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

A finance company leased a computer to an accountant who repeatedly made late payments. The lease stipulated that punctual payment was 'of the essence'. When the hirer defaulted, the company terminated the agreement and claimed damages for loss of the entire transaction. The Court of Appeal held that the 'time is of the essence' clause made timely payment a condition, entitling the owner to damages for loss of the whole bargain despite the penalty clause being struck down.

Facts

Lombard North Central PLC, a finance company, purchased a computer and leased it to Mr Butterworth, an accountant, under a five-year lease agreement. The agreement required quarterly rental payments, with clause 2(a) stipulating that punctual payment of each rental was ‘of the essence’ of the lease. Clause 5 permitted termination upon default, and clause 6 purported to make the hirer liable for all arrears and future rentals (less discount for accelerated payment) upon termination.

The first three quarterly payments were made on time. However, throughout 1982, the hirer repeatedly made late payments or had direct debits recalled by his bank. By December 1982, one instalment remained unpaid, and Lombard terminated the agreement, repossessed the computer, and sold it for only £172.85. Lombard claimed £6,869.97, representing arrears, future instalments (discounted), and giving credit for the resale proceeds.

Issues

1. Penalty Clause

Whether clause 6 of the agreement was unenforceable as a penalty.

2. Repudiatory Breach

Whether, apart from the ‘time is of the essence’ provision, the hirer’s conduct amounted to a repudiatory breach entitling the owner to damages for loss of the whole transaction.

3. Effect of ‘Time of the Essence’ Clause

Whether the express provision making punctual payment ‘of the essence’ elevated timely payment to a condition, breach of which entitled the owner to treat the contract as repudiated and claim full damages.

Judgment

Penalty Clause Issue

The Court of Appeal held that clause 6 was unenforceable as a penalty. Lord Justice Nicholls applied the principle from Financings Ltd v Baldock [1963] 2 QB 104, that when an owner terminates a hire agreement under a contractual power (absent repudiation), damages are limited to breaches occurring before termination. Clause 6’s requirement to pay future instalments regardless of the triviality of the breach rendered it penal.

Repudiation Without the ‘Time of the Essence’ Clause

Lord Justice Nicholls concluded that on the bare facts presented, without giving effect to the ‘time of the essence’ provision, the court could not infer that the hirer had evinced an intention to repudiate the agreement by 20 December 1982. Although payments were late, the 1981 instalments had been paid promptly, late 1982 payments had been accepted, and only one instalment was outstanding at termination.

Effect of ‘Time of the Essence’ Clause

Lord Justice Mustill held that an express stipulation making time of the essence for payment constitutes timely performance a condition of the contract. Any breach of a condition, however minor, entitles the innocent party to terminate and claim damages for loss of the bargain. He stated:

A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.

He further held that a clause making a term a condition is not itself a penalty clause and is not subject to the law on penalties:

A clause expressly assigning a particular obligation to the category of condition is not a clause which purports to fix the damages for breaches of the obligation, and is not subject to the law governing penalty clauses.

Lord Justice Nicholls, while expressing dissatisfaction that the drafting device of inserting a ‘time of the essence’ clause could circumvent the Financings v Baldock principle, agreed that such was the present state of the law.

Implications

This decision establishes that parties may by express contractual provision elevate an obligation to the status of a condition, making any breach—however trivial—a repudiatory breach entitling the innocent party to terminate and claim damages for loss of the entire bargain. This applies even where a separate damages clause is struck down as a penalty.

The practical effect is that finance companies and lessors can, through careful drafting, ensure recovery of future rental payments upon termination for late payment, notwithstanding that minimum payment clauses might otherwise be unenforceable as penalties. The decision effectively allows skilled draftsmen to sidestep the protection afforded by Financings v Baldock.

The case is significant in distinguishing between clauses that fix damages (subject to penalty rules) and clauses that define the nature of contractual obligations (not subject to penalty rules). It remains an important authority on the relationship between conditions, repudiation, penalties, and the measure of damages in hire and hire purchase agreements.

Verdict: Appeal dismissed. The finance company was entitled to damages for loss of the whole transaction because the ‘time is of the essence’ clause made punctual payment a condition of the contract, breach of which entitled them to treat the agreement as repudiated, notwithstanding that clause 6 was struck down as a penalty.

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