Penalty Clauses – Parking Eye v Beavis 2015

 

Parking Eye managed a car park on behalf of local retailers but they  were not the actual owners of the park. There was no charge for parking unless a motorist stayed beyond 2 hours. Mr Beavis did overstay and was charged £85 (which was subject to a reduction for prompt payment). He however defended proceedings on the basis the charge was unfair under the Unfair Terms in Consumer Contract Regulations 1999 and was also a penalty.

 

The Supreme Court (previously the House of Lords) concluded that the charge was fair and reasonable under the 1999 Act.

 

Of more interest to businesses though was their decision in relation to the question as to whether the charge of £85 could be a penalty. Businesses frequently seek to impose in their contract terms provisions which require the other party to pay specific sums of money (or in accordance with a particular formula) if that other party breaches the contract or if they want to terminate the contract early.

 

The common law position has been for many years that such a provision in a contract is only enforceable if it does not amount to a penalty.

 

The Supreme Court concluded on the facts of the case that the £85 charge was not a penalty. Even though Parking Eye suffered no financial loss if motorists overstayed, it did have a legitimate interest on behalf of the landowners in charging motorists in order to regulate access to the car park and use of the car park.

 

The key point to appreciate here is that at common law the landowners would have had a claim in the law of trespass against an overstaying motorist.

 

That still however left the question as to whether Parking Eye could charge anything they liked. The answer of the court was “no”. The court said : “It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it was providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests”.

 

Does this change the law on penalty clauses for businesses?

 

The Supreme Court said that the law had become too rigid in the area of penalty clauses and that the real question the courts need to decide (when a contractual provision is challenged as a penalty) is whether it is “penal” (i.e. a punishment) and not whether it is a genuine pre-estimate of loss (which is the test that the courts have traditionally applied).

 

A clause in a contract may not be a genuine pre-estimate of loss but it does not necessarily mean that the clause would be penal.

 

The true test as to whether a clause is a penalty or not is now said to be:

 

“Whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.

 

Businesses should therefore be reviewing with their legal advisers the relevant clauses in their terms of business (including liquidated damages clauses) and applying the test adopted by the Supreme Court and should seek legal advice as to whether they should amend their existing clauses.