PARKING CHARGES & PENALTY CLAUSES – TIME TO RE-WRITE CONTRACTS?

December 3, 2015

 

The Supreme Court in dismissing the appeal in Parking Eye Ltd v Beavis, has found that an £85 charge for overstaying in a car park is enforceable. The decision considers and updates the law on penalty clauses.

 

 

On 4th November 2015, the Supreme Court handed down judgment in the matter of Parking Eye Ltd v Barry Beavis [2015] UKSC 67. The case received much media attention as Mr Beavis, a chip shop owner from Essex, challenged a parking fine of £85 which he received for overstaying the free two hour period at the Riverside Retail Park in Chelmsford, Essex. The issue is one which many motorists feel strongly about and the case was of huge significance to the private parking industry.

 

The argument put forward by Mr Beavis was that the £85 fine was a penalty and as such, far too high to be a genuine pre-estimate of the loss that Parking Eye suffered as a result of the breach of contract. The case was therefore interesting for lawyers too since the court had to consider the law on penalty clauses which had not been considered since the decision in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co. Ltd [1915] A.C. 847 a century ago.

 

 

The effect of the ‘Penalty Rule’ is such that a contractual term is not enforceable if it has the effect of being a penalty as distinct from a genuine pre-estimate of loss resulting from a breach. The Supreme Court recognised the difficulties with the penalty rule commenting that “the penalty rule in England is an ancient, haphazardly constructed edifice which has not weathered well, and which in the opinion of some should simply be demolished, and in the opinion of others should be reconstructed and extended”.

 

Despite Mr Beavis’ arguments, the Supreme Court found that although the Penalty Rule had been engaged, the £85 charge was enforceable and not a penalty for the following reasons:

 

(1) Parking Eye had a legitimate interest in charging motorists for controlling parking in the interests of the retail outlets and their shoppers, which extended beyond recovery of any loss;

 

(2) Deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract;

 

(3) Parking Eye could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests.

 

It seems therefore that a commercially justifiable deterrent will not be considered a penalty and such a clause will now be enforceable if it exists to protect a party’s ‘legitimate interests’ even if it is not a genuine pre-estimate of loss. As stated at paragraph 32 of the judgment:

 

“The true test is 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”.

 

This will clearly have a significant impact on commercial lawyers and their clients. It can no longer be assumed that a party will not be able to enforce its penalty clause solely on the grounds that it does not reflect a genuine pre-estimate of loss and, if there is a legitimate interest, the decision makes it more difficult to challenge such clauses unless they are clearly exorbitant. Although no guarantee of an unsuccessful challenge, a contracting party may wish to state in a contract that a particular clause is proportionate and to protect relevant business interests in order to try to prevent the other side from arguing that the provision is an unenforceable penalty.

 

The decision also opens the way for penalties to be enforced in a range of situations such as missing a dentist appointment, although the Consumer Right Act 2015 may make this unlikely. It seems that whilst the decision provides greater flexibility for contracting parties, it has also introduced some uncertainty. No guidance was given by the Supreme Court on what would constitute a detriment out of all proportion and it will be interesting to see how the commercial justification argument develops. In this regard, we are unlikely to have to wait another 100 years for the case law to develop.

 

As for Mr Beavis and the parking charge cause, he is hoping that Parliament will change the law in respect of parking operators, but, even if such a change is to take place, Parliament is unlikely to make changes to the law on penalty clauses generally. It is therefore more important now than ever for those ts&cs to be reviewed and negotiated; where’s my red pen?!

 

Nina Roberts

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