Penalty Clauses in Contracts: Update

Parking charges in private car parks are constant irritation for motorists and for that reason the decision in ParkingEye Limited (Respondent) v Beavis (Appellant) [2015] UKSC 67 has been of great interest to many.

The case concerned a parking fine of £85 that the Defendant had been given after overstaying in a private car park managed by the Claimant. The Defendant refused to pay the parking fine as he considered it disproportionate.

The Claimant issued proceedings. The Defendant sought to defend himself by advancing the argument that it is a well established common law rule that a contractual penalty cannot be so high as to constitute a fine.

He also argued that the fine was disproportionate to the level of loss of suffered by the Claimant. At the first hearing the Defendant lost and appealed the decision to the Court of Appeal.

Court of Appeal

The Court of Appeal refused the Defendant’s appeal. It held that the charge was not disproportionate or unenforceable at common law.

The Court took the view that the Claimant had a “genuine commercial justification” for issuing the charge. The Court also drew a distinction between the relationship between the Claimant and Defendant and what it considered a normal commercial contract.

Court considered that the Claimant and Defendant were not in a contractual relationship (as they were acting as agents for the owners), but rather that the Claimant had granted the Defendant a licence to occupy the car park.

Due to this relationship, the fact that the charge was intended predominately as a deterrent did not make it unenforceable. Mr Beavis was not satisfied with the decision and appealed again, this time to the Supreme Court.

The Supreme Court

Unfortunately for Mr Beavis, the Supreme Court also found against him. The majority of the court held that the existing common law authorities were unclear and unfit for purpose, Lord Sumption going as far as to state that the penalty clause rule was an:

ancient, haphazardly constructed edifice which has not weathered well.

The Court consequently took the opportunity to reformulate the law in this area.

The Court decided that, when considering whether a penalty clause was enforceable,

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.

Applying this to Mr Beavis, the court decided that while the parking fine did engage the penalty clause rule, it did not fall foul of the above test.

This was because both ParkingEye and the landowners had a legitimate interest in charging overstaying motorists, which extended beyond the recovery of any loss.

Further, the charge was neither extravagant nor unconscionable, having regard to practice around the United Kingdom, and taking into account the use of this particular car park and the clear wording of the notices.

Consequently, the parking fine was enforceable.

Summary

While the facts of Mr Beavis’s case were trivial, the Supreme Court’s judgment is not and can be considered the leading authority on contractual penalty clauses in both consumer and commercial contracts.

This makes this decision important both for those who draft contracts and also litigators considering whether such a penalty is enforceable.

GET IN TOUCH

Are you in dispute over the enforceability of the terms of a contract? If so, the experienced commercial litigation solicitors at Levi Solicitors in Leeds, Wakefield, Bradford, Manchester and London who can offer you a free consultation on 0113 244 9931.

With solicitors in Leeds, Wakefield, Bradford, Manchester and London we can bring our experience and knowledge to your matter, irrespective of where you are in the region.

 

James Gould

James Gould

Solicitor

Tel: 0113 297 3183
Email:jgould@levisolicitors.co.uk
James Gould