Debt Recovery - Supreme Court clarifies the law on penalty clauses

Following on from the Court of Appeal case ParkingEye v Beavis last year, Mr Beavis took his appeal to the Supreme Court. An article I wrote entitled “Parking charge not an unenforceable penalty in the Court of Appeal” in May last year discusses this case.

Mr Beavis was appealing against the Court of Appeal decision which held that a contractual term imposing an £85.00 parking charge was not an unenforceable penalty.

The Supreme Court referred to the penalty rule as an “ancient, haphazardly constructed edifice which has not weathered well” however they considered it to be a long-standing, well established rule that should not be abolished or extended. The penalty rule regulates only the contractual remedy for breach of an obligation (usually payment of money) and not the fairness of the primary obligations. The judges considered the concepts of deterrence and genuine pre estimate of loss from Lord Dunedin’s tests in Dunlop Pneumatic Tyre Company Ltd. v New Garage and Motor Company Ltd. as unhelpful.

The judges found that to determine whether such a charge is an unenforceable penalty the first step is to consider whether any (and if so what) legitimate business interest is served and protected by the clause. If so secondly, whether the provision made for that interest is extravagant, exorbitant or unconscionable.

Applying this test to ParkingEye v Beavis, the Supreme Court dismissed the appeal and found that the charge of £85.00 did not contravene the penalty rule or the Unfair Terms in Consumer Contracts Regulations 1999. Both ParkingEye and the landowners had a legitimate interest in charging motorists who overstay, which extended beyond the recovery of any loss. The landowner’s interest was the provision and efficient management of customer parking for the retail outlets. ParkingEye’s interest was the income from the charge which met the running costs of a legitimate scheme, plus a profit margin. The Supreme Court judges concluded that 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.

In relation to the Unfair Terms in Consumer Contracts Regulations 1999, the charge did not come within the basic test for unfairness as there was no imbalance in the parties contrary to the requirements of good faith. ParkingEye and the landowners had a legitimate interest in inducing Mr Beavis not to overstay in order to efficiently manage the car park. The charge was no higher than was necessary to achieve that objective and the reasonable motorist would have, and often did, agree to the charge.

This is a welcome development on the law of penalties for those dealing with car parking matters and provides clarity to a previously grey area. This judgment means that it is no longer possible to argue that a breach of contract notice is unenforceable because it is not a genuine pre-estimate of loss. It seems that the Courts will now be more concerned with whether a legitimate business interest is being served and if so whether the sum claimed is extravagant or unconscionable.