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Penalty Clauses - A case study

View profile for Sarah Canning
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Penalty clauses have been a source of much litigation over the years. The recent case of ParkingEye Ltd v Beavis [2015] UKSC 67 is a case in point. It has been a significant decision maker for contract lawyers and litigators when they’re advising their clients in this regard.

The case

The background to the case relates to the management of a retail car park. ParkingEye Ltd agreed with the owners of Riverside Retail Park to manage the car parking on their site. ParkingEye displayed notices throughout the car park, advising that a failure to comply with the two-hour time limit would result in a parking charge of £85.

Mr Beavis parked in the car park and unfortunately overstayed the two-hour limit by almost an hour. He received a demand for payment of £85 and argued unsuccessfully before the Supreme Court that the £85 charge was unenforceable at common law as a penalty - under the unfair terms in Consumer Contracts Regulations 1999.

The outcome

The Supreme Court held that the charge was enforceable. Their assessment of the clause began with the premise that it didn’t matter that £85 was not a genuine pre estimate of financial loss, which is traditionally the test for penalty clauses. The court held that:

  1. Generally, the law does not uphold a contractual remedy where the adverse impact of that remedy significantly exceeds the innocent party’s legitimate interest.
  2. An innocent party may have a legitimate interest in performance, which extends beyond the recovery of pecuniary compensation. In this particular matter, it wasn’t necessary therefore to prove direct financial loss, but rather consider the general commercial interest. This was to stop people abusing the car park and limiting its use for customers of the retail park solely.
  3. The court found that the concept of a genuine pre estimate of loss, and that of a deterrent, were unhelpful generally, despite them being the traditional tests for penalties.

The true test for a penalty is whether the provision is a secondary obligation. This imposes a detriment on the individual breaking the contract that is out of all proportion to any legitimate interest of the innocent party when enforcing the primary obligation.

It will be interesting to see how the new approach to penalty clauses, set out in this case, continue to be interpreted by the courts.

If you’d like help or advice on penalty clauses, please do get in touch on 01908 660966 or email me on sarah.canning@franklins-sols.co.uk.

Image courtesy of 123rf.com.

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