Tungsten Electric Co Ltd v Tool Metal Manufacturing Co Ltd (No 3)
House of Lords
Citations:  1 WLR 761;  2 All ER 657; (1955) 72 RPC 209; (1955) 99 SJ 470;  CLY 490.
The appellants owned a British patent. They contracted with the respondent, authorising them to manufacture goods under that patent. The contract put a quota on the amount manufactured. Clause 5 specified that if the respondent exceeded the quota, they would be liable to pay the claimant 30% of the net value of the excess goods.
At a later date, the appellant agreed to suspend enforcement of clause 5. The parties hoped to reach a new agreement which never manifested. In 1945, the respondent sued the appellant. The appellant counter-claimed for compensation under clause 5. This claim failed, because the court held that the appellant was still waiving their rights under clause 5 when they made the counter-claim.
The appellants began another action under clause 5, but only claimed compensation from 1947 onwards. They argued that their original counter-claim for compensation was reasonable notice that they were no longer waiving their rights. The respondents countered that clause 5 was void under the penalty rule or was an unreasonable restraint of trade.
- Was the claimant still bound by their agreement to waive their right to enforce clause 5?
- Was clause 5 void under the penalty rule or the doctrine of unreasonable restraint of trade?
The House of Lords held in the appellant’s favour. The counterclaim was sufficient notice that the appellant would now rely on their rights under clause 5. Clause 5 was not a penalty clause because the additional payments were not activated by any breach of contract. The clause did not unreasonably restrain trade or run counter to any public policy. The court awarded compensation from 1947 onwards.
This Case is Authority For…
There is no universal method for terminating a waiver (also known as promissory estoppel in contract cases). All that matters is that the waiving party’s intentions are clear and unequivocal. There is also no need for the waiving party to state a precise date on which they will now rely on their legal rights. However, they must give the other party reasonable time ‘to adjust their position’ before they seek to enforce those rights.
The penalty rule only applies to clauses which require the defendant to pay a sum of money if they breach the contract. It does not apply to clauses which require the defendant to pay a sum of money in response to some other event.
The rules surrounding penalty clauses has been changed by the Supreme Court in Cavendish Square Holding BV v Makdessi  AC 1172 since this case was decided. However, it remains the case that the penalty rule is only applicable to clauses which impose detriments in response to breach of contract. This case also considered s.38(1) of the Patents and Designs Act 1907, which has since been repealed.