per cent. of the issued share capital of the [club] as at the due payment date to You jointly subject to the payment to me (or as I may direct) of £15,666.50. (b) In the event of any such default by me in respect of any subsequent instalment of the sum I shall transfer (or procure the transfer) of ordinary shares of 25p in the [club] amounting to not less than 44.9 per cent. of the issued share capital of the [club] at the due

payment date to you jointly subject to the payment to me (or as I may direct) of £40,000."

It is the re-transfer under paragraph (b) that the plaintiff, as assignee of the Rubins, now claims to enforce. Because the number of shares comprised in the sale agreement represented, as indicated above, slightly more than 44.9 per cent. of the issued share capital of the club, the action has been about, and the judge's order relates to, the slightly smaller number of 62,566 shares. But nothing turns on precise numbers.

The defendant paid the £40,000 provided for by the sale agreement and the 62,666 shares were transferred to him or to his nominee. He defaulted, however, in paying the first instalment, due on 12 February 1984, under paragraph 3 of the side letter. A variation agreement was accordingly entered into on 1 June 1984 between the Rubins and the defendant. This substituted a sum of £300,000 for the £311,698 specified in paragraph 3 of the side letter and provided for that sum to be paid by instalments: (a) as to £50,000 on the signing of the variation agreement, (b) as to a further £50,000 on 31 August 1984 and (c) as to the balance of £200,000 by 12 quarterly instalments of £15,000 each commencing on 31 March 1985 and a final instalment of £20,000 on 31 March 1988.

There were certain provisions included in the variation agreement for the protection of the Rubins in that the defendant agreed that the freehold or leasehold properties of the club should not be sold without their consent; he agreed not to charge or incumber the shares and agreed to deposit the share certificate relating to the shares with his then solicitors with irrevocable instructions not to part with it. The defendant also agreed that until a certain level of payments has been reached (which has not yet happened) the Rubins should have the right to appoint one director to the board of the club.

The defendant paid the Rubins the first £100,000 under the variation agreement, in addition to the £40,000 already mentioned, but he has failed to make any payment at all in respect of the balance of £200,000. The rights of the Rubins against the defendant were assigned to the plaintiff for value in July 1985, and he now claims against the defendant to enforce the re-purchase of 62,566 shares under paragraph 6(b) of the side letter.

At the trial a great deal of time was devoted to claims by the defendant that the sale agreement and the side letter were tainted with fraud and illegality, and so could not be enforced. The judge held that there was no sufficient evidence to support these claims, which he accordingly rejected, and as to that there is no appeal. Apart from that, however, the defendant pleaded in his defence that the provisions contained in paragraph 6 of the side letter constituted penalties and were accordingly unenforceable. He then counterclaimed that if, which he denied, paragraph 6 was valid and enforceable, he ought to be granted relief, which was described as "relief from the forfeiture of his said shares."

In a reserved judgment delivered on 23 January 1987, after the trial of the action, Harman J. held that paragraph 6(b) of the side letter was indeed a penalty clause, but he held that the effect of that was not that the clause was unenforceable or to be "blue-pencilled out," but that, all other things being equal, the defendant might in the discretion of the court be granted relief under his counterclaim. He then at the defendant's request adjourned the hearing of the counterclaim to

9 February. It appeared, however, after Harman J. had given judgment on 23 January 1987, that the defendant was then in default in complying with certain undertakings given to the court in November 1986 to disclose documents relating to the defendant's own recent financial circumstances. Harman J. accordingly extended the defendant's time for compliance with those undertakings to the close of business on 30 January 1987, but as by that time the defendant still had not complied with the undertakings, Harman J. on 5 February struck out the counterclaim for relief. There is no appeal against the striking out.

The defendant challenges by this appeal the judge's ruling that, although a penalty clause, paragraph 6(b) of the side letter creates an enforceable obligation from which the only escape for the party bound would be by relief, akin to relief against forfeiture, granted to that party by the court in its discretion. The defendant submits that the true view is that paragraph 6(b), being a penalty clause, is unenforceable. Thus the defendant relies on his defence that the penalty clause is unenforceable, and says that he does not need to rely on his counterclaim for relief, which has been struck out. The position on the record is that if the defendant fails on this submission the appeal must fail because the striking out of the counterclaim is not challenged.

The plaintiff's submission is that the law as to penalty clauses is that a penalty clause creates a binding obligation which the courts will enforce unless the courts see fit to grant equitable relief. This view of the law Harman J. accepted in his judgment of 23 January 1987 - contrary, as he said, to his initial reaction when the proposition was first advanced. The plaintiff submits that if this view of the law is correct, it must follow that, as the counterclaim for relief was struck out, the court cannot give the defendant relief from the penalty clause, and must order specific performance of the defendant's obligation under paragraph 6(b), as the judge did by his order of 5 February.

In this court the plaintiff does not challenge the judge's ruling that paragraph 6(b) is a penalty clause. That ruling was, in my judgment, plainly right for a combination of two reasons:

(1) the re-purchase of the shares under paragraph 6(b) was to be at the fixed price of £40,000 if there was default in payment of any instalment, without regard to how much the defendant had already paid - it would make no difference if the default was in the payment of the second, the last, or an intermediate instalment; and

(2) there was also paragraph 6(a) providing for re-purchase at an even lower price than £40,000 in the event of default in the payment of the first instalment under the side letter i.e., default when the defendant had only paid the £40,000 under the sale agreement. The plain reading of paragraph 6 is therefore that the defendant was to be punished for any default by being bound to re-transfer substantially all the shares to the Rubins at a fixed price which was bound to be less, and could be very much less, than the defendant had paid. The re-transfer price under either part of paragraph 6 could not have been based on a genuine pre-estimate either of the Rubins' loss or of the value of the shares.

The penal effect of paragraph 6(b) would of course be all the greater if, having enforced a re-transfer of the shares for £40,000 under that paragraph, the plaintiff as assignee of the Rubins would remain entitled to sue the defendant to recover additionally all the unpaid instalments under the side letter as varied by the variation agreement. For my part, however, I would hold as a matter of construction of the side letter that

re-transfer of the shares under paragraph 6(b) was to be in lieu of all other remedies and would preclude the plaintiff's recovering any unpaid instalments, whether those unpaid at the date when the re-transfer was called for or those which would only have become payable subsequently.

We have therefore to consider what the basis is of the court's approach to penalty clauses, and we have had the benefit of very interesting historical argument on each side.

The effect of the court's approach has been to establish what Lord Diplock, in Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827, 850E-F, referred to as "the equitable rule against penalties." He there said that an agreement

"must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation."

There is no doubt that the rule originated in equity, and is of long standing in equity. Thus, Lord Mansfield tells us in Wyllie v. Wilkes (1780) 2 Doug. K.B. 519, 523, that Sir Thomas More, when Lord Chancellor, summoned the judges to a conference concerning the granting of relief at law, after the forfeiture of bonds, upon payment of principal interest and costs, "and when they said they could not relieve against the penalty, he swore by the body of God, he would grant an injunction."

The refusal of the court to sanction legal proceedings for penalties was thus, as Lord Radcliffe stated in Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, 622, a rule of the court's own, produced and maintained for purposes of public policy (except where imposed by positive statutory enactment as in 8 & 9 Will. 3, c. 11 and 4 & 5 Anne c. 16).

In Clydebank Engineering and Shipbuilding Co. Ltd. v. Yzquierdo y Castaneda [1905] A.C. 6, 10, Lord Halsbury L.C. held that the law as to penalties is now the same in England as in Scotland. He referred to the different form of the administration of the law in England as giving rise to the Act of William III (8 & 9 Will. 3, c. 11), and held also, more importantly in my judgment for present purposes, that what gave the jurisdiction to the courts in both countries to interfere at all in an agreement between the parties was that an agreement to pay a penalty was regarded as "unconscionable and extravagant, and one which no court ought to allow to be enforced." This is of course not saying that the courts claim a general power not to enforce any agreement which the courts regard as unconscionable and extravagant; as Lord Radcliffe also stated in Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, 626, the courts of equity never undertook to serve as a general adjuster of men's bargains. But rules evolved as to the types of cases in which relief would be given, and one of those rules, now too entrenched to be challenged, is the equitable rule against penalties, based on the view, as stated by Lord Halsbury L.C. in Clydebank Engineering and Shipbuilding Co. Ltd. v. Yzquierdo y Castaneda [1905] A.C. 6, 10, that an agreement to pay a penalty was, for the reasons given, one that no court ought to allow to be enforced.

An explanation of the rule against penalties that leads to the same result is given by the Lord Justice Clerk (Lord Inglis) in the Scots case of Craig v. M'Beath (1863) 1 M. 1020, 1022, where he put as the basis of the rule that parties cannot lawfully enter into an agreement that the one party shall be punished at the suit of the other. Consequently, the court was bound to modify the penalty to the actual loss "if duly required by the defender to do so."

One consequence of the attitude of the courts to penalty clauses is that the question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach: Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79, 86-87, per Lord Dunedin. This was interpreted, in my view correctly, by Somervell L.J. in Cooden Engineering Co. Ltd. v. Stanford [1953] 1 Q.B. 86, 94, as meaning that the question whether a sum was a penalty or a pre-estimate of damages, if it arose, had to be considered as at the date of the contract and having regard to its terms, and not on the particular breach or breaches on which the claim was based. That approach makes it the less likely, in my view, that the enforcement of the penalty should depend on the particular breach or breaches on which the claim was based, and on whether or not relief in equity should be granted against those breaches.

It is also to be noted that a clause which was identified by the court of equity as a penalty clause as a matter of construction of the contract was not enforced, even though the desired result could legitimately have been achieved if the clause had been drawn differently. Thus in Astley v. Weldon (1801) 2 Bos. & P. 346, 353, Heath J. stated:

"It is a well known rule of equity, that if a mortgage covenant be to pay £5 per cent. and if the interest be paid on certain days then to be reduced to £4 per cent. the Court of Chancery will not relieve if the early day be suffered to pass without payment; but if the covenant be to pay £4 per cent. and if the party do not pay at a certain time it shall be raised to £5 there the Court of Chancery will relieve."

This concept was echoed by Lord Hatherley many years later in Wallingford v. Mutual Society (1880) 5 App.Cas. 685, 702. It is clear to me that equity relieved by not enforcing the penal increased interest which only became payable on default - not by examining the financial circumstances of the mortgagor at the time of breach and considering whether his breach was wilful or culpable or whether he ought to be let off paying the increased interest if he actually paid the arrears at the lower rate within a specified and reasonable time.

All the cases to which I have referred were cases where the penalty was a sum of money. Now that the jurisdictional differences between the courts of common law and equity no longer exist, any court, English or Scottish, when faced with a claim for a sum of money payable on default which it identifies as a penalty, must refuse to enforce the penal part of the sum and must give judgment for the claimant merely for the actual damages suffered by the claimant - with, as appropriate, interest and costs. Where the penalty is a sum of money, the relief, once the penalty has been identified, does not involve a consideration of the circumstances of the defendant, or of the factors which might be appropriate to a grant

of relief against forfeiture in such a case as Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, where there was no question of penalty. Giving judgment for the actual damage without further inquiry into the circumstances was the course taken in Cooden Engineering Co. Ltd. v. Stanford [1953] 1 Q.B. 86 and Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, and in my judgment it was the correct course.

Mr. Munby for the plaintiff submits otherwise, in reliance in particular on section 8 of the statute 8 & 9 Will. 3, c. 11. That rather lengthy section, which I do not propose to set out, applied to actions in any of the King's courts of record on any bond or any penal sum for non-performance of any covenant or agreement in any indenture deed or writing contained. The procedure under the section was that the plaintiff might sign judgment for the full amount of the penalty claimed, but he could not enforce the judgment by execution or otherwise without assigning or alleging the breaches of the agreement on which he relied and proving his damage from those breaches, and he could only enforce the judgment to the extent of the damage so proved. Parke B. stated in Beckham v. Drake (1849) 2 H.L.Cas. 579, 629, that the statute in effect made the bond a security only for the damages really sustained.

It was held in Roles v. Rosewell (1794) 5 Durn. & E. 538 that the procedure under section 8 was mandatory even if the defendant did not appear to plead the Act, and consequently the plaintiff could not levy a default judgment for the full amount of a penalty without going to a jury to prove his actual loss. The result under the Act was explained by Tindal C.J. in Kemble v. Farren (1829) 6 Bing. 141, 148, as follows:

"But that a very large sum should become immediately payable, in consequence of the non-payment of a very small sum, and that the former should not be considered as a penalty, appears to be a contradiction in terms; the case being precisely that in which courts of equity have always relieved, and against which courts of law have, in modern times, endeavoured to relieve, by directing juries to assess the real damages sustained by the breach of the agreement."

The judgments of Lord Eldon C.J. and Chambre J. in Astley v. Weldon, 2 Bos. & P. 346, 350, 353, are in my view, to the same effect.

I find nothing therefore in the Statute of William or the procedure under it to change my view, as indicated above, where the penalty is a sum of money.

The procedure in Scotland, as explained in Craig v. M'Beath, 1 M. 1020, seems to have been somewhat different from the procedure in England under the Statute of William, and there seems to have been some difference of opinion among the Scottish judges in that case as to where the onus of proving the extent of actual damage lay. Lord Benholme, however, stated, at p. 1024:

"Where it is truly penal - where the parties have not had in view a mere statement of liquidated damages - the penalty is to be modified and reduced to the amount of the damage actually sustained."

Does it make any difference then, that the penalty in the present case is not a sum of money? In principle, a transaction must be just as objectionable and unconscionable in the eyes of equity if it requires a transfer of property by way of penalty on a default in paying money as if it requires a payment of an extra, or excessive, sum of money. There is no distinction in principle between a clause which provides that if a

person makes default in paying a sum of £100 on a certain day he shall pay a penalty of £1,000, and a clause which provides that if a person makes default in paying a sum of £100 on a certain day he shall by way of penalty transfer to the obligee 1,000 shares in a certain company for no consideration. Again there should be no distinction in principle between a clause which requires the defaulter, on making default in paying money, to transfer shares for no consideration, and a clause which in like circumstances requires the defaulter to sell shares to the creditor at an under value. In each case the clause ought to be unenforceable in equity in so far as it is a penalty clause.

Instances in the books, of cases where the penalty has been other than a penalty in money for non-payment of money, are infrequent. Perhaps the closest on the facts is in In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) L.R. 8 Ch. App. 1022. In that case the company, incorporated by Act of Parliament, had contracted to purchase some land for the purpose of making a dock in exercise of its statutory powers. The price was payable by two instalments and on payment of the first instalment the company was let into possession and began construction on the land. The contract included a clause that if the company defaulted in paying the second instalment, the vendors could re-enter on the land and repossess it as in their former estate, with the benefit of the company's expenditure on it, and eject the company without repaying any part of the price which had been previously paid. There were successive agreements extending the time for payment of the second instalment and interest, and in the latest agreement the power of re-entry on default was again repeated, and the report records that the repossession was to be of "the lands and all works thereon." The right of repossession was to be exercisable whether or not any conveyance of the land had been made to the company. In the event it seems that no conveyance had been made. The company failed to pay the money, became insolvent and was put into compulsory liquidation. The vendors started an action of ejectment, and, under a consent order in the winding up, they were given liberty to sign judgment on an undertaking not to issue execution until further order, and to abide by any order the court might make as to the property. The vendors then applied to the court for an order that they might be at liberty to issue execution and for possession of the property free from all claims by the company.

That application came before Lord Romilly M.R., at first instance. It seems (from the analysis of the record by Romer L.J. in his judgment in Stockloser v. Johnson [1954] 1 Q.B. 476, 497) that there was before Lord Romilly M.R. an affidavit in which it had been stated that the liquidator of the company had represented that, if further time were allowed, the company would be able to come to some satisfactory arrangement. But it would seem that there was no immediate offer by the liquidator to pay the unpaid balance and interest, let alone a tender of it. Lord Romilly M.R. offered the vendors an order for sale of the property and payment out of the proceeds as in the ordinary case of a vendor's lien, but on the vendors' declining that offer he refused to make any order on the application. The vendors appealed. The Lords Justices did not find it necessary to call on counsel for the liquidator, and agreed with Lord Romilly M.R. that the repossession clause was plainly a penalty. The way it was put however, by James L.J. at the end of his judgment, L.R. 8 Ch. App. 1022, 1025, was that it was a penalty

"from which the company are entitled to be relieved on payment of the residue of the purchase money with interest."

It is to be observed that on the facts of that case, time to pay was what the liquidator needed, since he had to pay the balance of principal and interest to the vendors in full if he was to get a clear title to the lands so that he could realise them towards satisfaction of the creditors. It is to be inferred that after the order of the Court of Appeal some satisfactory arrangement was indeed come to between the parties, presumably by payment by the liquidator. The court therefore never had to face up - as it might have had to if the liquidator had again defaulted - to actually enforcing the penalty clause in full, despite its penal nature. The case is an instance of the court refusing to enforce a penalty clause, in that Lord Romilly M.R. refused to make the possession order, but in a context in which equitable relief on payment of the residue of the purchase money with interest was still available.

In the context of the present case, relief by way of an extension of time for the defendant to pay the unpaid purchase money and interest is just the relief which would have been considered on the defendant's counterclaim if the counterclaim had not been struck out. Moreover it is the sort of relief to which the documents which, in breach of his undertaking, the defendant failed to disclose might have been marginally relevant, in that they might have indicated what period he would realistically have required to raise the necessary amount of money. Therefore in my judgment it is not open to this court to grant that form of relief on this appeal. It does not necessarily follow, however, in my judgment, that this court is therefore bound to enforce the penal clause, paragraph 6(b), in all its rigour and without regard to its penal consequences.

There is one other penalty case to which I should refer; it is Public Works Commissioner v. Hills [1906] A.C. 368. In that case there had been an agreement between the Government of the Cape of Good Hope and a contractor for the contractor to build a railway between two places by a certain date. The agreement contained a clause that if the contractor failed to complete the railway in time (save for specified causes) certain securities provided by the contractor for the due performance of the contractor's obligations should be forfeit to the government; these included a security deposit paid by the contractor to the government in relation to that particular contract and also retention moneys held by the government for the contractor under two other contracts in respect of other lengths of railway which the contractor had completed. The contractor defaulted under the contract in suit, the government declared the securities forfeit, and the contractor's assignee sued for the return of the security moneys on the ground that the forfeiture clause was a penalty clause. The Privy Council upheld a decision in the court below that the forfeiture clause was a penalty clause and that the contractor was entitled to repayment of the security moneys, but the Privy Council, in an opinion delivered by Lord Dunedin, allowed the government an inquiry as to the actual damage suffered by it as the result of the failure of the contractor to complete the railway on time and the amount of such damage was to be deducted from the moneys payable. The case is thus a further illustration that a clause identified by the courts as a penalty clause cannot be enforced so as to enable a party to recover or retain more than his actual loss.

What then should the court do in the present case?

It is not, in my judgment, open to the court to decree specific performance of the sale of the shares to the plaintiff, but at a higher price than the £40,000, so as to recoup to the defendant what he has actually paid for the shares, since that would involve the court making a new contract between the parties.

One possibility that might have been considered is that the court, while refusing specific performance, should, as in the money penalty cases such as Cooden Engineering Co. Ltd. v. Stanford [1953] 1 Q.B. 86 and Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, enter immediate judgment for the plaintiff against the defendant for the amount of the plaintiff's loss, viz. all the unpaid instalments under the variation agreement with interest from default in respect of each instalment until judgment. That however is disclaimed by Mr. Munby for the plaintiff and has not been sought at any earlier stage. Moreover if paragraph 6(b) of the side letter is wholly unenforceable, the plaintiff could sue the defendant for the unpaid instalments and interest in a fresh action and would be entitled to summary judgment under R.S.C., Ord. 14.

There remain two other alternatives.

Mr. Munby concedes that in the circumstances of this case the plaintiff is not entitled to any unpaid vendor's lien under the general law on the shares which have been transferred to the defendant under the sale agreement. If I am right, however, that the remedy of re-purchase of the shares under paragraph 6(b) of the side letter is an alternative, and not in addition to, the recovery of the unpaid instalments, the re-purchase is in substance a security for the payment of the unpaid instalments and interest.

Accordingly the court could, I apprehend, follow the course taken by Lord Romilly M.R. in In re Dagenham (Thames) Dock Co., Ex parte Hulse, L.R. 8 Ch. App. 1022, and offer the plaintiff an order for sale of the 62,566 shares by the court, and payment of the unpaid instalments and interest out of the proceeds as in the ordinary case of a vendor's lien.

Alternatively, by analogy to the power which the court has had for a very long time to direct an inquiry as to damages in a penalty case so as to ensure that there is no enforcement beyond the plaintiff's actual loss, the court could, in my judgment, direct inquiries to ascertain (i) the present value of the 62,566 shares; (ii) the present aggregate of the unpaid instalments under the variation agreement with interest as above; and (iii) the present amount charged on the shares under the charging order obtained by Chartered Standard Bank (C.I.) Ltd. The order for specific performance would then stand if the present value of the shares as certified under (i) did not exceed by more than £40,000 (the sale price under paragraph 6(b) of the side letter) the aggregate of the unpaid instalments and interest under (ii) and the amount, if any, by which the present amount charged under the charging order as certified under (iii) exceeds the £40,000 (and so cannot be paid off out of the purchase price under paragraph 6(b)). If however, that condition is not satisfied, the order for specific performance would have to be discharged, since its enforcement would be the enforcement of a penalty.

These two alternatives should, in my judgment, be offered to the plaintiff, but they cannot be forced on him. If neither is acceptable to him the appeal must, in my judgment, be allowed and the order for specific performance must be discharged since otherwise the court would

be lending its machinery to the enforcement of the penal effects of a clause which has been clearly identified as a penalty clause. But in that event, as mentioned above the plaintiff will be free to bring a fresh action for payment.

NICHOLLS L.J. This case, as it has proceeded on appeal in this court, is a very unusual one. Partly this is because the term in the contract, paragraph 6(b), of which the plaintiff is seeking specific performance, is itself a somewhat unusual provision. More especially is this case unusual because of two other matters. First, in the court below the judge struck out the defendant's counterclaim for relief, not after an investigation of its merits, but because of the defendant's failure to comply with an undertaking given by him to the court regarding discovery of documents considered material on the issues raised by his counterclaim for relief. Secondly, there has been no appeal from the striking out order. This has made it necessary to grapple with problems concerning the effect of an admittedly "penal" provision in a case where there is no extant application for relief from "forfeiture."

Equitable relief

In considering this appeal it is right to have in mind that the legal principles applicable today regarding penalty clauses in contracts and those applicable regarding relief from forfeiture stem from a common origin. A penalty clause in a contract, as that expression is normally used today, is a provision which, on breach of the contract, requires the party in default to make a payment to the innocent party of a sum of money which, however it may be labelled, is not a genuine pre-estimate of the damage likely to be sustained by the innocent party, but is a payment stipulated in terrorem of the party in default. For centuries equity has given relief against such provisions by not permitting the innocent party to recover under the penal provision more than his actual loss. In Wyllie v. Wilkes (1780) 2 Doug. K.B. 519, 522, Lord Mansfield observed that in the reign of Henry VIII Sir Thomas Moore had attempted unsuccessfully to persuade the judges to give relief in respect of money bonds:

"For he summoned them to a conference concerning the granting of relief at law, after the forfeiture of bonds, upon payment of principal, interest, and costs; and when they said they could not relieve against the penalty, he swore by the body of God, he would grant an injunction."

Likewise with forfeiture. Take the simple case of a provision for forfeiture of a lease on non-payment of rent. That provision was regarded by equity as a security for the rent. So that, where conscience so required, equity relieved against the forfeiture on payment of the rent with interest. Again with mortgages: if an estate was conveyed with a condition enabling the "feoffor," to use the ancient terminology, to re-enter on payment by him of a given sum on a given date, and in substance the transaction was intended to be by way of security for payment of that sum, equity relieved against the condition by permitting the feoffor to redeem his estate on payment of principal, interest and costs within a reasonable time. Viscount Haldane L.C. observed in G. & C. Kreglinger v. New Patagonia Meat and Cold Storage Co. Ltd. [1914]

A.C. 25, 35, that the intervention of equity with regard to mortgages was "merely a special application of a more general power to relieve against penalties and to mould them into mere securities." In Thompson v. Hudson (1869) L.R. 4 H.L. 1, 15, Lord Hatherley L.C. summarised the underlying principle:

"I take the law to be perfectly clear . . . namely, that where there is a debt actually due, and in respect of that debt a security is given, be it by way of mortgage or be it by way of stipulation that in case of its not being paid at the time appointed a larger sum shall become payable, and be paid, in either of those cases equity regards the security that has been given as a mere pledge for the debt, and it will not allow either a forfeiture of the property pledged, or any augmentation of the debt as a penal provision, on the ground that equity regards the contemplated forfeiture which might take place at law with reference to the estate as in the nature of a penal provision, against which equity will relieve when the object in view, namely, the securing of the debt, is attained, and regarding also the stipulation for the payment of a larger sum of money, if the sum be not paid at the time it is due, as a penalty and a forfeiture against which equity will relieve."

Penalty clauses

The particular procedure by which the Court of Chancery prevented a party seeking payment under a penalty clause in a contract, including a bond, from recovering more than his actual loss seems to have differed a little according to whether the penalty was intended to secure only a payment of money on a specified date or was intended to secure the performance of an obligation other than a payment of money. The details are not material for the purpose of this appeal. It suffices to say that an example of the latter type of case is to be found in Sloman v. Walter (1784) 1 Bro. C.C. 418. The party seeking payment of the penalty was prevented by injunction from recovering, by execution or otherwise, more from his judgment obtained at law on a bond that the amount of his loss as established by an issue of quantum damnificatus directed by the Court of Chancery. In the former case, of a bond securing only a money payment, the Court of Chancery proceeded on the principle that failure to pay the principal on a certain day could be compensated sufficiently by payment of principal, interest and costs on a subsequent day. Thus it was unnecessary to direct an issue of quantum damnificatus. If necessary, the court referred the calculation to a master: see Rigby L.J. in In re Dixon [1900] 2 Ch. 561, 576. Subsequently the common law courts became obliged to give effect to these equitable principles, under the statutes of 8 & 9 Will. 3, c. 11, section 8, and 4 & 5 Anne, c. 16, sections 12 and 13. After the Supreme Court of Judicature Act 1873 came into force these two statutes ceased to be necessary, and eventually they were repealed.

Thus today, when law and equity are administered concurrently in the same courts, and the rules of equity prevail whenever there is any conflict or variance between the rules of equity and the rules of the common law with reference to the same matter (section 49 of the Supreme Court Act 1981), a penalty clause in a contract is, in practice, a dead letter. An obligation to make a money payment stipulated in terrorem will not be enforced beyond the sum which represents the

actual loss of the party seeking payment, namely, principal, interest and, if appropriate, costs, in those cases where (to use modern terminology) the primary obligation is to pay money, or where the primary obligation is to perform some other obligation, beyond the sum recoverable as damages for breach of that obligation. (For convenience I shall hereafter refer to that sum as "the actual loss of the innocent party.") Hence normally there is no advantage in suing on the penalty clause. In Wall. v. Rederiaktiebolaget Luggude [1915] 3 K.B. 66, 73, Bailhache J. concluded his examination of the history of this matter in the context of a penalty clause in a charterparty with these words:

"This being the state of the law as I understand it, one easily sees why in charterparty cases no one sues on the penalty clause now. You cannot under it recover more than the proved damages, and if the proved damages exceed the penal sum you are restricted to the lower amount. As the penalty clause may be disregarded it always is disregarded and has become a dead letter, or from another point of view a 'brutum fulmen' . . ."

This accords with authoritative dicta in Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600. In particular, Lord Morton of Henryton observed, at p. 616, that the result of the conclusion that the clause there in point was a penalty was that Bridge, the hirer, was "entitled to relief in accordance with the principles laid down by Lord Thurlow L.C. in Sloman v. Walter, 1 Bro. C.C. 418." Likewise Lord Radcliffe, at p. 625:

"In my opinion, a clause of this kind, when founded upon a consequence of a contractual breach, comes within the range of the court's jurisdiction to relieve against penalties, and the owners should be confined to the right of claiming from Bridge any damage that they can show themselves to have actually suffered from his falling down upon the contract."

Lord Denning's remarks on this, at p. 632, are to the same effect.

Although in practice a penalty clause in a contract as described above is effectively a dead letter, it is important in the present case to note that, contrary to the submissions of Mr. Joseph, the strict legal position is not that such a clause is simply struck out of the contract, as though with a blue pencil, so that the contract takes effect as if it had never been included therein. Strictly, the legal position is that the clause remains in the contract and can be sued upon, but it will not be enforced by the court beyond the sum which represents, in the events which have happened, the actual loss of the party seeking payment. There are many cases which make this clear. I have already referred to the decision of Bailhache J. in Wall. v. Rederiaktiebolaget Luggude [1915] 3 K.B. 66, 73. I mention only two other decisions. In Beckham v. Drake (1849) 2 H.L. Cas. 579, a contract of employment provided for the payment of a penal sum of £500 in the event of default by the other party. As one of the judges advising the House of Lords, Maule J. said, at p. 622:

"The clause by which, in the event that has happened, the master agreed to pay the servant £500, is certainly in its terms an agreement to pay money, and though the construction which the law requires to be put upon it prevents the whole sum from being payable when it would be more than a reasonable compensation for a failure of

performance, it is not thereby rendered wholly inoperative, but it retains the effect of binding the failing party to pay such part of the sum as may be reasonable in respect of the failure."

Lord Campbell said, at p. 645:

"8 & 9 Will. 3, c.11 although it prevents the party recovering, as he might have done at common law, the whole of the penalty, does not at all prevent that part of the penalty which is recovered being considered in the nature of a debt; and so much is it a debt that an action of debt might be maintained for it. Instead of an action of assumpsit upon damages, an action of debt might have been maintained, and there would have been judgment for the amount of the debt."

Consistently with this, in Gerrard v. Clowes [1892] 2 Q.B. 11, it was decided that a claim for £500, the amount stated in a bond securing payment of £250, was not a claim for damages but was a claim properly brought under R.S.C., Ord. 14, on the bond, judgment being given for £250 as part of the claim to which there was no defence.

There is a further point to be mentioned here. As noted above, equity adopted the attitude in relation to penalty clauses that non-payment of money is adequately compensated by late payment with interest. This seems to have been established by the time of Lord Eldon L.C., although he was critical of the principle in Reynolds v. Pitt (1812) 19 Ves. 134, 140. Sir George Jessel M.R. was equally critical in Wallis v. Smith (1882) 21 Ch.D. 243, 257, but he too accepted that the old decisions were binding. Accordingly, once a court becomes aware that the amount claimed by the plaintiff is a penalty arising on default of payment of a specific sum of money the legal consequence which follows, as day follows night, is that the amount claimed will be scaled down by the court to a sum equal to the unpaid principal, with interest and costs. That consequence, albeit having its historical origin in equity, is not dependent upon the court exercising a discretion to grant or withhold relief having regard to all the circumstances. It is a consequence which for many years has followed automatically, regardless of the circumstances of the default.

In this respect, as the law has developed, a distinction has arisen between the enforcement of penalty clauses in contracts and the enforcement of forfeiture clauses. A penalty clause will not be enforced beyond the sum which equals the actual loss of the innocent party. A forfeiture clause, of which a right of re-entry under a lease on non-payment of rent is the classic example, may also be penal in its effect. Such a clause frequently subjects the defaulting party, in the event of non-payment of rent or breach of some other obligation, to a sanction which damnifies the defaulting party, and benefits the other party, to an extent far greater than the actual loss of the innocent party. For instance, the lease may be exceedingly valuable and the amount of unpaid rent may be small. But in such a case the court will lend its aid in the enforcement of the forfeiture, by making an order for possession, subject to any relief which in its discretion the court may grant to the party in default. Normally the granting of such relief is made conditional upon the payment of the rent with interest and costs. If that condition is not complied with, and subject to any further application by the tenant or other person in default for yet more time, the forfeiture provision will

be enforced. Thus the innocent party is in a better position when seeking to enforce a forfeiture clause than when seeking to enforce a penalty clause in a contract.

This is not the occasion to attempt to rationalise the distinction. One possible explanation is that the distinction is rooted in the different forms which the relief takes. In the case of a penalty clause in a contract equity relieves by cutting down the extent to which the contractual obligation is enforceable: the "scaling down" exercise, as I have described it. In the case of forfeiture clauses equitable relief takes the form of relieving wholly against the contractual forfeiture provision, subject to compliance with conditions imposed by the court. Be that as it may, I see no reason why the court's ability to grant discretionary relief automatically granted in respect of a penalty clause if, exceptionally, a contractual provision has characteristics which enable a defendant to pray in aid both heads of relief.

Property and not money

I return to penalty clauses. The scaling down exercise which is carried out automatically by equity is straightforward when the penalty clause provides for payment of a sum of money. More difficult, and more unusual, is the case where the penal obligation triggered by the breach is an obligation to transfer property to the party not in default, as under paragraph 6(b). Even in such a case there is no difficulty where the value of the property at the time when the court is making its order does not exceed the actual loss of the innocent party. In that event there can be no more objection to the court specifically enforcing the obligation to transfer the property than there would be to the court making an order for the payment of a sum of money stipulated in a (pecuniary) penalty clause where, in the event, that sum does not exceed the actual loss of the innocent party. The difficulty arises where the value of the property agreed to be transferred exceeds the actual loss of the innocent party. A precisely comparable scaling down exercise would not provide an acceptable solution, at any rate where the property consists of a single piece of land, or a block of shares in a company such as Southend United Football Club Ltd., whose shares are not traded in one of the securities markets. It could not be right to order specific performance of paragraph 6(b) in part only, namely, in respect of the reduced number of shares whose value does not exceed the actual loss of the plaintiff. That, indeed, would be to make a new bargain for the parties.

In the present case we do not know what is the current value of the shares comprised in paragraph 6(b), even in approximate terms. I shall return later to the question of what, in that circumstance, can and should be done. For the moment it is sufficient to note that, apart from the difference between shares and money, paragraph 6(b) possesses all the essential characteristics of a penalty clause. In principle, and subject to the complication arising from the difficulty of "scaling down" an obligation to transfer shares, there can be no difference between an obligation to pay a stipulated sum of money arising on a default and an obligation to transfer specified property arising on a default. The essential vice is the same in each case. In principle, so far as this can be achieved, the parties' respective positions should be no better, or worse, than they would be if paragraph 6(b) had stipulated for payment of money rather than a transfer of shares.

A forfeiture clause

Paragraph 6(b), however, is something of a hybrid. It possesses the essential characteristics of a penalty clause in a contract. It also possesses features which resemble those of a forfeiture provision. Paragraph 6(b) provided that if the purchaser failed to pay all the agreed instalments, he would re-transfer to the vendors a slice (44.9 per cent.) of the issued share capital of the company equal to the slice the vendors had sold to him. In substance paragraph 6(b) is equivalent to a right to re-take the property being sold in default of payment of the full price. Paragraph 6(b) was inserted as an attempt to give the vendors some "security" over the property being sold if the purchaser failed to pay in full. This was sought to be buttressed by paragraph 7 of the side letter. Although worded infelicitously, the object of paragraph 7 was to impose on the purchaser an obligation to keep a 44.9 per cent. stake in the company until the whole of the purchase price had been paid. The protection afforded to the vendors by paragraph 6(b) was strengthened further by the variation agreement. The purchaser was required to deposit his certificate for his 62,666 shares with his solicitors with irrevocable instructions not to part with possession of it without the consent of the vendors. The purchaser agreed not to charge the shares. Until further instalments to a stated amount had been paid, which has not yet occurred, the vendors were to be entitled to appoint a director to the board of the company. Until all the further instalments had been paid the purchaser agreed that the company would not dispose of any land without the consent of the vendors.

The terms of the agreement between the parties were unusual in that, despite the presence of paragraph 6(b) and the elaborate terms just mentioned, after completion the vendors (and this is common ground between the parties) had no lien or charge over the shares sold. Paragraph 6(b) operated only as an unsecured personal obligation. Furthermore, under paragraph 6(b) the shares to be re-transferred to the vendors need not be precisely the same shares as those sold by the vendors, nor did the 62,666 shares sold to the defendant comprise exactly 44.9 per cent. of the then issued share capital of the company (62,666 shares represented just over 44.9 per cent.). Again, if the issued share capital were to be increased (or reduced) before paragraph 6(b) was invoked, the defendant would be required to transfer a correspondingly larger (or smaller) number of shares under that sub-clause than he had bought. But I do not regard these features as undermining the conclusion that the purpose of paragraph 6(b) was to provide a form of security for payment in that the purchaser was obliged to restore to the vendors their former stake in the company if default occurred in payment, that stake not to be diminished by any further issues of shares made meanwhile.

So construed, paragraph 6(b) falls squarely within the words I have italicised in the following extract from the speech of Lord Wilberforce in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, 722:

"There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation

to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs (Peachy v. Duke of Somerset (1721) 1 Stra. 447 and cases there cited)."

In the present case paragraph 6(b) is a term intended to provide the unpaid vendors with some "security" against non-payment by giving them an alternative remedy (re-possession of their former slice in the company) in the event of default in payment of all the instalments. That is a situation in which, par excellence, equity in its discretion, and having regard to all the circumstances, may grant relief. Such relief would normally be on terms that the primary obligation for which this alternative remedy is "security" is performed within a reasonable time, albeit later than stipulated in the agreement.

In the present case legal and beneficial title to the 62,666 shares had passed to the purchaser before paragraph 6(b) was invoked. Thus, it was submitted, this case is different from one where the forfeiting party seeks merely to re-possess property title to which, or a reversion in which, he has retained throughout. For example, where a landlord seeks to re-enter following forfeiture of a lease for non-payment of rent, or a vendor seeks to eject a purchaser whom he has permitted to enter upon the property being sold pending completion. I am unable to accept that this difference represents a crucial distinction in this case. I note that relief from forfeiture was held to be available in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691 even though the forfeiting party there had retained no legal or equitable interest, other than the right to re-enter, in the property in question. As the owner of adjoining land he had retained a live, practical interest in seeing that the fencing and support obligations were performed, but the fact that the forfeiting party had this interest cannot by itself turn the case into one in which the defaulting party could have recourse to the equitable principles of relief from forfeiture if otherwise he could not have done so.

I think, therefore, that paragraph 6(b) is a clause in respect of which Harman J. had jurisdiction to grant relief. The most obvious form which the relief might have taken was to relieve the defendant from complying with paragraph 6(b) if he paid the balance of the price with interest and costs, as occurred in In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) L.R. 8 Ch. App. 1022, 1025. The contrary conclusion, that the court had no jurisdiction to give relief, would mean that if the defendant's claim for relief had not been struck out at the trial, and if the defendant had been able and willing to pay the outstanding instalments with interest and costs at once in full, the court could still not have given him any relief in respect of paragraph 6(b), however deserving his case. That is not an acceptable conclusion.

Procedurally it is established practice for a claim by a defendant for relief from forfeiture to be the subject of a counterclaim. Whether that is an issue which can be raised only in a counterclaim as distinct from in a defence is not a matter which calls for consideration in this case,

because in the present case the claim for relief from forfeiture was made, in the normal way, in a counterclaim and it was this counterclaim that was struck out by the judge. Thus the defendant's claim for relief from forfeiture was the issue which the judge barred the defendant from pursuing. Against that order of the judge there has been no appeal.

The consequence of no claim for relief

However, I am unable to accept that in the absence of a claim for discretionary relief from forfeiture it follows that the court must or should now specifically enforce paragraph 6(b) in its entirety, whatever the value of the shares. As I have said, I see no reason why there should not be an order for specific performance of paragraph 6(b) if the shares do not exceed in value the actual loss of the plaintiff. What that loss comprises, in arithmetical terms, is set out with regard to the facts in the present case in the judgment of Dillon L.J. If, on the other hand, the shares are now worth more than the amount of the plaintiff's loss, the court has available to it a means of ensuring that the purpose for which paragraph 6(b) was included in the main agreement is duly fulfilled without either party otherwise being prejudiced. Paragraph 6(b) was intended to provide the vendors with a form of "security" if the purchaser defaulted in paying the full price. If the shares are now worth more than the actual loss of the plaintiff, ex hypothesi a sale of the shares will realise a sum which is sufficient to put the plaintiff in the financial position he would have occupied if the defendant had not defaulted. If the shares are now sold and the plaintiff is duly paid the amount of his actual loss, with the surplus proceeds being paid to the defendant, the plaintiff will have obtained from paragraph 6(b) everything for which it was provided as "security."

In my view that is the course which the court can and should take. It is the equivalent in the different circumstances of this case to the automatic scaling down of a (pecuniary) penalty clause. Paragraph 6(b) is being enforced, in favour of the plaintiff and against the defendant, but in a form modified to preclude it from operating penally. As I have said, it would not be right to order the transfer to the defendant of a reduced number of shares. Nor would it be right to order the transfer of all the shares, to the prejudice of the defendant, or to refuse to grant any specific relief with regard to the shares, to the prejudice of the plaintiff, when by ordering (if the plaintiff so requests) that the shares be sold, the court can enforce paragraph 6(b) to an extent, or in a manner, that would give the plaintiff everything for which paragraph 6(b) was intended to be "security" and yet still prevent the clause operating punitively against the defendant. If the court orders a sale it will be granting a limited form of specific relief in respect of the defendant's obligations under paragraph 6(b). In an early leading case, Peachy v. Duke of Somerset (1721) 1 Stra. 447, 453, Lord Macclesfield L.C. observed:

"The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the court gives him all that he expected or desired."

That will be achieved in this case by ordering specific relief which stops short of an order for specific performance. A similar course seems to have been adopted by Lord Romilly M.R., at first instance in In re Dagenham (Thames) Dock Co., Ex parte Hulse, L.R. 8 Ch. App. 1022.

He offered to the applicant seeking leave to execute an order for possession "an order for sale and payment, as in the ordinary case of vendor's lien:" see p. 1024.

Mr. Munby submitted that the plaintiff ought not to be worse off than he would be if the defendant had made an application for relief which had succeeded on terms that the defendant paid all the outstanding instalments with interest and costs within a stated period. In such event, if the defendant had not complied with the conditions on which relief was given, the court would have made an order for specific performance of paragraph 6(b). In this way the plaintiff would have obtained either the money due to him or the shares. As to that, I will say only that the course proposed above will result in the plaintiff obtaining either the shares (if they are worth less than the actual amount of the plaintiff's loss) or the money (if the shares are worth more). Both parties should be free to bid and buy the shares if there is a sale, so that if the plaintiff is anxious to acquire a stake in the company he will have the opportunity to do so.

Other defences

For completeness I should add that Mr. Joseph further submitted that in any event specific performance of paragraph 6(b) ought not to be ordered, because damages would afford an adequate remedy. I am unable to accept this. It was not suggested that there is an active market in shares in the company in which a 44.9 per cent. stake in that company could readily be bought. Mr. Joseph also relied on evidence by the original vendors that when the sale agreement was made in 1983 they did not want the shares, and he submitted that the plaintiff as their assignee could be in no better position than they would be if they were pursuing the claim themselves. I can see nothing in this. The Rubins sold the shares, so it is not surprising to find that they did not want them. They wanted payment, and paragraph 6(b) was drafted to protect their position and ensure payment. But that of itself does not afford any sort of reason for the court declining to order specific performance of paragraph 6(b). It may also be that if the plaintiff obtains the shares he will seek to sell them. But, again, this is not a sound answer to a claim for specific performance.

Conclusion

For these reasons I would make an order in the terms outlined by Dillon L.J. I agree also with what he says on the irrecoverability of the unpaid instalments if the plaintiff chooses to take an order for the enforcement of paragraph 6(b) in the manner discussed above. I would be disposed to hear counsel on the precise calculation of the plaintiff's actual loss. In particular, with regard to interest and costs.

I regret to find myself differing from Kerr L.J. in that I am unable to agree with the alternative course proposed by him. That course would restore the parties, so far as is now possible, to their pre-contract positions. That approach does not accord with the established equitable principle relating to penalty clauses, whereunder equity confines the sum recoverable under a penalty clause to the loss actually suffered by the innocent party by reason of the breach of contract.

KERR L.J. I respectfully differ on one aspect of this puzzling case from the conclusions reached in the judgments of Dillon and Nicholls

L.JJ. which I have had the great advantage of reading. This concerns the choice of remedies to which the plaintiff should now be entitled.

It is common ground that paragraph 6(b) is penal in its nature. The reason is of course not that the value of the shares might rise substantially above the agreed price before the end of the period during which the instalments fall to be paid, although in my view, as explained below, this may be relevant to the appropriate order which should now be considered in the unusual circumstances of this case. The reason why paragraph 6(b) is penal in its nature, as explained by Dillon L.J., is that it subjects the defendant to the same liability irrespective of the gravity and consequences of the breach relied upon by the plaintiff in seeking to enforce the clause: see Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79, 87, para. 4(c), per Lord Dunedin. This is a question which falls to be decided upon the true construction of the clause independently of subsequent events: see p. 86, para. 3.

However, it does not follow that a penalty clause is illegal in the same way as, for instance, provisions imposing unlawful restraints of trade. These are simply struck down, or "blue-pencilled," because they are prohibited on the ground of public policy, unless it is possible to sever the good from the bad. Penalty clauses falling within the principles considered in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. are not in the same category. In my view, the combined effect of law and equity upon penalty clauses is simply that they will not be enforced in favour of a plaintiff without first giving to the defendant a proper opportunity to obtain relief against their penal consequences.

This is of particular importance in relation to the relevant provision in the present case. I respectfully agree with the analysis of Nicholls L.J. in the section of his judgment headed "A forfeiture clause" that this is the true nature of paragraph 6(b). Although this classification presents some obvious problems, due to the fact that no property in the shares was retained by the vendor and that the identical shares did not have to be re-transferred by the purchaser, taking paragraph 6(b) in the context of the other provisions to which Nicholls L.J. refers it is in my view much closer to what is commonly referred to as a "forfeiture" than a "penalty" clause. It follows a fortiori that paragraph 6(b) is not necessarily unenforceable, but merely that the defendant must be given a proper opportunity of seeking appropriate relief before there can be any question of enforcing the provisions.

This analysis is also supported by the course which this action would have taken but for the fact that the defendant's counterclaim for relief came to be struck out due to his own fault, and I did not understand anyone to suggest the contrary. The normal course of events would have been that the defendant would have been granted relief from the obligation to re-transfer the shares, but on terms that he must pay the then outstanding instalments in full, together with interest and the plaintiff's costs: see e.g. per Lord Wilberforce in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, 722. However, if it should then have turned out that the defendant was unwilling or unable to abide by these terms, after he had been given every reasonable opportunity to do so, then an order for the re-transfer of the shares on the terms of paragraph 6(b) would have been made. This is an everyday situation in the context of provisions for forfeiture in leases, and it is also the basis on which the law of mortgages and the equity of redemption have developed. It seems to work well in practice and to cause little injustice. Thus, if in the

present case the value of the shares in January 1987 had been greatly in excess of the outstanding instalments, when Harman J. was dealing with the matter, then the defendant would no doubt have been willing and able to raise the amount of the outstanding instalments together with interest and costs - if necessary by borrowing on the security of the shares - in order to obtain relief in the normal way.

However, the defendant chose not to pursue this course. He evidently preferred to let his counterclaim be struck out. Perhaps he was unwilling to comply with an order which would have forced him to reveal his financial circumstances; or it may be that the then value of the shares made a claim for relief unattractive; or perhaps he had both considerations in mind. In the result, the stage of considering and formulating the terms on which relief should be granted was never reached.

In these unusual circumstances, but only with considerable doubt, I respectfully agree with the judgments of Dillon and Nicholls L.JJ. that it was at any rate premature to grant immediate specific performance of a forfeiture clause which - for the reasons already stated - was also penal in its nature.

But more than a year has passed since then. Although both parties were somewhat cagey about explaining the present position, it is clear that circumstances have changed. On behalf of the defendant, Mr. Joseph intimated to us - as I understood him - that the shares were now worth far more than the total outstanding purchase price and that the defendant would have no difficulty in raising the necessary sum to be granted relief on usual terms to obtain their release from escrow. On behalf of the plaintiff, Mr. Munby did not contradict these veiled references to the present value of the shares, but he reminded us repeatedly that we had no evidence of their value and must not speculate about it. He also pointed out that Mr. Joseph was careful not to suggest that there was any way whereby the defendant's struck out counterclaim for relief could now somehow be revived.

If one accepts that the order for specific performance made by Harman J. cannot stand, as I do albeit with doubt, what is the appropriate course which this court should now take?

Two things appear clear.

First, the rights of the plaintiff cannot be prejudiced by the defendant's failure to pursue the offer of relief which the court was bound to, and did, grant to him. If this process had run its normal course, then the plaintiff would have obtained an order for payment by the defendant of all the outstanding instalments, together with interest and costs, within a reasonable time, or alternatively for the re-transfer of the shares pursuant to paragraph 6(b) in default of compliance.

Secondly, it is plain that whereas in January 1987 the issue may have been largely about money, at any rate so far as the defendant was concerned, it is now solely about the right to the shares. Both sides are clearly most anxious to obtain them and interested in little else. That is why Mr. Joseph took pains to let us know - although perhaps he should not have done so - that the defendant was now willing, able and extremely Keen to comply with any order as to payment if he is permitted to retain the shares. It is equally the reason why Mr. Munby on behalf of the plaintiff not only formally declined the court's offer of a monetary judgment, but also made no response to Mr. Joseph's offer of more or less readily available cash in full.

Quite apart from the fact that the counterclaim for relief has been struck out, I agree that it is now far too late for the defendant to seek relief in the normal way. I say that, because in my view the plea in the defence that paragraph 6(b) is a penal provision obliges the court to offer relief to the defendant, without the need for any formal counterclaim. It follows inevitably, once it is clear that the plaintiff is seeking to enforce a penalty clause. I also agree that, given that the order of Harman J. cannot stand, it is necessary for this court to reach an appropriate conclusion in equity. To this end the judgments of Dillon and Nicholls L.JJ. have offered the choice of two remedies to the plaintiff. The first is an order for the sale of the shares by the court and payment of the unpaid instalments and interest out of the proceeds, no doubt together with costs in the ordinary way, and obviously leaving it open to the plaintiff to sue thereafter for any balance of the price which may still be outstanding. The second is an inquiry as to the value of the shares, and an order to the effect of paragraph 6(b) in the event that their present value is less than the total net sum presently due from the defendant; but not otherwise.

In my view neither of these alternatives offers sufficient justice to the plaintiff in the exceptional circumstances of this case. The first alternative differs little from simply granting relief to the defendant in the usual way, save that this would be accompanied by what would in effect be an auction of the shares, in which both parties as well as outsiders could compete. The second alternative is almost certainly unrealistic and not a worthwhile offer in practice, since it is to be suspected that the present value of the shares greatly exceeds all monetary sums to which the plaintiff is now entitled.

In these circumstances it seems to me that, in equity, the plaintiff is entitled to a further alternative. This would be an order giving effect to paragraph 6(b), but on terms that the plaintiff repays to the defendant, perhaps with interest, the £160,000 which he has received under the agreement. In my view a further option to this effect would do justice to the plaintiff without contravening any principle of equity. It would give effect to the unenforceability of paragraph 6(b) because of its penal nature, but without simply "blue-pencilling" it, which would be wrong. Secondly, it would provide some compensation to the plaintiff for having lost the opportunity of obtaining an order in terms of paragraph 6(b) because the normal process of an application for relief from forfeiture was frustrated by the defendant's decision to allow his counterclaim to be struck out. Above all, it would result in equitable restitution to both parties, without either enforcing or "blue-pencilling" paragraph 6(b). There is nothing penal about a provision that, in the event of a failure by the defendant to pay any instalment of the price, the plaintiff is to be entitled to rescind the contract and to recover the goods against a refund of all sums received by him: cf. Alder v. Moore [1961] 2 Q.B. 57. Paragraph 6(b) is penal, because its operation takes no account of the sums already received, and to that extent it is unenforceable. But it is enforceable to the extent that it is not a penalty, by requiring full restitution by the plaintiff as a condition of its enforcement. That would not be a case of "mending men's bargains," but the enforcement of a penal forfeiture clause by the removal of its penal element, and in a situation where relief from forfeiture can no longer be claimed by the defendant.

Subject to offering this further alternative to the plaintiff I therefore agree that the order of Harman J. should be set aside and that the defendant's appeal should be allowed to this extent.

Solicitors: Maurice Hackenbroch & Co.; Jefferies, Southend-on-Sea.

A. R.