Lombard North Central v Butterworth [1986] EWCA Civ 5 (31 July 1986)

A hirer's late payment under a hire-purchase agreement, where a clause made timely payment 'of the essence', was held to be a repudiatory breach. This entitled the owner to terminate the contract and claim damages for the loss of the entire bargain.

Facts

The plaintiffs, Lombard North Central Plc, let a computer and equipment to the defendant, Mr Butterworth, under a hire-purchase agreement dated 26th July 1984. The agreement required an initial payment followed by 19 monthly instalments. Clause 2(a) of the agreement explicitly stated:

‘the hirer shall pay punctually the rentals… time of payment of each and every sum payable hereunder shall be of the essence of this agreement’.

The defendant paid the first three instalments on time but was late with the fourth and fifth, which he paid together in January 1985. He failed to pay the sixth instalment, which was due on 26th January 1985. On 13th March 1985, the plaintiffs terminated the agreement for breach and subsequently sued for arrears and damages for the loss of the whole transaction.

Issues

The central legal issue for the Court of Appeal was whether the defendant’s failure to make punctual payments constituted a repudiatory breach of contract, which would entitle the plaintiffs to terminate the agreement and claim damages for the loss of the entire bargain. This depended on the legal effect of clause 2(a), which stipulated that time of payment was ‘of the essence’. The court also had to consider whether such a clause should be treated as a penalty and whether the equitable doctrine of relief from forfeiture could apply.

Judgment

The Court of Appeal, in a judgment delivered by Mustill L.J., allowed the plaintiffs’ appeal. The court held that the parties were free to classify the relative importance of their contractual terms. By stating that time of payment was ‘of the essence’, they had designated the obligation to pay punctually as a condition of the contract. Consequently, any breach of this term, regardless of its gravity, was a repudiatory breach.

Reasoning of the Court

Mustill L.J. affirmed the principle of freedom of contract, stating that parties can stipulate that a term is fundamental. He distinguished this from the general common law position where a delay in payment is not typically considered a repudiatory breach unless it is substantial. He stated:

‘where the parties have agreed that time is to be of the essence, they have demonstrated their appreciation of the commercial importance of the term, and the court is not at liberty, just because the event which has occurred seems trivial, to say that the term is not a condition, but only a warranty or an innominate term.’

The court rejected the argument that the clause operated as a penalty. Mustill L.J. clarified that a penalty clause fixes the level of damages for a breach, whereas the ‘time of the essence’ clause defined the nature of the primary obligation itself. The damages claimed were the ordinary common law remedy for a repudiatory breach – compensation for the loss of the bargain – not a sum specified in a penalty clause. He noted:

‘This argument, in my judgment, confuses the question whether a breach has occurred with the question what are the consequences of the breach. The event which enables the owner to terminate is not the same as the event which gives rise to the right to damages.’

Furthermore, the court held that the equitable jurisdiction to grant relief from forfeiture was not applicable to the termination of a hire-purchase agreement for non-payment of instalments, following the House of Lords’ reasoning in The Scaptrade [1983] 2 A.C. 694.

Nicholls L.J., concurring, acknowledged the potentially harsh outcome for the defendant but emphasised that it was a matter for Parliament, not the courts, to alter established principles of contract law for consumer protection. This particular agreement, being for business purposes, fell outside the scope of the Consumer Credit Act 1974.

Implications

The decision in Lombard v Butterworth is a crucial authority on the power and effect of ‘time of the essence’ clauses. It confirms that where parties explicitly agree that punctual performance of an obligation (including payment) is essential, any failure to comply will be treated as a repudiatory breach. This allows the innocent party to terminate the contract and sue for damages for the loss of the entire bargain. The case reinforces the principle of freedom of contract, upholding the right of parties to define their own essential terms, and it clarifies the distinction between a contractual condition and a penalty clause. It also significantly limits the application of equitable relief from forfeiture in the context of commercial finance and leasing agreements.

Verdict: Appeal allowed. The plaintiffs were entitled to terminate the agreement and claim damages for the loss of the whole bargain, including arrears and future rentals, less the proceeds of the sale of the repossessed computer.

Source: Lombard North Central v Butterworth [1986] EWCA Civ 5 (31 July 1986)