Today, the Supreme Court published its much-awaited decisions in the cases of ParkingEye Ltd v Beavis and Cavendish Square Holding BV v Talal El Makdessi. The Court has concluded that an £85 parking charge for overstaying at a car park is not a penalty and is, therefore, enforceable.  On the face of it, it may seem like a minor blow for motorists but, in fact, this judgment has much wider ramifications for businesses and consumers.

In August we reported the Court of Appeal’s judgment from which Mr Beavis (backed by the Consumers’ Association) then appealed to the Supreme Court.  At that point, the Court of Appeal had decided that a parking charge of £85 should not be construed as a penalty and was enforceable.  This conclusion was reached despite the charge having a primarily deterrent effect and not reflecting the actual loss suffered by ParkingEye – the car park operator.  The basis for the court’s reasoning was that the charge was justified by a combination of social and commercial factors.

This case has implications which go much further than parking fines. The decision affects the drafting and interpretation of all liquidated damages clauses in consumer and commercial contracts. Until today's ruling, any clause whose effect was “extravagant and unconscionable” to use the words of the hitherto landmark case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 would be regarded as a penalty and unenforceable.  Prior to ParkingEye, social and commercial factors have not been acknowledged as mitigating this.  Now the Supreme Court has brought the law on penalties - which it describes as “an ancient, haphazardly constructed edifice which has not weathered well” - up to date.  It has taken the tests set out in Dunlop and has revisited the question of whether a clause having a primarily deterrent effect should be seen as automatically extravagant and unconscionable and, therefore, a penalty.

No punches have been pulled in this forthright decision. Early in the judgment it says “In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field”.

The judgment then goes on to set out what the true test should be which 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”.

Well-advised commercial parties who enter into a contract will be hard pressed to argue that a term is an unenforceable penalty even if it satisfies this test. The Court has made it clear that “in a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach”.

In the ParkingEye case, the Court ruled that even though ParkingEye was not liable to suffer loss as a result of overstaying motorists, it had a legitimate interest in charging them which extended beyond the recovery of any loss.  They were clear that an objective of deterrence would not be considered to be 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.  The charge of £85 was not out of proportion to ParkingEye’s legitimate business interests.

We will study this comprehensive judgement carefully and provide our readers with a fuller analysis in our next newsletter. In the meantime, any contract which includes liquidated damages will need to be reviewed in line with this change in the law to ensure the parties are still able to achieve what they had intended.