The defendant hired a car for 36 months paying a set monthly amount. He fell into arrears and the claimant recovered the car. The agreement between them provided that upon repudiation, the defendant was to pay the total amount of rentals payable during the hire period, less the amount of rental paid, less a rebate on the rentals that had not become due to take account of early payment. The defendant claimed that the clause was a penalty and unenforceable as it was not a genuine pre-estimate of the loss the claimant was likely to suffer as a result of the breach of contract. It did not take into account the capital value of the car at the end of the hire period, nor the fact that in being returned early the car would have a greater value.

The court agreed that the clause was a penalty and so unenforceable. The value of the car should have been taken into account. There had been no genuine pre-estimate of loss. Just because the defendant was an articulate, intelligent man who entered into the agreement freely, did not mean that he was not entitled to rely on the fact that the clause was unfair and a penalty.

Volkswagen Financial Services (UK) Ltd v Ramage