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In the particular case, the judges held that the sum specified in the contract was reasonable and was classified as liquidated damages. However, in this case, Lord Dunedin laid down rules which are still applied today in these types of cases:
i) The sum is a penalty if it is greater than the greatest loss which could be suffered from the breach – in other words, if it is "extravagant and unconscionable".
ii) If it agreed that a larger sum shall be payable in default of paying a smaller sum, this is a penalty. Ford Motor Co. v. Armstrong (1915)
In this case, the judges reached the conclusion that the sum to be paid for a breach of the contract was substantial and arbitrary and bore no relation to the potential loss of the other party. It was, therefore, a penalty.
i) The sum is a penalty if it is greater than the greatest loss which could be suffered from the breach – in other words, if it is "extravagant and unconscionable".
ii) If it agreed that a larger sum shall be payable in default of paying a smaller sum, this is a penalty. Ford Motor Co. v. Armstrong (1915)
In this case, the judges reached the conclusion that the sum to be paid for a breach of the contract was substantial and arbitrary and bore no relation to the potential loss of the other party. It was, therefore, a penalty.
