Neutral Citation Number: [2005] EWCA Civ 963
Case No: A2/2004/1827
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
STANLEY BURNTON J
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 28/07/2005
Before :

LADY JUSTICE ARDEN
LORD JUSTICE CLARKE
and
LORD JUSTICE BUXTON
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Between :

	MURRAY	Appellant	
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	LEISUREPLAY PLC	Respondent	

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Mr Edward Bannister QC (instructed by Bray Walker) for the appellant
Mr Richard Salter QC and Mr Michael Lazarus (instructed by Ingram Winter Green) for the respondent

Hearing date : 5,6 May 2005
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Judgment
Lady Justice Arden :
1.	Following the trial of this action, Stanley Burnton J gave a careful and lengthy judgment in which he dealt with a number of difficult issues arising out of the dismissal by the respondents ("MFC") of the appellant, Mr Murray, as Chief Executive Director of MFC.  That dismissal prompted Mr Murray to sue MFC under clause 17.1 of his service agreement dated 2 June 1998 with MFC ("the agreement"). This court is concerned only with the small number of issues in the action which are the subject of the present appeal and cross appeal.  The first issue ("the penalty issue") is whether the clause in the agreement providing for the payment of a year's gross salary in the event of termination of Mr Murray's employment without one year's notice is unenforceable as a penalty.  The second issue ("the amendment issue") arises only if the appeal against that holding is dismissed: the judge rejected an application at the start of the trial on the part of Mr Murray to amend his particulars of claim so as to include a claim for damages of £252,897 at common law.  The third issue ("the section 320 issue") is whether under section 322 of the Companies Act 1985 ("CA 1985") MFC can recover from Mr Murray the costs which it incurred in an arrangement to acquire a company from Mr Murray made in breach of section 320 of the Companies Act 1985.  The costs were incurred by MFC in instructing accountants to prepare a draft due diligence report on the company to be acquired and in hiring an additional director to assist with the acquisition. Section 320 (as amended) of the CA 1985 invalidates transactions and arrangements involving the acquisition of assets worth more than £100,000 from a director without a resolution at general meeting.  The judge held that MFC had entered into an agreement in breach of section 320 when it entered into an agreement for the acquisition from Mr Murray of the share capital of Blue Planet Investment Management Ltd ("BPIM").  The fourth and last issue on this appeal ("the section 727 issue") is whether if Mr Murray is liable for those costs the court should grant him relief under section 727 of the CA 1985.  
The Penalty Issue
2.	The agreement provides in material part as follows: - 
"1. INTERPRETATION
1.1	In this Agreement the following words and expressions have the meanings set opposite them: …
(a)	"Wrongful Termination"
(b)	termination of this Agreement by the Company except in accordance with any of clauses 3.1, 3.2, or 15; or
(b)	termination of this Agreement by the Executive in circumstances which amount to the acceptance of the Company's repudiary [sic] breach of contract …
2. 	APPOINTMENT
2.1	The Company shall employ the Executive as chief executive director and the Executive shall serve the Company as chief executive director …
3.	TERM
3.1	The Executive's employment shall be treated as having commenced on 1 December 1997 and he shall be employed until the expiry of not less than one year's written notice given by either party to the other so as to expire at any time, save that following the execution of heads of agreement relating to the acquisition of a building society or other financial institution the Executive's employment shall be terminable by not less than three years' written notice given by either party so as to expire at any time.  The Company reserves the right to terminate the Executive's employment by payment in lieu of notice.
3.2	Notwithstanding the provisions of clause 3.1 the Executive's employment shall terminate automatically when the Executive reaches the age of 70 years …
5.	REMUNERATION
5.1	As remuneration for his services hereunder the Company shall pay to the Executive a salary at the rate of one hundred and twenty five thousand pounds (£125,000) per annum (which shall be deemed to accrue from day to day) payable in arrears by equal monthly instalments on the fifteenth (15) day of each month such salary being inclusive of any fees to which the Executive may be entitled as a director of the Company.
5.2	The said salary shall be reviewed by the Remuneration Committee of the Board from time to time (but not less frequently than annually) and the rate thereof may be increased with effect from any such review date …
12.	RESTRICTIVE COVENANTS
12.1	The Executive shall not without the prior written consent of the Board (such consent to be withheld only so far as may be reasonably necessary to project the legitimate interests of the Company or any Associated Company):
(a) For a period of 12 months after the termination of his employment hereunder be engaged or interested (whether as a director, shareholder, principal, consultant, agent, partner or employee) in any business concern (of whatever kind) which shall in the United Kingdom be in competition with the Company or with any Associated Company and whose activities include the acquisition of building societies, and other financial institutions including life insurance companies and friendly societies being activities of a kind with which the Executive was concerned to a material extent during the period of one year prior to the termination of his employment with the Company PROVIDED ALWAYS that nothing in this clause 12.1(a) shall restrain the Executive from engaging or being interested as aforesaid in any such business concern insofar as his duties or work relate principally to activities of a kind with which the Executive was not concerned during the period of one year prior to the termination of his employment hereunder:
(b)  For a period of 12 months after the termination of his employment hereunder either on his own behalf or on behalf of any other person, firm or company directly or indirectly solicit or entice or endeavour to solicit or entice away from the Company or from any Associated Company any employee of executive or managerial status engaged in its or their business and with whom the Executive had dealings at any time during last year of his employment hereunder.
12.2	Whilst each of the restrictions in clauses 12.1(a) and 12.1(b) are considered by the parties to be reasonable in all the circumstances as at the date hereof it is hereby agreed and declared that if any one or more of such restrictions shall be judged to be void as going beyond what is reasonable in all the circumstances for the protection of the interests of the Company and/or any Associated Company but would be valid if words were deleted there from the said restrictions shall be deemed to apply with such modifications as may be necessary to make them valid and effective and any such modification shall not thereby affect the validity of any other restriction contained herein.
13.	TERMINATION BY RECONSTRUCTION OR AMALGAMATION
	If the employment of the Executive hereunder shall be terminated by reason of the liquidation of the Company for the purposes of amalgamation or reconstruction or as part of any arrangement for the amalgamation of the undertaking of the Company not involving liquidation and the Executive shall be offered employment with the amalgamated or reconstructed company on terms not less favourable than the terms of this Agreement the Executive shall have no claim against the Company in respect of the termination of his employment by the Company…
 
17.	LIQUIDATED DAMAGES
17.1	In the event of a Wrongful Termination by way of liquidated damages the Company shall forthwith pay to the Executive a sum equal to one year's gross salary, pension contributions and other benefits in kind assuming that salary, pension contributions and benefits in kind had continued to be paid at the same rate as immediately prior to the date of Wrongful Termination, save that following the execution of heads of agreement relating to the acquisition of a building society or other financial institution the Company shall forthwith pay to the Executive a sum equal to three years' gross salary, pensions contributions and other benefits in kind assuming that salary, pensions contributions and benefits in kind had continued to be paid at the same rate as immediately prior to the date of Wrongful Termination.  In the event of a dispute as to the value of any benefit in kind the amount payable shall be determined by the Company's auditors.
17.2	Subject to any rights accrued at the date of termination of the Executive's employment under the provisions of any pension scheme, option scheme or bonus or benefit plan of the Company, any payment of liquidated damages by the Company shall be made in full and final settlement of all and any claims arising out of the Executive's employment, its termination, or his ceasing to hold the office of director of the Company or any associated company …"
3.	At the trial, the judge heard a number of witnesses, including Mr Murray. He concluded that Mr Murray was an unreliable witness ([70]). The agreement was signed by two directors, namely Mr Brian Rankin and Mr John Redwood. The judge found that although the agreement had been approved by the board of MFC in its original form (which was less favourable to MFC) and in the amended form in which it was finally executed, Mr Murray "was able within broad limits to determine the terms of his service agreement…" ([97]). At the date of the execution of the agreement, Mr. Murray was 39 years of age.  The agreement provided for him to work three days a week.  The original form of the contract gave him a right to three years' gross salary and benefits in the event of breach.  Particulars of this agreement were included in a pathfinder prospectus, and there is evidence that one prospective investor expressed the view to MFC's financial advisers that "The service agreement of Mr. Murray is inappropriate… 3 year protection is excessive" (fax dated 18 May 1998 from Cargill Financial Markets PLC to Peel Hunt).  The same objection was not apparently taken to the particulars of other directors' service contracts, who had similar protection but limited to one year.    
4.	The judge found that the agreement was determined by MFC by letter dated 7 May 2003 with effect from 30 June 2003.  Accordingly Mr Murray was only given 7½ weeks notice of termination rather than the 12 month's notice to which he was entitled under the agreement.  
5.	The judge also found that, although MFC had considered two acquisitions during the agreement, neither constituted the acquisition of a financial institution for the purposes of the proviso to clause 17.1 of the agreement. There is no appeal against that finding and on that basis Mr Murray's claim under clause 17.1 of the agreement is for £243,897 or thereabouts. 
6.	Mr Murray does not contend that MFC exercised its option under clause 3.1 to make a payment to him in lieu of notice.  Mr Murray's case is that the termination of his employment constituted Wrongful Termination for the purposes of the agreement and that he is entitled to payment under clause 17.1 of the agreement.
The Judge's Judgment on the Penalty Issue
7.	The judge referred to the analysis of the law or penalties in the judgement of Mance LJ in Cine Bes Filmcilik Ve Yapim Click v United International Pictures [2003] EWCA Civ 166g (referred to below as the Cine case).  The judge himself summarised the principles he considered applicable and at [103] of his judgment, he held that the fact that clause 17.1 of the agreement took no account of Mr Murray's duty to mitigate his damages was sufficient to render the clause a penalty.  He held that reasonable contracting parties must have had in mind that there was a real possibility that if Mr Murray were not constrained to act as an executive director of MFC he could and would benefit from other work.  He held that an enforceable liquidated damages clause would have had to make a significant allowance for the income and profits that Mr Murray was likely to make if freed from his commitment to MFC.  
Submissions on the Penalty Issue
8.	Mr Edward Bannister QC, for Mr Murray, submits that the judge was wrong on the bargaining power of the parties.  In addition he submits that the question whether clause 17 was a penalty was a question of construction which was to be judged at the time the contract was made.  He further submits that there is an initial presumption of validity.  In support of this submission he relies upon Dunlop Pneumatic Tyre v New Garage [1915] AC 67 and Robophone Facilities v Blank [1966] 1 WLR 1428.  
9.	Mr Bannister submits that there is no authority for the proposition that the presumption of validity should be confined to contracts at arm's length.  He distinguishes the Robophone case on this point.  
10.	Mr Bannister further submits that on the facts there was no inequality of bargaining power.  The fact that directors were chosen by Mr Murray did not mean that there was an inequality of bargaining power.  The directors were persons with substantial experience and reputations.  The service agreements were approved by resolutions of the board of directors of MFC.  
11.	Moreover, Mr Murray's service agreement had originally provided for the payment of three years' gross salary in the event of wrongful termination.  As a result of investor pressure (see paragraph 3 above), this provision was modified and clause 17.1 was agreed. 
12.	Mr Bannister submits that this was a case in which the company could determine its commercial interests and in support of this submission he relies on the judgment of Lord Woolf in Philips v. Hong Kong v Attorney General of Hong Kong 1993 61 VLR 49.  
13.	Mr Bannister submits that, if the judge is right, it will be almost impossible to draft a liquidated damages clause in an employment contract.  As of June 1998, it was impossible to say when Mr Murray would earn anything at all if dismissed.  According to the judge, he would have gone to work for his own companies.  However no-one could say whether his own companies would still be in business or still be profitable even if he had been fit to obtain other work in June 1998.  If he had applied himself solely to BPIM, there would have been difficulties about calculation, for example difficulties of knowing how much of his time was spent on BPIM as a result of being released from his employment with MPC.  
14.	Mr Bannister submits that the genuine pre-estimate of damages required by the Dunlop case is not an actuarial calculation but what the parties have genuinely agreed.  It is possible that he would not have found a comparable job within one year.  The judge's approach opens up a set of disputes and does not fulfil the commercial purpose of a liquidated damages clause. Mr Bannister submits that the correct test is whether clause 17.1 was extravagant or unconscionable by reference to the greatest loss that could conceivably have been proved by Mr Murray (or could possibly have been in the contemplation of the parties), viewing the matter at the time the contract was made. 
15.	Mr Bannister submits that, if Mr Murray was given less than 12 months' notice, he would have to give credit for the period of notice which he was given and for which he was paid.  He would have to give that credit against the amount received under clause 17.1.  The court should uphold the agreement of the parties made in good faith unless the amount of the damages agreed is so unconscionably disproportionate as to the amount of damages which MFC could be liable to pay that the only inference that the court could draw is that they had not genuinely agreed a pre-estimate of damages.  
16.	Mr Bannister also relies on Abrahams v Performing Rights Society [1995] 1 WLR 1028, in which this court held that where there was a right to receive a lump sum payment under a service agreement the dismissed employee had no duty to mitigate since he was not claiming damages.
17.	Mr Bannister submits that the effect of clause 17.2 is that any arrears of contributions to Mr Murray's private pension which MFC had failed to pay were swept up in the settlement provided for by clause 17.1.  The same would apply to the loss of directorships of associated companies.  Accordingly, he submits that it would be odd if the company was liable for more under clause 17.1 than under clause 3.1.  
18.	Mr Richard Salter QC, for MFC, submits that a clause may be a penalty even though the parties were at arm's length. He submits that there is no presumption of validity.  He relies on the decisions of this court in the Cine case, and Jeancharm Ltd (t/a Beaver International) v Barnet Football Club Ltd [2003] 92 Con LR 26.  In the latter case this court held that nothing in the Philips case represented a departure from the law as established by Lord Dunedin in the Dunlop case.  Mr Salter submits that the correct test as to whether any contractual sum is a penalty is to ask as a matter of interpretation or the contract whether the sum payable under that provision is a genuine pre-estimate of what the loss is likely to be.  If it is a genuine pre-estimate of loss, the provision will be enforceable as liquidated damages.  Otherwise it will be a penalty.  The tests suggested by Lord Dunedin in the Dunlop case are merely aids to applying that test.  The sum payable on breach does not have to be extravagant or unconscionable.
19.	Mr Salter submits that if, contrary to his submission, there is a presumption of validity, it applies only to agreements made at arm's length, and, on his submission, the agreement was not negotiated at arm's length.  He submits that the judge so found in [97] of his judgment, quoted above.  He rejected the evidence of Mr Murray that Mr Rankin negotiated the agreement on behalf of the company.  
20.	Mr Salter submits that the parties contemplated that Mr Murray would set up his own pension scheme.  The judge was right in holding that pension accruals were excluded from clause 17.1 of the agreement.  In any event, it was unlikely that the parties thought there would be any accruals at the time the agreement was entered into.  Accordingly no account should be taken of the argument that such accruals would be swept up in the settlement effected by clause 17.2.  
21.	Mr Salter relies on the fact that the agreement to pay one year's gross salary was greatly in excess of the maximum that the employee could obtain.  Clause 17.1 applied to wrongful termination unless Mr Murray was given full contractual notice or the agreement terminated because he attained the age of 70 years (clause 3.2) or became bankrupt or incapable or the termination was for cause (clause 15).  Clause 17.1 takes no account of mitigation or of the possibility that MFC might give some, though not full, notice.  That follows from clause 17.1 which provides for the sum payable under clause 17.1 to be paid forthwith on the termination of the contract, viz at the end of the period of (short) notice.  Moreover at common law he would have to give credit for the tax that he would have paid if the sum had been paid as remuneration but which was not payable because the amount was a lump sum payable on determination of his service agreement.  (This relates to the first £30,000 tranche of the compensation).  In addition, it had to be assumed that the employer would perform the contract in the way most beneficial to him and that accordingly he would not award bonuses or increase the salary to which Mr Murray was entitled during the year for which he should have been given notice.  Accordingly no account could be taken of possible increases of bonuses.
22.	Mr Salter points out that Mr Murray claimed at trial that he was entitled to the 7½ weeks' remuneration in addition to the 12 months under clause 17.1.  Mr Salter submits that when MFC terminates Mr Murray's employment on notice, the termination occurs at the expiration of the notice.  Accordingly in this case it occurred on 30 June 1998 when the notice expired.  
23.	Mr Murray had his own companies and therefore it must have been clear to the parties that he would receive income from other sources if he was dismissed.  Mr Salter does not accept that Mr Murray would necessarily have difficulty finding a comparable position.  If indeed he had become a business mogul as a result of the acquisition of a building society or financial institution, he would have become entitled to up to three years' gross salary under clause 17.1.  Mr Salter submits that it is plain that clause 17 overcompensates Mr Murray.
24.	In support of his submission that the contract terminated at the end of the period of notice, Mr Salter relies on clauses 8 and 16 of the agreement.  
25.	Mr Salter submits that in determining whether clause 17 constitutes a penalty, no account should be taken of heads of damage which are not recoverable by law.  In effect, the parties have to pre-estimate the damages correctly in broad terms.  In the Cine case, the inclusion of a head of damage which was not recoverable was treated as an indicator that the term might be a penalty.  
26.	In reply Mr Bannister relies on the board minute of 29 April 1998 whereby the independent director of MFC approved the agreement in its original form.  He submits that MFC could not unilaterally alter the date of expiry of the contract by giving short notice.  He submits that the agreement draws a distinction between terminating employment and terminating the agreement.  Mr Murray continued to be employed even though the agreement itself has terminated.
27.	Mr Bannister submits that when the courts speak of a genuine pre-estimate of damages in the Clydebank Engineering and Shipbuilding Company Limited v Don Jose Ramos Yzquierdo y Castenada [1905] AC 6  and subsequent cases, that does not involve an economic or financial forecasting.  Otherwise, the cases could not have been decided as they were.  A pre-estimate of damages for this purpose is not the same as a builder's estimate which is supposed to be accurate.  It is sufficient that the parties have treated the sum as an adequate and sufficient sum.  A contrast should be drawn between sums of that nature and amounts arbitrarily inserted into a contract with no purpose other than to secure compliance in the event of default.  Such clauses are properly described as in terrorem.  
28.	The crucial question is on which side of the line clause 17.1 falls.  Mr Bannister submits that in the Robophone case Lord Diplock carried out calculations because one of the parties was a litigant in person.  However on Mr Bannister's submission the court does not have to do that.  Mr Bannister accepts that, when the courts are working out common law damages, deductions are made.  However that is not the same situation.  What a person would have got is probably inadmissible evidence.  It is open to the parties to agree to pay a sum without deduction of tax.  Such a sum is not in terrorem of a breach or a disincentive to a party to breach a contract.  Accordingly it does not begin to be a penalty.  
Conclusions on the Penalty Issue
29.	The penalty issue is one of considerable jurisprudential interest.  English law is well-known for the respect which it gives to the sanctity of contact.   The question which the law of penalties poses is this: to what extent does English contract law allow parties to a contract to specify for their own remedies in damages in the event of breach?  The answer is that English law does not in this particular field take the same laissez-faire approach that it takes to (for example) the question whether parties can agree to time limits for the performance of obligations which they subsequently find difficulty in meeting.  So far as that is concerned, pacta sunt servanda.  So far as pre-determined damages clauses are concerned, English contract law recognises that, if the parties agree that a party in breach of contract shall pay an unjustifiable amount in the event of a breach of contract, their agreement is to that extent  unenforceable .   The reasons for this exception may be pragmatic rather principled.  Diplock LJ  made the following observations on this point in the Robophone case:  
"I make no attempt, where so many others have failed, to rationalise this common law rule.  It seems to be sui generis.  The court has no general jurisdiction to re-form terms of a contract because it thinks them unduly onerous on one of the parties—otherwise we should not be so hard put to find tortuous constructions for exemption clauses, which are penalty clauses in reverse; we could simply refuse to enforce them.  …  But however anomalous it may be, the rule of public policy that the court will not enforce a "penalty clause" so as to permit a party to a contract to recover in an action a sum greater than the measure of damages to which he would be entitled at common law is well established, and in these days when so often one party cannot satisfy his contractual hunger a la carte but only at the table d'hote of a standard printed contract, it has certainly not outlived its usefulness." (at  pages1446 to 1447)

30.	 Interestingly, despite the influence of equity, English law has not always taken a consistent approach.  As cases cited by the parties show, that the present position was only reached through the influence of Scots law and Commonwealth jurisprudence.   Dunlop Pneumatic  Tyre v New Garage and Motor Company, Ltd  is thus a remarkable example of the ability of English common law to absorb rules from other legal systems, and in addition of the influence of the Privy Council.  The latter point is relevant to the question which Baroness Hale recently raised for consideration,  namely the question whether this court is bound by previous decisions which have been disapproved as part of the ratio decidendi in a  Privy Council case  (see her speech in National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL  41,[163]).
31.	The Clydebank case, cited by counsel, was a Scottish appeal.  It concerned a contract for the construction by a Scottish shipbuilder of four torpedo boats for the Spanish government.  The contract provided that: "The penalty for late delivery shall be at the rate of £500 per week for each vessel".  The House of Lords held that this sum was not a penalty.  In the words of Lord Halsbury LC, it was "obvious on  the face of the contract that the very thing intended to be provided against by this pactional amount of damages is to avoid [the] kind of  minute and somewhat difficult and complex system of examination  that would be necessary if you were to attempt to prove the damage." (page 11).  Lord Davey applied a principle of interpretation of contracts in Scots law: 
"My Lords, I therefore conceive that it may be taken as an established principle in the law of Scotland that, if you find a sum of money made payable for the breach, not of an agreement generally which might result in either a trifling or a serious breach, but a breach of one particular stipulation in an agreement, and when you find that the sum payable is proportioned to the amount if I may so call it, or the rate of the non-performance of the agreement – for instance, if you find that it is so much per acre for ground which has been spoilt by mining operations, or if you find, as in the present case, that it is so much per week during the whole time for which the non-delivery of vessels beyond the contract time is delayed – then you infer that primậ facie the parties intended the amount to be liquidate damages and not penalty.  I say "primậ facie" because it is always open to the parties to shew that the amount named in the clause is so exorbitant and extravagant that it could not possibly have been regarded as damages for any possible breach which was in the contemplation of the parties, and that is a reason for holding it to be a penalty and not liquidated damages notwithstanding the considerations to which I have alluded."
32.	Lord Davey held that evidence as to the loss which the Spanish government had actually suffered was inadmissible, and that it would be contrary to the purpose of the clause to admit such evidence.  For different view on this point, see per Lord Woolf in the Philips case at pages 59-60.
33.	The Clydebank case was decided in 1904, and it was followed by two decisions of the Privy Council, namely Public Works Commissioner v Hills [1906] AC  368 and Webster v Bosanquet [1912] AC 394. The former case was an appeal from the Cape of Good Hope.  The advice of the Privy Council was given by Lord Dunedin, who later gave the leading judgment in the Dunlop case.   He noted that the Clydebank case was decided according to "the rules of a system of law where contract law was based directly on the civil law and no complications in the matter of pleading had ever been introduced by the separation of common law and equity." (page 375).  The Privy Council held that the clause in that case was a penalty.  It held that the principle to be deduced from the Clydebank case was that the criterion of whether a sum was a penalty or damages was to be found in whether the sum in question "can or cannot be regarded as a "genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation." (page 376).  In Webster v Bosanquet the appeal to the Privy Council came from Ceylon. The Privy Council again applied the Clydebank case.  
34.	The three cases just cited play an important role in the speech of Lord Dunedin in the Dunlop case. In that case, a contractual provision in an agreement between a manufacturer and dealer in tyres for the payment of 5s per tyre sold below list price in breach of contract was held on the facts not to be a penalty. The House reversed the (unreported) decision of this court (Vaughan Williams and Swinfen Eady LJJ, Kennedy LJ dissenting). The Court of Appeal held that, since the contract in question provided for damages to be paid on breaches of varying degrees of importance, the relevant provision had to be treated as a penalty. The House took the view that such a clause did not inevitably have to be treated as penalty. The leading speech was that of Lord Dunedin and he, drawing on the three cases mentioned above, enunciated the law on penalties which is now embedded in our common law.   The classic statement of the law on penalties by Lord Dunedin in the Dunlop case is set out below.
35.	The judge took the analysis of the case law on penalties in the recent Cine case as a complete statement of the law for his purposes.  I will take it as my starting point.  The facts of that case are complex and issues arose which are not relevant for the consideration of penalties, and accordingly I will restrict my examination of the case to a statement of the facts and principles set out therein relevant to the question of penalties.  The first judgment was that of Mance LJ.  The other members of the court, Peter Gibson and Thomas LJJ, agreed with him, but gave concurring judgments. 
36.	The Cine case concerned the appeal of a Turkish cable television company and its guarantor from the  order of Mr Julian Flaux QC giving summary judgment for damages to be assessed for breach of an agreement dated  as of 1 May 2000 in favour of the claimant, a joint venture company ("UIP").  Under this agreement Cine was given a licence to exhibit films of the members of the joint venture.  Two critical provisions of the agreement were clauses 16 and 17. Clause 16 required Cine to hold an amount of $4,836,155 ("the AB amount") in a special account for use by UIP and the members of the joint venture in advertising the films licensed. On termination of the agreement the full AB amount had to be paid to UIP.  Clause 17 dealt with termination.   If Cine failed to maintain a letter of credit in favour of UIP,  for payment of the licence fees, UIP could terminate the agreement and thereupon the whole of the licence fees payable over the balance of the term of the licence became due and payable, together with all damages resulting from such breach the AB amount and the outstanding costs of certain prior proceedings between the parties which had been compromised.
37.	The relevant issue on the Cine appeal was whether the argument that clauses 16 and 17 were unenforceable as penalties had a real prospect of success.   If so, the claimant was not entitled to summary judgment and the matter would have to go to trial.  Because this was an appeal from the grant of summary judgment, this court did not have to reach a final view on these matters.  
38.	There is a useful and succinct statement of the law in the judgment of Mance LJ:
"11.	The general scope of the law relating to penalties was identified by Lord Browne-Wilkinson giving the advice of the Privy Council in Workers Trust Bank Ltd. v. Dojap Ltd. [1993] AC 573: 
"In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit (customarily 10% of the contract price) on the sale of land. ….."
12.	The classic distinction drawn by Lord Dunedin in Dunlop Pneumatic Tyre Company v. New Garage and Motor Company Ltd. [1915] AC 79, 86f was between a payment on breach stipulated as in terrorem of the offending party and a genuine covenanted pre-estimate of damage. Lord Dunedin added that the question was one of construction of each contract, to be decided as at the time of its making, not the time of breach. He offered as tests which might prove "helpful, or even conclusive", these: 
"a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ..….
b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ….. This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable ….. is probably more interesting than material.
(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage". 
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties….." 
13.	Although the phrase in terrorem has appeared in many cases since Dunlop, there is force in Lord Radcliffe's comment in Campbell Discount Co. Ltd. v. Bridge [1962] AC 600, 622, that 
"I do not find that that description adds anything to the idea conveyed by the word "penalty" itself, and it obscures the fact that penalties may quite easily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them …."
A more accessible paraphrase of the concept of penalty is that adopted by Colman J in Lordsvale Finance Plc v. Bank of Zambia [1996] QB 752, 762G, when he said that Dunlop Pneumatic Tyre showed that:
"whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred."
14.	In Philips Hong Kong Ltd. v. The AG of Hong Kong (1993) 61 BLR 49, the Privy Council in advice delivered by Lord Woolf underlined test (a) suggested by Lord Dunedin, endorsed the view that the "court should not be astute to descry a 'penalty clause'" and emphasised that it would "normally be insufficient …. to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss" (pp.58-59). However, Lord Woolf went on: 
"A difficulty can arise where the range of possible loss is broad. Where it should be obvious that, in relation to part of the range, the liquidated damages are totally out of proportion to certain of the losses which may be incurred, the failure to make special provision for those losses may result in the "liquidated damages" not being recoverable. (See the decision of the Court of Appeal on very special facts in Ariston SRL v Charly Records Ltd (1990) The Independent 13 April 1990.) However, the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts "
15.	I have also have found valuable Colman J's further observation in Lordsvale at pp.763g-764a, which indicate that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all the possibilities. There are clauses which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. In the case before him, Colman J was concerned with a provision for prospective increase in the interest rate payable by a borrower, following the borrower's default. He said that, although the payment of liquidated damages is "the most prevalent purpose" for which an additional payment on breach might be required under a contract 
"…. the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach." "
39.	In essence, this court held in the Cine case, that in determining whether provisions were a penalty the court had at the outset of its enquiry to look at the aggregate amount that would be payable on breach under the terms of the agreement, and compare that with what would have been payable if UIP had had to bring its claim under the common law.  In other words the alleged genuine pre-estimate of loss in clause 17 had to relate to the overall net balance of losses payable on termination less the credits to which Cine would have been entitled at common law.  The court declined to treat the AB amount as separate from the other items payable on breach under clause 17.  It noted that under the agreement UIP did not have to give credit for the right to use the films licensed to Cine, which came to an end on the termination of its licence.  
40.	In the circumstances, this court concluded that a triable issue was shown with respect to the question whether the provisions of the agreement for the acceleration of licence fees and the payment of the AB amount to UIP in the event of breach were unenforceable as penalties.  At [50], Thomas LJ held that it would have to be investigated at trial why what appeared to be benefits to UIP on termination were not brought into account when the agreement was drawn up.  He added: "A genuine pre-estimate would ordinarily imply consideration being given to bringing into account the material and significant matters that went into the ascertainment of the actual loss suffered by the innocent party."  As Peter Gibson LJ observed, the question, whether the  failure to bring the benefit of the termination of the film rights into account in determining the amount payable on breach rendered clause 17 a penalty, had to be assessed on the basis of the position at the date of the agreement.
41.	It was also argued in the Cine case that there was a triable issue as to whether the other amounts payable on breach were also penalties but for reasons which were specific to the facts of that case and which I need not explore the court held that the only triable issues were as I have set out above.
42.	What, to my judgment, is striking about the statement of the law in the Cine case and its application is the way in which the court sought objectively to rationalise its conclusions as to whether the provisions of the agreement constituted a penalty.  The court's reasoning turns on a comparison between the overall amount payable under the agreement in the event of a breach with the overall amount that would have been payable if a claim for damages for breach of contract had been brought at common law.  The court proceeded on the basis that, if such a comparison discloses a discrepancy, which can be shown not to be a genuine pre-estimate of damage or to be unjustified, the agreement provides for a penalty.
43.	The usual way of expressing the conclusion that a contractual provision does not impose a penalty is by stating that the provision for the payment of money in the event of breach was a genuine pre-estimate by the parties to the agreement of the damage the innocent party would suffer in the event of breach.  As Lord Dunedin said in the Dunlop case, the "essence" of a liquidated damages clause is "a genuine covenanted pre-estimate of damage" (at page 86).   As the Dunlop case and the citation from the Philips case (in the Cine case) show, a contractual provision does not become a penalty simply because the clause in question results in overpayment in particular circumstances.  The parties are allowed a generous margin.
44.	The judgments in the Cine case show the continued usefulness of the authoritative guidance given by Lord Dunedin in the Dunlop.  There are two particular points I would make about that guidance for the purposes of this appeal.  First, paragraph (a) envisages an exceptional payment, though paragraph (a) does not state that this is the only circumstance in which a payment will be held to be a penalty.  Second, paragraph (c) of Lord Dunedin's guidance shows that there are several types of clause which may amount to penalties.  Some may provide for the same sum to be paid on different breaches of contract.  That is the sort of penalty clause which Lord Dunedin had in mind in (c).  There are other kinds of clauses which may constitute penalties, such as those which provide for a single sum or aggregate sum to be paid on a single breach.  This was the situation in the Cine case.  It is also the case in this case where there is a single event giving rise to the payment of money under clause 17, namely the termination of the agreement without giving one year's notice.
45.	Third, paragraph (d) of Lord Dunedin's guidance is also relevant in this case.  When a person is dismissed without notice, it is difficult to forecast in advance what the damages payable will be.  It may depend for instance on whether he is able to obtain comparable employment.  Paragraph (d) makes it clear that, even in the situation when the parties cannot at the time of contracting, predict the loss likely to result from a breach of contract, a sum can be a genuine pre-estimate of damage.
46.	In paragraph (a) Lord Dunedin refers to the sum stipulated in the parties' contract being "extravagant and unconscionable".  The decision of this court in the Cine case shows that those words have to be given a contemporary meaning.  The real question is whether the sums for which the parties have provided the paid on breach differ substantially from the sums that would be recoverable at common law and whether there is shown to be no justification for that.
47.	In paragraph 13 of his judgment, quoted above, Mance LJ refers to the observation of Lord Radcliffe in Campbell Discount Co Ltd v Bridge [1962] AC 600, 622 that the description of sums being stipulated as in terrorem adds little to the concept of penalty.  That point has particular resonance in this case.  The evidence of Mr Murray at trial was not that he wanted to terrorise MFC or that he wanted to deter MFC from dismissing him without one year's notice.  His evidence was that he wanted a remuneration package which, seen overall, was generous because of the loss that his working for MFC would cause to his other business interests.  In other words Mr Murray was motivated by his own desire to protect his own interests not a desire to terrorise MFC.  Since he had other business interests, he would not necessarily want to deter MFC from terminating his agreement.  For the reasons given below, I do not consider that the absence of evidence that Mr. Murray intended to deter MFC from breaching the agreement means that clause 17.1 cannot be a penalty. 
48.	I have already referred to the Philips case, which is referred to by Mance LJ in paragraph 14 of his judgment.  The words of Lord Woolf which he quotes are a timely reminder of the importance of legal certainty.  The court should give  weight to the fact that the parties have agreed the particular clause.  In the same case Lord Woolf said:
"Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. " (at pages 58 to 59)
49.	The appellant has relied on the opening phrase in this passage.  He contends that this is not a case where domination can be shown and that accordingly the respondent cannot, simply by pointing to the absence of any deduction for mitigation from the payment provided for by clause 17 in this case, contend that clause 17 must be a penalty because in some situations a greater loss could be recovered under clause 17 than at common law.  In my judgment there are two answers to this point.  The first is that Lord Woolf was not laying down any principle that a different rule would apply in the case of domination; he simply recognised that there might be a different rule in that case.   Indeed this court in the Jeancharm case held that the Philips case did not represent a departure from the law as laid down by Lord Dunedin in the Dunlop case.  Accordingly I do not consider that oppression on a party to make a contract is of itself a criterion in determining whether a contractual sum is a penalty.  Second the fact that a greater loss can be recovered under a contractual provision than at common law may lead to the conclusion that the clause in question is a penalty, although that result is not inevitable.  It all depends on the circumstances.
50.	In paragraph 15 of his judgment, Mance LJ makes the point that it need not simply be shown that the clause was a genuine pre-estimate of the damage that would occur on breach.  There is scope for other justification for the amount payable on breach.  The Cine case illustrates this point.  Clause 17 of the agreement in that case provided for the payment of costs of prior proceedings.  Those proceedings had been compromised on terms which did not require Cine to pay UIP's costs.  However, Mance LJ was not prepared to hold that the clause was necessarily a penalty.  It was open to the parties to agree to forego the costs in the prior litigation on terms that the new agreement was entered into and duly performed.
51.	However in the normal situation, the test will be whether or not the parties genuinely pre-estimated the loss that would occur on breach.  This is a relatively low level of review: see paragraphs 44 and 45 above.  I agree with Mr Bannister that the parties do not have to make an accurate assessment of the damages that would have been awarded at common law.  Indeed it may be very difficult for them to do so.  That will frequently be the case in an employment contract.  In ascertaining whether the parties have made a genuine pre-estimate of the damage, the court will consider the reasons which the parties had for agreeing to the clause in question at the time when the agreement was made.  
52.	Lord Dunedin in the Dunlop case makes the point that, although the issue is one of construction, the court is not confined to the terms of the agreement and may look at the "inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach…" (at page 87).  In my judgment, the inherent circumstances to which the court may have regard extend beyond those which may be adduced in evidence for the purposes of determining the true interpretation of the agreement under the well known test in the Investors' Compensation Scheme Ltd v West Bromwich Building Society  [1998] 1 WLR 896.  But the purpose of adducing that evidence is not so that the parties can demonstrate that they agreed to opt out of the remedies regime provided by the common law but rather that the reasons that they had for doing so constitute adequate justification for the discrepancy between the contractual measure of damages and that provided by the common law.
53.	The parties in this case cited a number of further authorities not cited by Mance LJ in the Cine case. I need only deal with Abrahams v Performing Right Society.  In this case, the plaintiff was employed for an indefinite period under a contract by which his employer had agreed to give him two years' notice of termination of his employment or pay him a lump sum of two years' salary in lieu.  The employer failed to give notice and so the plaintiff sued him for the lump sum.  The employer argued that the plaintiff had a duty to mitigate his loss but this argument was rejected because the payment of two years salary was a contractual payment, viz one which the employer was  bound to make. Termination of the plaintiff's employment was not a breach of the contract but if the employer elected to terminate the contract, it had either to give notice or to pay a sum equivalent to two years' gross salary. Hutchinson LJ, with whom  Aldous LJ agreed, observed that the contractual sum could not be impugned as a penalty.  He did not give any reasons for this conclusion.  Accordingly it is not clear whether Hutchinson LJ meant that the clause was a genuine pre-estimate of the employee's loss or whether he meant that since the sum was not payable on breach but on the exercise of an option to terminate the employment of the plaintiff with a lump sum payment.  In my judgment, he meant the latter.  In that case it is distinguishable from the present case where the sum payable under clause 17 is payable on breach.   There does not appear to have been argument directed to the penalty question in any event.  
54.	With the benefit of the citation of authority given above, in my judgment, the following (with the explanation given below) constitutes a practical step by step guide as to the questions which the court should ask in a case like this:-
i)	To what breaches of contract does the contractual damages provision apply?
ii)	What amount is payable on breach under that clause in the parties' agreement?
iii)	What amount would be payable if a claim for damages for breach of contract was brought under common law?
iv)	What were the parties' reasons for agreeing for the relevant clause?
v)	Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the discrepancy between i) and ii) above?
55.	A point that neither the Dunlop case nor the Cine case considers is the position if either there is no evidence at trial as to why the parties agreed a particular clause, or if the evidence is that they did consider it but took a wholly wrong view about what damages would be payable under the general law in the event of breach.  In the Dunlop case, trial had taken place and there had been evidence as to why Dunlop needed the clause.  In the Cine case, trial had not take place but the court proceeded on the basis that there would or could be evidence about the reasons for the clause in question at the trial to which the case was remitted.  What happens if there is no evidence about the reasons for the clause? There would in my judgment be no reason why the court could not draw inferences of fact as to the reasons and as to the genuineness of those reasons.  What if it appears from the evidence that is given (or from the inferences that the court makes from the facts) that the decision to include the damages clause was included on the basis of a mistaken belief that the damages at common law would be assessed on a materially more generous basis than in fact would occur?  This would be the case if for example the parties failed to have regard to the fact that a party would have to give credit for a benefit that he obtained on breach, such as a tax saving as a result of the receipt of damages for lost income in the form of a lump sum payment of damages.  In my judgment, the good faith belief of the parties is not the deciding factor here.  The court would look at the result and (bearing in mind that the onus is on the party challenging the clause to establish that it is a penalty) ask whether it is satisfied that the parties could not, if they had had the proper information or considerations in front of them, genuinely have considered that the damages payable under the contractual provision were a realistic pre-estimate of the damages payable on breach at common law.  In other words, in the context of Lord Dunedin's speech, the test of genuineness is objective.  A pre-estimate is genuine if it is not unreasonable in all the circumstances of the case.
56.	I now turn to the facts of this case
The first step –to what breaches of contract did the contractual damages provision apply?
57.	The provisions of the agreement are clear at least in this respect, namely that Clause 17.1 applies whenever there is Wrongful Termination as defined in the agreement. I deal below with the effect on clause 17.1 where some notice, but less than one year's notice, is given.
The second step - what amount did the agreement provide should be payable on  breach?
58.	It is common ground that, under clause 17.1 of the agreement, if MFC gives no notice to terminate the agreement, Mr Murray becomes entitled to a year's gross salary, pension and other benefits in kind.  Is the position altered by the fact that MFC in fact gave 7 ½ weeks notice?
59.	Mr Salter submits that the effect of inadequate notice is that MFC has to pay remuneration earned in the period of notice and in addition the sum payable under clause 17.1. He points out that that indeed was Mr Murray's case at the trial.  He points to the literal working of clause 17.1 and to the fact that the sum payable under clause 17.1 is payable on Wrongful Termination, i.e. at the end of the period of notice.
60.	The parties did nor provide for what was to happen if MFC gave (say) 364 and not 365 days notice.  It would, however, be remarkable if, as Mr Salter contends, in that case the effect of the agreement was that MFC was bound to pay a whole years gross salary and other benefits under clause 17.1 in addition to the sums due during the period of notice. There is no commercial logic in this position and no suggestion that it was a result which the parties expressly intended to achieve.  As drafted the agreement proceeds on the basis that except where the agreement makes other express provision MFC will either give the full 12 months' notice or no notice.  In my judgment the agreement must be construed as meaning that if less than one year's notice is given the payment of gross salary etc under clause 17.1 is reduced to the extent that salary is duly paid in the notice period.  Otherwise the agreement would have the draconian effect for which Mr Salter contends. In my judgment the agreement should be construed to have the effect which I have given it, rather than the potentially extreme result for which Mr Salter contends.  
61.	The other issue of interpretation of the agreement is whether the opening words of clause 17.2 mean that Mr Murray does not thereunder give up his rights to amounts due to him by MFC for arrears of pension contribution.
62.	Again there is force in that submission as a matter of the literal wording of the clause in question, which speaks of rights accrued "under the provisions of any pension scheme".   I have not seen Mr Murray's pension scheme to which MFC contributed on his behalf.  I will assume that the scheme itself imposed no obligation on MFC to pay contributions to the scheme.  On that basis Mr Murray's right as against MFC to enforce payment of any outstanding contributions would not be rights accrued under the pension scheme. The judge considered that the opening words of clause 17.2 referred to accrued rights of any kind, but he did not develop his reasons for this and his interpretation gives no effect to the words "under the provisions of any pension scheme".  I consider that the judge's interpretation was in error and that the effect of the opening words is that Mr Murray relinquishes any right to any arrears of contributions to his pension scheme when a payment is made under clause 17.1. but only if MFC was obliged to make payments under the scheme.  The release of the right to such arrears therefore forms part of the justification for the one year's gross salary etc provided for in clause 17.1.
63.	In the events which happened, MFC became liable under clause 17.1 (if enforceable) to pay 44 ½ weeks gross salary, pension contributions and other benefits to Mr Murray.
The third step - What damages would have been payable at common law?
64.	This calculation falls to be made as at the date of the signing of the contract, not at the date of breach (see the Dunlop case) and accordingly it can only be an approximate calculation.
65.	In the present case, however, it is clear that at common law Mr Murray would have to mitigate his damages by giving credit for remuneration he could reasonably have earned from other sources in the period of one year ( or in the events which happened 44 ½  weeks) following notice.  These matters are common ground.  On my interpretation of the agreement, he would also have had to give credit for what he earned in the 7 ½ weeks for which he was given notice.  There is no suggestion that Mr Murray would not be able to obtain some kind of alternative employment.  On the contrary at the time the agreement was executed he clearly had other business interests in which he could be gainfully employed.   MFC submits that he would also have to give credit for the fact that the first £30,000 of his compensation package is tax free, whereas if he had earned his salary in the usual way he would have paid income tax on it.  Mr Bannister does not appear to challenge this, and we were not taken to taxing provisions in point.  It follows that the sum payable under clause 17.1 was likely greatly to exceed the damages which Mr Murray could have claimed if he had brought an action for breach of contract.  
66.	The fact that some of the damages may be difficult to calculate as at the date of the contract (for example, because they require a prediction as to future interest rates) may lead the court to take the view that there was good reason for the parties to agree to a contractual provision for the payment of damages in the event of breach so that they would know for certain what the consequences of breach would be.  As Diplock LJ said in the Robophone case:
"[Nevertheless,] the courts would be doing an ill-turn to those whom the rule about "penalty clauses" is designed to protect if they were to apply it so as to make it impracticable for parties to agree at the time when they enter into a contract on a fair and easily ascertainable sum to become payable by one party to another as compensation for the loss which the latter will sustain as a consequence of its breach.  It is good business sense that parties to a contract should know what will be the financial consequences to them of a breach on their part, for circumstances may arise when further performance of the contract may involve them in loss.  And the more difficult it is likely to prove and assess the loss which a party will suffer in the event of a breach, the greater the advantages to both parties of fixing by the terms of the contract itself an easily ascertainable sum to be paid in that event.  Not only does it enable the parties to know in advance what their position will be if a breach occurs and so avoid litigation at all, but, if litigation cannot be avoided, it eliminates what may be the very heavy legal costs of proving the loss actually sustained which would have to be paid by the unsuccessful party.  The court should not be astute to descry a "penalty clause" in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former." (at page 1447)

The fourth step - What were the parties' reasons for introducing clause 17 into agreement ?
67.	I have already referred to the reason which Mr Murray gave for his overall remuneration package at trial. As to MFC's motivation, I have already referred to the finding by the judge that Mr Murray was able "within broad limits to determine the terms of the service agreement …"([97]).  For my part I do not consider that it is possible to go behind this finding, though it must of course be read in the context of the judge's other findings.  There is no finding as to what justification the other directors had for causing MFC to agree to this clause.  There is no evidence that they tried to negotiate any better terms with MFC.   I appreciate that MFC was advised by a leading firm of solicitors, but the question of what the terms of the agreement should be was also one for commercial negotiation.  This case can be contrasted with the Dunlop case where there was uncontroverted evidence that Dunlop would be damaged if its tyres were sold below list price.
68.	The evidence to which I have referred in the preceding paragraph is direct evidence as to the parties' motivation.  As I have explained above, the fact that the parties do not express their aims in agreeing a clause challenged as a penalty does not prevent the clause from being found to be a penalty.  I have held above that in my judgment, the relevant  question  in that event is whether the parties could not, if they had had the proper information or considerations in front of them, genuinely have considered that the damages payable under the contractual provision were a realistic pre-estimate of the damages payable on breach at common law.  I deal with that question that I turn under the next step.
The fifth step – Has MFC shown that the amount payable under clause 17 was imposed in terrorem, or that it did not amount to a genuine pre-estimate of damage for the purposes of the Dunlop case, and (if the latter) was there some other justification for the payment of these amounts?
69.	The burden of showing that a clause for the payment of damages on breach is a penalty clause is on the party who seeks to escape liability under it, not on the party who seeks to enforce it.  I have already made the point that there is no direct evidence as to why the parties agreed to clause 17 rather than (say) a clause making some allowance for mitigation.  As explained above, this issue has to be judged as at the date of the agreement.  In this case, there is no question of MFC showing that clause 17 was imposed in terrorem.   
70.	The judge considered that the deciding issue was the absence of an allowance for the failure to mitigate.    Any allowance, however, which the parties could have made would of necessity have been rough and ready.  The judge was also concerned by the lack of any evidence as to any independent review of the clause by the other directors.  As against that, however, there was no concealment of the terms from the board, who did indeed approve them and MFC was advised by solicitors.  Furthermore, and perhaps of more significance for the type of review that the court makes on a penalty issue, the term agreed was not out of line with market expectations.  Particulars of the directors' service agreements had been included in the pathfinder prospectus issued by MFC's financial advisers, Peel Hunt.  The particulars related to Mr Murray's agreement before the reduction of the period under clause 17 to one year, with three years only if there was an agreement to acquire (for example) an insurance company.   The reaction of at least one investor was that the provision for three years was excessive.  No objection was taken to the provisions disclosed for other directors, providing for one year's gross salary alone.  The clause in the agreement was then amended, and the offering of shares and admission to trading on the Alternative Investment Market, was successfully achieved.   The inference to be drawn from this sequence of events in my judgment is that the clause as finally agreed did not cut across market expectations.  Indeed, though we have not been referred to the various corporate governance codes to which Lovell White Durrant made reference in their general advice to MFC, it is well-known that the upshot of those codes was that a notice period of one year for directors was regarded as generally acceptable.  Indeed the Hampel Report published in January 1998 (which led to a number of changes in the code of corporate governance applicable to listed companies at least) specifically recommended the use of pre-determined damages clauses fixing the amount payable by companies on breach of directors' service agreements.  It noted that the notice period in directors' service contracts was "a fiction. Neither party seriously expects the typical notice period…to be worked out."  It referred to the payment of damages on breach of contract as "inherently unsatisfactory…A solution which brings certainty would be desirable…Such a provision would be effective whether or not the director found other employment…"(para.4.10).  This is part of the background against which clause 17 has to be judged.  Since the context in which clause 17 was agreed was commercial, the question whether it is a penalty or not has to be assessed by reference to commercial considerations.
71.	The next point is that the agreement contains some fierce restrictions on competition.  During the period of the agreement, Mr Murray was only due to work for MFC for three days a week.  Nonetheless, as clause 12 of the agreement set out above shows, Mr Murray could not after termination of his agreement engage for one year in any business which competed with MFC.    The type of business was restricted to the business of acquiring building societies and other financial institutions etc "being activities of a kind with which [Mr Murray] was concerned to a material extent during the period of one year prior to termination of his contract".  It is to be noted, however, that the purpose for which MFC has raised money through the placing was that the directors intended to establish the business of MFC by the acquisition of a building society or financial institutions.   Under clause 13, Mr Murray could ask for permission to engage in a competing business but MFC were not obliged to give that permission if it was not in the interests of MFC to do so.   Accordingly, the restrictions which Mr Murray undertook to observe on termination of his contract were important and significant.  He had set out to make his name in business though the acquisition of building societies and so the restriction could result in his not being able to pursue his business plans during the year following termination, leading to diminished earnings after that year was up.    If MFC wanted a restriction of this kind, it would not be unreasonable for Mr Murray to demand some recompense.  Moreover if these restrictions on their true construction apply to a non-consensual termination of the agreement (which it is unnecessary for me to decide), they would undermine any point that can be made about Mr Murray being in the prime of his life and well able to obtain employment, including employment with one of his own business, if he was summarily dismissed by MFC.
72.	Clause 13 is also not without significance.  It meant that if MFC was taken over by another company (a not uncommon experience for companies whose shares are publicly traded on an exchange in the UK) and he was offered comparable terms by the acquirer, he would have no claim for damages if he decided that his ideas were not consistent with the ethos of the new management.  This again could be a significant restriction on Mr Murray and one that he would not necessarily be willing to undertake without recompense.
73.	Another factor which is relevant is that MFC was content to take the right to elect to make a payment of one year's salary etc in lieu of notice under clause 3.1(set out above).  It was clearly prepared to do that without any discount for mitigation.
74.	There are other relevant points.  Clause 17 gave MFC the advantage that if it wanted to dismiss Mr Murray it could effect a clean break and know the measure of its financial exposure without what might well be damaging publicity and lengthy litigation.  If MFC wanted to terminate the agreement, it would no doubt be because Mr Murray's continued connection with MFC was damaging to MFC.  In those circumstances as a commercial matter it might well want to end the relationship swiftly and without the glare of publicity.  Damages for breach of an employment contract can be difficult to determine in advance because of the difficulty of knowing what alternative employment might be available.  The negotiation of clause 17 achieves the further advantage of avoiding spending management time and money on lawyers' fees to work such damages out.
75.	Other factors that can be take into account are: the fact that if less than one year's notice of termination of the agreement was given, then on the interpretation of the agreement which I have preferred above,  the amount payable under clause 17 would be reduced in due proportion.  In addition, on the interpretation that I have preferred above, Mr Murray could be relinquishing other claims for arrears of pensions claims under the opening clause of clause 17.2.
76.	In the circumstances, I have come to a different conclusion from the judge.  On the facts of this case, it is not shown that the parties could not reasonably have come to the view that clause 17 was a genuine pre-estimate of damage or that it was not otherwise justifiable.  MFC was of course the contract-breaker.  In the considerations referred to above, I have taken into account the disadvantages to it of wrongful termination without a pre-determined damages clause.  I do not consider that the court is precluded from taking such matters into account. To do so is consistent with freedom of contract, which the doctrine of penalties has so far as possible to respect.  Such considerations may help explain why a party may wish to take on an obligation which (without that explanation) might be considered to be sufficiently onerous to be a penalty within paragraph a) of Lord Dunedin's guidance.  Such considerations may indeed be best described as justification for the clause said to be a penalty, rather than elements of a genuine pre-estimate of the damage.  In my formulation of the steps above, I do not intend to exclude such 
considerations or the possibility that a clause could be justified on this sort of ground alone.
The Amendment Issue
77.	The judge dealt with this matter at length, but in the circumstances that it does not now arise, it will be sufficient if I deal with it briefly.
78.	What happened was that on the first day of the trial Mr Murray sought to amend his pleadings so as to include a claim for damages at common law.  The judge rejected this application.  He held that the application was very late and wholly unparticularised.  He held that the application was in effect for a split trial and that accordingly to accede to the application would put the respondents at a forensic disadvantage in view of the issues of credibility that could arise.  He proceeded on the basis, however, that Mr Murray would probably not be permitted to bring a separate claim for common law damages.
79.	It is the last point that causes me concern.  The modern practice is to allow amendments so that all the matters in issue between the parties can be adjudicated upon, unless the party against whom the amendment is sought will be prejudiced in a way that cannot be compensated in costs:  this point is made with particular clarity by Peter Gibson LJ in Cobbold v London Borough of Greenwich [1999] EWCA Civ 2074:
"There can be no doubt but that Greenwich are late in seeking the amendment which, they should have realised at least as early as November of last year, needed to be made in order to take the two new points which they are wanting to argue.  However, I own to being unhappy with the way the judge exercised his discretion, particularly in relation to the application to amend.  It is, of course, important that trial dates, when they are fixed, should be adhered to, but I fear that he may have let that factor dictate his approach to the question of amendment.  The overriding objective is that the court should deal with cases justly.  That includes, so far as practicable, ensuring that each case is dealt with not only expeditiously but also fairly.  Amendments in general ought to be allowed so that the real dispute between the parties can be adjudicated upon provided that any prejudice to the other party or parties caused by the amendment can be compensated for in costs, and the public interest in the efficient administration of justice is not significantly harmed.  I cannot agree with the judge when he said that there would be no prejudice to Greenwich in not being allowed to make the amendments which they are seeking.  There is always prejudice when a party is not allowed to put forward his real case, provided that that is properly arguable"(transcript pages 4 to 5)
80.	There would no real prejudice to the respondents of a recognisable kind that could not be compensated in costs if the amendment was allowed, though I would accept that MFC should have the option of having the issues arising from the amendment tried before the same judge.  I can see no basis on which Mr Murray could object to such of the issues raised by the amendment which would normally be heard by a judge being tried by Stanley Burnton J.  
81.	The only issue of prejudice relied on is the delay.  MFC is in difficulty making its business plans for the future while this litigation is going on, and it is holding a substantial sum in an escrow account to meet its liabilities under any judgment given in Mr Murray's favour.  I do not consider that those reasons are good enough.  The escrow account will no doubt be reduced so as to reflect the maximum amount that Mr Murray can claim by way of damages at common law.  If MFC wins at the end of the day it will be entitled to the interest earned on the account.  MFC can take steps to prevent the proceedings from being spun out by Mr Murray improperly (I am not saying that he intends to do so) by obtaining appropriate case management directions. The prejudice relied on thus pales into insignificance against the probability that Mr Murray will if the amendment is not allowed obtain no recompense at all from MFC for its admitted breach of contract.
82.	In my judgment the judge misdirected himself as to the guiding principle on this issue.  In the circumstances, if this issue had been live, I would have allowed the appeal on the amendment issue and directed that the issues raised by the amendment which are appropriate to be tried by a judge, rather than a master, be listed before Stanley Burnton J , unless MFC otherwise agreed.  
The Section 320 Issue
83.	Section 320 of the Companies Act 1985 (Substantial property transactions involving directors, etc)(as amended) provides in material part as follows; 
"(1) With the exceptions provided by the section next following, a company shall not enter into an arrangement—
(a)	whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b)     whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected,
unless the arrangement is first approved by a resolution of the company in general meeting and, if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.
(2)	For this purpose a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than £2,000 but (subject to that) exceeds £100,000 or 10 per cent of the company's asset value…"
84.	Section 322 of the Companies Act 1985 (Liabilities arising from a contravention of section 322) provides in material part as follows; - 
(1)	An arrangement entered into by a company in contravention of section 320, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) is voidable at the instance of the company unless one or more of the conditions specified in the next subsection is satisfied.
(2)	Those conditions are that—
(a)	restitution of any money or other asset which is the subject-matter of the arrangement or transaction is no longer possible or the company has been indemnified in pursuance of this section by any other person for the loss or damage suffered by it; or
(b)	any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance; or
(c)	the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting.

(3)	If an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of section 320, that director and the person so connected, and any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement, is liable—
(a)	to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction, and
(b)	(jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction.

(4)	Subsection (3) is without prejudice to any liability imposed otherwise than by that subsection, and is subject to the following two subsections; and the liability under subsection (3) arises whether or not the arrangement or transaction entered into has been avoided in pursuance of subsection (1).  If an arrangement is entered into by a company and a person connected with a director of the company or its holding company in contravention of section 320, that director is not liable under subsection (3) if he shows that he took all reasonable steps to secure the company's compliance with that section…"
85.	By its counterclaim in these proceedings, MFC sought to recover from Mr. Murray solicitors' and accountants' fees in connection with the acquisition of BPIM, and in addition the costs of engaging a new director to supervise that acquisition.  The first step was the execution on 6 November 2001 of heads of agreement between MFC and the shareholders of BPIM.  Thereafter the accountants undertook an investigation into BPIM's financial position.  No point is taken is taken on the amount of any such fees or their connection with the arrangement made in breach of section 320 of the Companies Act 1985.  The heads of agreement envisaged that there would be a further agreement by which the acquisition would be completed, but the negotiations broke down in March 2002 before this agreement was executed. 
86.	The judge held that section 320 applied to the heads of agreement because it was an arrangement to acquire a substantial non-cash asset from Mr Murray.  There is no appeal on that issue.  At trial Mr Murray argued that the execution of the heads of agreement triggered his right to three year's gross salary under clause 17.1.  The judge rejected that argument and there is no appeal on that point.  The judge further held that, if the heads of agreement had enabled Mr Murray to claim three year's gross salary under clause 17.1, the claim would fail because the increase in his entitlement to gross salary under clause 17.1 would itself be loss for which he was liable to indemnify the company under section 322(3)(a).
87.	The judge rejected MFC's claim to recover the professional fees and costs of the additional director.  He held that he was bound by the decision of this court in Re Duckwari plc (No.2) [1999] Ch 268.  In that case this court held that the acquiring company's borrowing costs raised for the purpose of acquiring a non-cash asset from a director were not "loss or damage resulting from the  transaction" for the purposes of section 322(3)(b).    I refer to this decision in more detail below.
Submissions under Section 320 Issue
88.	Mr Salter submits that the decision of this court in Re Duckwari plc (No.2) is distinguishable.  This court in Re Duckwari plc (No.1) drew an analogy between liability for breach of fiduciary duty and the liability under section 322.  As a matter of trust law, loss is recoverable if such loss would not have occurred but for the breach: Target Holdings Ltd v Redferns [1996] AC 421.  Mr Salter submits that the professional costs of preparing the due diligence report and the director's fees would not have been incurred but for the breach.  The company in general meeting was deprived of an opportunity to consider the transaction.  The decision of this court in Re Duckwari plc (No.2) is distinguishable because in the present case the heads of agreement represented an arrangement in breach of section 320 and the professional fees and director's fees were a transaction pursuant to that arrangement.
89.	Mr Bannister submits that some of the costs sought to be recovered by MFC pursuant to its counterclaim were incurred before the heads of agreement were signed.  He submits that it is not possible to say that such costs were incurred but for the breach of section 320.  Mr Bannister further submits that there is no clear finding by the judge that the fees would not have been incurred but for the heads of agreement.  
90.	Mr Bannister further submits that no loss is recoverable under section 322(3)(b) because the purpose of section 320 is to stop a director from acquiring property from, or disposing of his property to, his company.  Here there was no transaction which resulted in the acquisition of property and accordingly these costs are not recoverable from Mr Murray.  The loss is restricted to loss from completion.
91.	Mr Bannister further submits that the costs of due diligence are not costs within the mischief of section 320.
Conclusions on Section 320 Issue
92.	In Re Duckwari plc (No.1) [1999] Ch 253 the company in question entered into an arrangement to acquire a property in which one of its directors was interested and it was one of the terms of acquisition that the director in question and a nominee of his should share in the profits but not the losses resulting from the acquisition.  The property was in due course acquired but it depreciated in value due to a fall in the market.  The judge held that the loss to the company was to be assessed as at the date of the acquisition and since the fall in value had not occurred at that date the director was not liable to indemnify the company for that element of loss.
93.	This court allowed an appeal against that ruling and held that the loss had to be measured at the date of trial so that the company should be compensated for the difference between what it paid for the property and the value of the property at the date of trial.  
94.	This court held that the effect of section 322 (3) (b) was to provide the company with full protection against loss it suffered as a result of the transaction, including a fall in property values:
"…by virtue of s 320(1)(b) Duckwari was  prohibited from entering into the arrangement with Offerventure pursuant to which it purchased the property unless the arrangement was first approved by a resolution of Duckwari in general meeting. Such approval not having been obtained, the payment of £495,000, together with the other costs of the acquisition, was a misapplication of Duckwari's funds which, had s 320 stood alone, the directors responsible would have been liable to make good as if they were trustees.
The basis on which trustees would have been liable to make good the misapplication is well settled. If a trustee applies trust moneys in the acquisition of an unauthorised investment, he is liable to restore to the trust the amount of the loss incurred on its realisation (see Knott v Cottee (1852) 16 Beav 77, 51 ER 705). He is also liable for interest. Where more than one trustee is responsible for the acquisition their liability is joint and several. If these rules were to apply to the present case, the directors responsible would prima facie appear to be jointly and severally liable to restore to Duckwari the difference between the gross acquisition cost, £505,923, and the £177,970 which has since been realised on the sale of the property, plus interest, credit being given for the amount of any rents and profits received before completion of the sale.
That would have been the position if s 320 had stood alone, which it does not. A company's remedies for a contravention of that section are spelled out in s 322, in this case in s 322(3)(b). So the question is what loss or damage is comprehended by that provision. The persons who are rendered liable to indemnify Duckwari are not only Mr Cooper and the other directors responsible but also Offerventure, as a person connected with Mr Cooper. Mr Richards' first submission was that, subject to that point, there is on the face of the provision nothing to suggest that it is intended to give the company some different remedy from that to which it would have been entitled by virtue of s 320 alone. He said that it cannot reasonably be construed so as to give the company some lesser remedy.  
Secondly, Mr Richards attached great weight to the interrelationship between sub-ss (3)(b) and (2)(a) of s 322. He pointed out that one of the effects of s 322(2)(a) is that the primary remedy of rescission afforded by s 322(1) will not be available if 'the company has been indemnified in pursuance of this section by any other person for the loss or damage suffered by it'. Mr Richards submitted that that provision is only explicable on the footing that the indemnity against loss or damage under s 222(3)(b) will place the company in a position equivalent to that in which it would have been if rescission had been ordered. Had rescission been possible here, the amount of the acquisition cost would have been restored to Duckwari in full, plus interest. Accordingly, submitted Mr Richards, the indemnity must have been intended to have an equivalent effect. His third principal submission was that the liability under s 322(3)(a) to account to the company for any 'gain' made directly or indirectly by the arrangement or transaction, a liability which in practice can only be quantified at the date of judgment, confirms the view he propounds of s 322(3)(b). He said that the judge's differentiation between 'gain' and 'profits' was mistaken (see [1997] 2 BCLC 729 at 735, [1997] Ch 201 at 209).  
Mr Bannister submitted that the effect of ss 320 and 322 was to be ascertained from their wording alone and without attempting to fit them into some existing category of remedies available to companies against their directors. In adopting the judge's view of s 322(3)(b), he relied on further passages in the judgment, in particular ([1997] 2 BCLC 729 at 734, [1997] Ch 201 at 209): 
 'It is true that in the analogous case of an unauthorised investment by a trustee he is liable to make good to the trust any losses, and to account for any profit, but there it is the nature of the investment which leads to this conclusion. In the case of a contravention of s 320 it is the terms of the acquisition and not the attributes of the asset acquired which both lead to and limit liability to account for gain and to indemnify against loss and damage'. 
and again ([1997] 2 BCLC 729 at 734–735, [1997] Ch 201 at 209):
'The loss or damage has to result from the transaction, not from the holding of the property acquired pursuant to it.' 
Mr Bannister advanced an argument which was not put to the judge. He emphasised that the primary remedy of rescission under s 322(1) is available simply for non-compliance with the requirements of s 320 and that no fraud or other impropriety need be found. From that he argued that if there was an analogy elsewhere in the law it was not the remedies against a trustee who has made an unauthorised investment but the right to rescind a contract for innocent misrepresentation or mistake. He relied on the decision of Farwell J in Whittington v Seale-Hayne (1900) 82 LT 49 for the proposition that the losses recoverable under s 322(3)(b) are limited to what he called transactional losses and do not include consequential losses such as a fall in the value of the property. He placed particular reliance on the word 'indemnify', which, in its natural sense, would extend only to transactional losses. He suggested that that was what the judge had had in mind when he said that it was the terms of the acquisition and not the attributes of the asset acquired which both led to and limited liability to indemnify against loss and damage (see [1997] 2 BCLC 729 at 734, [1997] Ch 201 at 209). 
In considering these rival submissions I return once more to the wording of s 322(3)(b), which provides for an indemnity 'for any loss or damage resulting from the arrangement or transaction'. Plainly those words, if read in isolation, are capable of including a loss incurred by Duckwari on a realisation of the property, for less than the cost of its acquisition. Such a loss can fairly be said to result from the purchase, on the ground that if the purchase had not been made the loss would not have been incurred. But the loss can also fairly be said to result from the fall in value of the property. So it is necessary to look at the other provisions of ss 320 and 322 and the general law in order to see whether a loss of the former kind was intended to be included. 
I agree with Mr Richards that the judge was wrong both in thinking that the general distinction between the decision-making powers of directors and trustees had some relevance to the question and in restricting the mischief addressed by the provisions to acquisitions at an inflated value or disposals at an undervalue. It is obvious that there will be many other circumstances in which it is appropriate for the approval of shareholders to be obtained. In the present case, for example, the shareholders might well have declined to approve the purchase either because it was a new kind of venture or, more pertinently, because Offerventure or Mr Cooper was to take 50% of any profits arising from the development of the property but was not to bear a share of any loss. A one-sided arrangement thus favourable to the director would seem to be an exemplar of the kind of arrangement which was intended to be within the scope of s 320. 
Bearing in mind the evident purpose of ss 320 and 322 to give shareholders specific protection in respect of arrangements and transactions which will or may benefit directors to the detriment of the company, I am unable to construe s 322(3)(b) as denying the company a remedy which appears to flow naturally from a combination of s 320(1)(b) and the general law. No doubt it is possible to cite instances where Parliament has been held to take away with one hand what it appears to give with the other. But I cannot conceive that one would be found where the result was to give a narrow effect to provisions plainly intended to afford a protection and equally amenable to being given some wider effect.
This broad approach to s 322(3)(b) is entirely consistent with the provisions of s 322(2)(a) and (3)(a). Indeed, Mr Richards' submissions as to the interrelationship between sub-ss (3)(b) and (2)(a) are unusually compelling and would, if it were necessary, be decisive. What could be the purpose of denying the company its primary remedy of rescission if the indemnity which was the occasion for the denial was worthless, or at any rate worth far less than the primary remedy? I do not think that there is an answer to that question. I also accept Mr Richards' submission as to the confirmatory effect of s 322(3)(a). 
Mr Bannister's suggested analogy of a right to rescind a contract for innocent misrepresentation or mistake is, I believe, misconceived. The true view is that wherever the remedy of rescission is available it operates to restore the status quo ante so far as that is possible. But the consequences of the remedy vary according to the nature of the transaction. The consequences of the rescission of a contract are different from the consequences of the rescission of a transaction involving a misapplication of trust moneys. There is no justification for seeking to apply the consequences of the former to the latter. 
It is well recognised that the basis on which a trustee is liable to make good a misapplication of trust moneys is strict and sometimes harsh, especially where, as here, there has been a huge depreciation in the value of the asset acquired. I can understand what I believe to have been the reluctance of the judge to visit Mr Cooper (with whom I include Offerventure) with the consequences of the loss. But the loss has to fall somewhere and, if a proposal to purchase the property had been put to and rejected by the shareholders, it would have lain with Mr Cooper. The approval of the shareholders not having been obtained, it is not unfair that the loss should continue to lie with Mr Cooper rather than Duckwari. 
For these reasons, subject to the effect of s 727 in the case of Mr Cooper, I would hold that he and Offerventure are, in broad terms, jointly and severally liable to make good to Duckwari the loss caused to it by the depreciation in value of the property."
95.	In the course of its judgment, this court drew an analogy between liability under section 322 and the remedies for breach of fiduciary duty.  It would thus follow, Mr Salter submits, that the appropriate test of causation was that applicable to claims for breach of fiduciary duty and not to claims at common law.  That test is the "but for" test rather than the test applying at common law. As Lord Browne-Wilkinson, with whom the other members of the House agreed, held in Target Holdings Ltd v Redferns: 
 	"The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate (see Nocton v Lord Ashburton [1914] AC 932 at 952, 958, [1914-15] All ER Rep 45 at 51, 55 per Viscount Haldane LC).  If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed (see Caffrey v Darby (1801) 6 Ves 488, [1775-1802] All ER Rep 507 and Clough v Bond (1838) 3 My & Cr 490, 40 ER 1016).  Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred (see Underhill and Hayton Law of Trusts and Trustees (14th edn, 1987) pp 734-736, Re Dawson (decd), Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 and Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] 2 All ER 92, [1980] Ch 515).  Thus the common law rules of remoteness of damage and causation do not apply.  However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz the fact that the loss would not have occurred but for the breach (see also Re Miller's Deed Trusts (1978) 75 LS Gaz 454 and Nestle v National Westminster Bank plc [1994] 1 All ER 118, [1993] 1 WLR 1260)."
96.	In Re Duckwari plc (No.2), the issue was whether the director was also liable for the costs of borrowing which the company incurred in order to buy the asset in question. However, this loss was held not to be within section 322 (3)(b).  Nourse LJ, in a judgment with which the other members of the court agreed, held:
"The essence of the argument of Mr Richards QC, for Duckwari, is that the transaction entered into in pursuance of the arrangement was not simply Duckwari's acquisition of the property but included the means by which it was acquired, in particular the borrowing of £350,000 from the bank and the application of £155,923 from Duckwari's own resources (see [1998] 2 BCLC 315 at 317, [1998] 3 WLR 913 at 917). He says, correctly on the evidence, that the acquisition and the borrowing were part and parcel of one transaction, in the sense that the acquisition could not have been achieved without the borrowing and the borrowing would not have been incurred but for the acquisition. Identifying the transaction in that way, Mr Richards claims that the 'loss or damage resulting from' it included, up to 8 May 1998, actual compound interest paid or owing to the bank amounting to £676,686 and notional compound interest lost on the £155,923 amounting (at base rate less 0.5%) to £183,632. On that footing, Duckwari's total claim is put at £1,216,753. I should add that the rate of interest charged by the bank was base rate plus 3% with a minimum of 13%. Since base rate has been 9% or lower ever since September 1992 (it was 7% or lower between November 1992 and November 1997), it is evident that the cost of the loan to Duckwari (if it is to be charged in full) will, for most of the time since November 1989, have been exorbitant.
The essence of the argument of Mr Hoser, for the respondents, is that, since the arrangement which contravened s 320(1) was that Duckwari should be at liberty to take over Offerventure's rights and liabilities under the contract, the only transaction falling within s 322 was Duckwari's acquisition of the property pursuant to the contract. That, and that alone, was the 'substantial property transaction' involving a director within the marginal note to s 320. Neither Duckwari's borrowing from the bank nor the application of its own moneys in part payment of the purchase price was part of the arrangement between Offerventure and Duckwari and neither was in contravention of s 320(1). A fortiori, neither could be or be part of a transaction entered into in pursuance of an arrangement for the purposes of s 322. On the footing that the transaction for those purposes was, as he contends, Duckwari's acquisition of the property, Mr Hoser accepts that the respondents are jointly and severally liable on the basis stated in my earlier judgment ([1998] 2 BCLC 315 at 322, [1998] 3 WLR 913 at 921), ie to restore to Duckwari the difference between £505,923 and £177,970, plus interest on the amount for the time being outstanding. (We were told on 30 July that no rents or profits were received before completion of the sale.) 
While I have found the question to be one of some difficulty, I have come to a clear conclusion that the argument of Mr Hoser is to be preferred to that of Mr Richards. Although it was at the heart of our earlier decision that the effect of s 322(3)(b) was to make the respondents liable as if they had been trustees, we also held that that basis of liability only arose because there had been a breach of s 320(1) (see [1998] 2 BCLC 315 at 322, [1998] 3 WLR 913 at 920). It necessarily follows that the loss or damage recoverable under s 322(3)(b) is limited to that resulting from the breach, in other words from the acquisition itself."
97.	Mr Bannister focuses on the final paragraph of that quotation.  He submits that it is clear that this court decided as a matter of construction that loss or damage derived from transactions other than the transaction in breach of section 322 were not recoverable under section 322(3)(b) on its true construction.
98.	I agree.  In Re Duckwari plc (no 2), this court decided the issue of borrowing costs as a matter of the interpretation of section 322(3)(b). Section 322(3)(a) imposes a liability to account for any gain made "directly or indirectly" by the arrangement or transaction in question. By contrast, the liability to indemnify the company is only for any loss or damage "resulting from the arrangement or transaction".  In my judgment this court essentially took the view that loss or damage within section 322(3)(b) could not include loss or damage which resulted indirectly from the arrangement or transaction in question.  It is open to question whether this interpretation is consistent with this court's previous conclusion in the earlier Duckwari case that a parallel was to be drawn between the liability imposed by section 322 and the liability imposed as a matter of trust law on the trustees.  However, its interpretation of section 322(3)(b) in this way is binding on us.  It cannot be said to be per incuriam.   This court allowed the costs of the acquisition to be recovered from the director made liable under section 322(3).  However, unlike the borrowing costs, these costs were a direct result of the agreement for acquisition of property from the director.  In this case, the costs of obtaining a due diligence report were also a direct result of the arrangement for acquiring BPIM since the parties agreed that a satisfactory due diligence report was a necessary pre-condition of that acquisition.  However, the costs of hiring an additional director were not foreshadowed by the acquisition agreement and so cannot be recovered under section 322(3)(b).  It may, however, be possible to recover them in an action for breach of fiduciary duty : see section 322(4).
The Section 727 issue
99.	Section 727 of the Companies Act 1985 (Power of court to grant relief in certain cases) provides in material part;-
 "(1)  If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit."
100.	The judge did not decide whether the court should grant Mr Murray any relief under section 727 in respect of the liability which he had incurred for professional fees.  Section 727 was referred to in Mr Murray's pleadings, but no particulars were given of the grounds on which it was said that he had acted reasonably and ought fairly to be excused.
101.	Mr Bannister submits that this court should remit the issue of relief under section 727 to the trial judge.  It was not clear who was the driving force behind the BPIM acquisition and whether legal advice was taken on the transaction which should have revealed the obligation to comply with section 320.
102.	Mr Salter submits that it is plain that Mr Murray did not act reasonably.  He ought to have appreciated that he was interested in the transaction not only by virtue of his interest as a vendor shareholder but also because of clause 17.1 of the agreement.  It was up to Mr Murray to bring those matters to the attention of the legal advisers to MPC.  As a fiduciary, he should have realised that the potential conflict of interest was all the more important.
Conclusions on the Section 727 Issue
103.	In order to determine whether any relief should be given under section 727 this court would have to make findings on a number of issues, including whether MFC's solicitors legal adviser should have advised MFC and its directors on the provisions of section 320 of the Companies Act 1985.  This court is not well placed to make findings of fact on such issues.  In those circumstances, despite desirability in the interests of time and costs of this court dealing with all the outstanding issues, in my judgment this question has to be remitted back to the trial judge.
Disposition
104.	For the reasons given above, I would allow the appeal on the penalty issue, allow the cross-appeal in part on the section 320 issue and allow the appeal on the section 727 issue.  As to the section 727 issue,  I would remit to the judge the question whether Mr Murray is entitled to relief under section 727 of the Companies Act 1985 in respect of the amounts due from him pursuant to section 322(3)(b) of the Companies Act 1985.
Lord Justice Clarke: 
105.	I have had the benefit of reading the judgments of Arden LJ and Buxton LJJ in draft.  I agree with them that the appeal on the penalty issue should be allowed.  In so far as there is a difference of approach between them, I prefer the broader approach of Buxton LJ.
106.	The essential reasons which have led me to the conclusion that clause 17.1 is not a penalty are these:
i)	Given the general principle that pacta sunt servanda, the courts should be cautious before holding that a clause in a contract of this kind is a penalty.
ii)	The modern approach to Lord Dunedin's test in Dunlop Pneumatic Tyre v New Garage and Motor Company Ltd [1915] AC 67 at 86 is to be found in Lordsvale Finance plc v Bank of Zambia [1996] QB 752 per Colman J at page 762G and Cine Bes Filmcilik Ve Yapim Click v United International Pictures [2003] EWCA Civ 1699.
iii)	It is perhaps no longer entirely appropriate to ask whether a payment on breach was stipulated in terrorem of the offending party but, as Colman J put it in the Lordsvale case at page 762G (in a passage quoted by both Arden and Buxton LJJ):
"whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach."
iv)	Colman J continued:
"That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred."
I do not read Colman J as saying there that, if that comparison discloses a discrepancy, it follows that the clause is a penalty.  It seems to me that the comparison is relevant but no more than a guide to the answer to the question whether the clause is penal:  se eg Philips Hong Kong v A-G of Hong Kong (1993) 61 BLR 49 per Lord Woolf at 58-9.  
v)	In paragraph 15 of his judgment in the Cine case (set out by Arden LJ at paragraph 39) Mance LJ quoted a further passage from the judgment of Colman J in the Lordsvale case (at pages 763g-764a) where he said that a particular clause might be commercially justifiable, provided that its dominant purpose was not to deter the other party from breach.
vi)	As I see it, each case depends upon its circumstances and, in considering those circumstances, the court should have in mind the warnings to which Arden and Buxton LJJ have adverted.  They include the importance to the parties both of knowing what will be the financial consequences to them of a breach of contract  (Robophone v Faciliites v Blank [1966] 1 WLR 1428 per Diplock LJ at 1447) and of avoiding disputes (Kemble v Farren (1829 6 Bing 141 per Tindal CJ at 148).  They also include the statements to the effect that a clause will only be held to be a penalty if the sum payable on breach is extravagant or unconscionable: see eg the Philips Hong Kong case per Lord Woolf at page 59 and Dunlop per Lord Dunedin at page 87.
vii)	It is important to have in mind that the onus of showing that clause 17 is a penalty was on the respondent (see eg per Diplock LJ in the Robophone case at page 1447F).  In paragraph 98(a) of the judgment in the instant case the judge quoted this passage from the judgment of Lord Browne-Wilkinson in Workers Trust bank Ltd v Dofap Ltd [1993] AC 573:
"In general, a contractual provision that requires one party in the event of his breach of the contract to pay the other party a sum of money is unlawful as being a penalty unless the provision can be justified as a payment of liquidated damages, being a genuine pre-estimate of the loss that the innocent party will incur by reason of the breach."
I am concerned that the judge has taken that passage out of context because it is not for the claimant to justify the payment but for the defendant to show that the payment is extravagant and unconscionable and not a genuine pre-estimate of loss.  	
viii)	On the facts I do not think that clause 17 was extravagant or unconscionable and in my judgment the respondent failed to discharge the burden of showing that it was.  In this regard I entirely agree with Buxton LJ.
ix)	The judge regarded the fact that clause 17 takes no account of Mr Murray's duty to mitigate his loss at common law as sufficient to lead to the conclusion that the clause is a penalty.  I respectfully disagree, essentially for the reasons given by Buxton LJ.      
x)	I also agree that it must have been difficult to say with confidence at the time of making the contract what might happen to Mr Murray if he were dismissed.  I see no reason why a company should not, as Buxton LJ put it, include in his 'package' generous reassurance against the eventuality of dismissal.  It was in both parties' interests to know the position and to avoid dispute in the future.  The respondent was advised by solicitors and I would accept Mr Bannister's submission that there was no inequality of bargaining power.  The directors were people with substantial experience and reputations and the service agreements were approved by resolutions of the board of directors.  In these circumstances I do not agree with the judge that this is not a case in which the contract was made between equal parties at arm's length.  That conclusion seems to me to be demeaning to the directors who approved the agreements.  Moreover that is so, even accepting the judge's finding to which Arden LJ has referred, that Mr Murray was within broad limits able to determine the terms of his service agreement.  It remained the directors' responsibility to agree a clause which was not extravagant and unconscionable
xi)	It is in my opinion important to avoid nice calculations but to look at the question in the round.  It was not for Mr Murray to justify the clause but for the respondent to show that it was a penalty.  It adduced no or no sufficient evidence that the clause was unconscionable.                         
xii)	Finally, although the question for decision is a broad one, I agree with Arden LJ that the considerations which she has set out in paragraphs 69 to 76 of her judgment under her fifth step support the conclusion that clause 17.1 is not a penalty.   
107.	For these reasons I too would allow the appeal on the penalty point.  I do not wish to add anything on the remaining issues, upon which I agree with Arden and Buxton LJJ for the reasons they have given.
Lord Justice Buxton:
108.	I agree with my Lady that the appeal should be allowed on the penalty point, but since my approach differs from hers I need to explain my conclusions in some detail; as well as adding some words of my own on the other issues.
Penalty or liquidated damages
109.	I respectfully agree with my Lady in her paragraph 47, citing the observations of Mance LJ in the Cine case, that the language of stipulations in terrorem sounds unusual in modern ears; and particularly when applied to a contract such as the present, where a company well able to look after itself employed to play a leading and entrepreneurial role in its affairs a Chief Executive who, as his evidence cited by my Lady demonstrates, was motivated by a desire to protect his own interests.
110.	That insight requires a recasting in more modern terms of the classic test set out by Lord Dunedin in Dunlop [1915] AC at p86:
 "The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage"
That recasting is to be found in the judgment of Colman J in Lordsvale Finance plc v Bank of Zambia [1996] QB 752 at 762G, a passage cited with approval by Mance LJ in paragraph 13 of his judgment in the Cine case [2003] EWCA Civ 1699:
"whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach.  That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred."
111.	It is important to note that the two alternatives, a deterrent penalty; or a genuine pre-estimate of loss; are indeed alternatives, with no middle ground between them.  Accordingly, if the court cannot say with some confidence that the clause is indeed intended as a deterrent, it appears to be forced back upon finding it to be a genuine pre-estimate of loss.  That choice illuminates the meaning of the latter phrase.  "Genuine" in this context does not mean "honest"; and much less, as the argument before us at one stage suggested, that the sum stipulated must be in fact an accurate statement of the loss.  Rather, the expression merely underlines the requirement that the clause should be compensatory rather than deterrent.  
112.	That at first sight produces a simple solution in this case.  It is agreed, or at least it is fairly clear, that Mr Murray's intentions were not of a deterrent nature.  Does it therefore follow of necessity that this clause cannot be penal?  The authorities demand a more complex approach.   In particular, the  respondents pointed to the last part of the citation from Colman J, that a guide as to the existence of penalty is to be found in the comparison between the stipulated amount and the possible loss that might be sustained in the event of breach.  Applying that test to this case, even if Mr Murray did no work at all during the year after his dismissal he would be better off with the stipulated sum rather than with liquidated damages, because the latter would be subject, as the former would not, to deductions in respect of tax and National Insurance contributions.  The judge, in his paragraphs 102(e) and 103, appears to have regarded that factor as conclusive in favour of the liquidated damages provision being a penalty.  I would make the following observations.
113.	First, Colman J said no more than that the comparison was a guide to the assessment of a provision as deterrent rather than compensatory.  That also, in my view, is as far as this court went in the Cine case itself.   That was a summary judgment case, involving no more than the identification of a triable issue: I would draw attention in that connexion to the observations of Thomas LJ in his paragraph [50] and of Peter Gibson LJ in his paragraph [54].  The approach that should be applied at trial would be in more general terms than that suggested by my Lady in her paragraph 42, that always requires a comparison between the liquidated and the common law damages to see if the comparison discloses a discrepancy; and then requires that discrepancy to be justified as a genuine pre-estimate of damages, or by some other form of justification..
114.	I venture to disagree with that approach because it introduces a rigid and inflexible element into what should be a broad and general question.  It is also inconsistent with warnings by judges of high authority that, at least in connexion with commercial contracts, great caution should be exercised before striking down a clause as penal; and with the tests that they have postulated to that end.  My Lady has cited in her paragraph 66 the observations of Diplock LJ in Robophone v Blank [1966] 1 WLR 1428 at p 1447.  I would add the well-known passage of Lord Woolf  in Philips Hong Kong v A-G of Hong Kong (1993) 61 BLR 49 at pp 58-59:
"Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss.  Even in such situations so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonably be anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damages provision"
And exclusive concentration on the factual difference between the liquidated and the contractual damages overlooks a principal test formulated by Lord Dunedin to identify a penalty, [1915] AC at p 87, that 
"It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach"
115.	Neither the literal wording of that test nor the spirit of it applies here.  Mr Murray's terms were generous, but they were not unconscionable. As to the absence of any requirement of mitigation in clause 17.1, to which as we have seen the judge attached determinative importance, two comments have to be made.  First, it must have been difficult to say with confidence at the time of entering into the contract what might happen to Mr Murray were he to be dismissed: provisions protecting an employee in the case of wrongful termination may take the form that they do because such an event can damage his future employability, at least in the short term.   Second, in order to meet this criticism a pre-estimate of damages clause would have to be drafted to encompass not only the fact of mitigation in terms of income from other sources but also the duty to seek such mitigation   Such a clause would directly invite disputes about the reasonableness of Mr Murray's behaviour after termination, of the kind that clauses stipulating the amount of compensation are precisely designed to avoid.  As Tindal CJ put it in Kemble v Farren (1829) 6 Bing 141 at p 148, a dictum approved in the Dunlop case, even where damages accruing from a breach can be accurately ascertained, a liquidated damages clause "saves the expense and difficulty of bringing witnesses to that point".  And a clause that made reference to the duty to mitigate would also inevitably postpone payment under the clause well beyond the termination date: again, something that the inclusion of such a clause in the contract must have been intended to avoid.  This last consideration strongly reinforces the general impression created by this case, that the traditional learning as to penalty clauses is very unlikely to fit into the dynamics of an employment contract, at least when the penalty is said to be imposed on the employer.   
116.	It is therefore necessary to stand back and look at the reality of this agreement.  Although I agree that evidence about it is sparse, I am prepared to take judicial notice of the fact that an entrepreneurial company such as MFC, promoting a product conceived by one man, will often place a high value upon retaining the services, and the loyalty and attention, of that one man as its chief executive: to the extent of including in his "package" generous reassurance against the eventuality of dismissal.   That such reassurance exceeds the likely amount of contractual damages on dismissal does not render the terms penal unless the party seeking to avoid the terms can demonstrate that they meet the test of extravagance posited by Lord Dunedin and by Lord Woolf.  I regard that as a comparatively broad and simple question, that will not normally call for detailed analysis of the contractual background.   Applying that test, which I accept differs from that adopted by my Lady, I would accordingly allow the appeal on the penalty issue.
117.	I would add this.  The difficulty that the court has in identifying a penalty in an orthodox commercial contract is demonstrated by the outcome of the Dunlop case itself.   The clause in question was a standard form, imposed on all of Dunlop's customers, that required the payment of five pounds by way of "liquidated damages" if the customer did any one of the acts of tampering with marks on the goods; selling at under list price; supplying to persons blacklisted by Dunlop; or exporting without Dunlop's consent.  Contrary to what would be thought today, the House did not view the fact that the clause was part of a contract of adhesion as undermining its status as an agreement freely bargained for: see for instance the opening paragraphs of the speech of Lord Dunedin in Dunlop v Selfridge [1915] AC 847 at p854, a case that addressed that same clause.  The clause imposed a single payment for any of a varied series of breaches; but assisted by Dunlop's evidence as to the benefits to the company of the price maintenance policy (expressly so described) that the clause imposed, as set out in particular by Lord Atkinson in both the Dunlop cases,  the House concluded that an explanation of the clause in commercial rather than deterrent terms was available. That commercial explanation lay in Dunlop's desire enforce its commercial policy without the difficulty and burden of proving the quantum of damage accruing from every particular breach of that policy.
118.	Dunlop differed from the present case in that the House was impressed by the difficulty of proving an exact loss in every, or any, of the many cases of breach to which the clause extended.  That particular problem does not affect our case.  But the cautious approach of the House, and its willingness to look at the clause in its commercial context, does at least underline the importance stressed by Lord Woolf of not moving automatically from the fact that a clause could result in greater recovery than the amount of the actual loss to an assumption that without further justification the clause must be penal in nature.
Amendment
119.	This issue does not now arise since Mr Murray has the relief that he seeks by way of the liquidated damages clause.  If the issue were live, I would respectfully agree with the approach to it set out by my Lady in her paragraphs 70-75.
Section 320
120.	The prohibition relates to an arrangement whereby the company "acquires or is to acquire" a director's assets.  It is therefore broken by the making of an agreement to do that, even if the agreement is not acted on.  The BPIM Heads of Agreement fell squarely into that category.   By contrast, this court in Re Duckwari (No 2) saw the relevant transaction as being the acquisition itself: see [1999] Ch at p 272B.  The court then seems to have held that transactions prior to that acquisition, including the funding arrangements, could not result from the acquisition: in contrast to costs attaching to the property once acquired, such as the costs of holding and realising it, including the costs of applying for a planning permission that significantly increased the property's value (see [1999] Ch at pp 272G-273B).  Under such a distinction, there can be no doubt that the fees incurred after, and in an attempt to implement, the BPIM Heads of Agreement did result from the existence of those Heads: which very existence entailed a breach of section 320.   I respectfully understand why the judge felt himself constrained by Duckwari(No 2).  The case undoubtedly causes difficulty in interpreting section 322.  However, understood as I have ventured to suggest I do not think that it enunciates a general principle such as to exclude the conclusion that my Lady proposes.
121.	I also agree that the issue therefore arising under section 727 will, regrettably, have to be remitted to the judge.   Such potentially relevant findings as he did make were based upon assumptions different from those required by the decision of this court, and it could not be fair for us now to speculate on how the judge might have viewed the matter if it had been more fully before him.