The Supreme Court has restated the principles underlying the rule against penalties in the conjoined appeals of Cavendish Square Holdings BV v Makdessi and ParkingEye Limited v Beavis.
The court confirmed that the test of whether a contract clause which provides for a payment to the innocent party on breach is unenforceable as a penalty is whether: "the provision imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party" and not simply whether it is a genuine pre-estimate of loss flowing from the breach.
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In ParkingEye, the court also considered whether the clause was unfair under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). Mr Beavis received a £85 fine for overstaying a two-hour free period of parking at a retail park. Beavis argued that the fine was unfair and unenforceable under the UTCCR and a penalty as it was not a genuine pre-estimate of loss. If he had not overstayed, the space would have either remained empty or been taken up for another period of free parking.
The Supreme Court held that the rule against penalties was engaged as the £85 was a charge for breaching the terms of the car parking licence and did have a deterrent effect. However, it was not a penalty. The charge had two main objects:
- To manage the efficient use of parking spaces for the benefit of all users by deterring long-stay traffic;
- To generate income to operate the scheme.
The court held these objectives to be perfectly reasonable. Although ParkingEye suffered no ascertainable loss as a result of the overstay, it did have a legitimate commercial interest in charging the £85. ParkingEye could not charge whatever it wanted for the overstay but £85 was neither extravagant nor unconscionable nor out of proportion to its interests.
The majority of the Supreme Court held that the charge was not unfair under the UTCCR for the same reasons. Any imbalance in the parties’ rights did not arise contrary to the requirements of good faith. ParkingEye had a legitimate interest in imposing a liability and inducing motorists to observe the two-hour limit which underpinned the business model.
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By GlobalDataThe court held that a reasonable motorist in Beavis’s position would have agreed to the terms imposing the charge which were objectively reasonable terms. The notices containing the terms were brief, simple and prominently displayed. Motorists could hardly avoid seeing the notices and were under no pressure to accept the terms. Overstaying penalties were a normal feature of such parking contracts.
The fact that a damages clause is not a genuine pre-estimate of loss, or has a deterrent effect, does not, without more, mean that it is penal. If the sum claimed is neither exorbitant nor unconscionable and serves to protect the legitimate commercial interests of the innocent party, the party claiming it is a penalty is likely to face an uphill struggle, even if a consumer where the terms are properly brought to the consumer’s notice.
Greg Standing is a partner in Wragge Lawrence Graham & Co’s motor finance team
