This morning (4 November 2015), the Supreme Court handed down decisions in two cases concerning alleged penalty clauses. The cases are important from a legal perspective but practically too, it means that to be on the safe side, you should not overstay your time limit in a car park as the resulting charge may well be legally enforceable.

Background

The two cases in question can be summarised as follows:

1. ParkingEye Ltd v Beavis

ParkingEye managed the car park where Mr Beavis parked his car one day in April 2013. There were around 20 clear signs around the car park stating that if a driver stayed over two hours, there would be a "Parking Charge of £85". Mr Beavis overstayed by nearly an hour, was charged the £85 and refused to pay. He has since argued that the Parking Charge clause was unenforceable at common law as a penalty and/or by virtue of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCC Regulations).

Mr Beavis lost at first instance and in the Court of Appeal - he appealed to the Supreme Court.

2. Cavendish Square Holding BV v Talal El Makdessi

Mr Makdessi and Cavendish contracted for the sale from Mr Makdessi of a controlling stake in a company. The contract contained clauses restricting Mr Makdessi from certain competing activities and provided that if he breached those clauses, he would lose his entitlement to the last two instalments of the purchase price and could be obliged to sell the balance of his shares to Cavendish at a reduced price. Mr Makdessi breached the restrictive covenants but argued that the consequential clauses were unenforceable penalties.

Mr Makdessi lost initially but won his case in the Court of Appeal - Cavendish appealed to the Supreme Court.

The Supreme Court decisions

In short, the Supreme Court handed down a combined judgment and upheld the clauses in dispute in both cases. So both Mr Makdessi and Mr Beavis lost - they both have to pay the amounts claimed as a result of their breaches of contract.

To summarise:

  • The disputed clauses in the contract between Mr Makdessi and Cavendish were not penalties in the opinion of the Supreme Court - in fact they were primary obligations reflecting the importance and criticality of the goodwill of the business in relation to this purchase.
  • The Parking Charge claimed from Mr Beavis was not in the court's view a penalty clause but a clause to facilitate good management of the car park and to generate legitimate income for ParkingEye. The charge of £85 was not extravagant nor unconscionable and the clause did not result in any imbalance between the parties. One judge, Lord Toulson, dissented, considering that ParkingEye had not demonstrated that a reasonable motorist would have agreed to the term in individual negotiations on level terms and so the clause was in breach of the UTCC Regulations which afford protection to consumers.

The decision is particularly interesting in terms of the Supreme Court's statements on the penalty rule. This rule, in simple terms, has traditionally meant that where a clause in a contract provides that upon breach, the party in breach has to pay an amount that is exorbitant (bearing in mind the primary provisions of the contract), that provision will amount to a penalty clause that is unenforceable.

The Supreme Court's judgment today stated that this rule is "an ancient, haphazardly constructed edifice which has not weathered well" and also that the often used concepts of:

  • deterrence (was the clause primarily included in order to deter breach?); and
  • genuine pre-estimate of loss (was the "penalty" payment way in excess of the loss caused by the breach?) are unhelpful.

The Supreme Court said that the true and correct test in such cases is whether the disputed clause (the alleged penalty clause) 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 terms of the enforcement of the primary obligation. Taking the car park context as an example, is the "penalty" parking charge way over the initial charge to park in the first place?

These cases turn on their facts of course and each contract needs to be looked at specifically, but this ruling does potentially open up many arguments relating to provisions for payments that are consequential on breach. If I am a contracting party looking to include such a provision, I might well now try to push my luck in negotiations in reliance on these cases. As an example, such clauses are often to be found in PFI contracts and this decision may well affect the way such "penalty" clauses are looked at.

As set out above, one of the considerations in the ParkingEye case was whether a reasonable motorist would have agreed to the term in individual negotiations on level terms - the Supreme Court considered that "a reasonable motorist would have agreed". The first two hours of parking were free for Mr Beavis. If you had to sit down with ParkingEye to negotiate before parking, would you agree to an £85 charge if you overstay two hours? Are you a "reasonable motorist"?

In any event, we may see repercussions from these cases going forward. The decisions of course have only extended the approach currently being taken by the courts but arguably significantly, particularly in relation to consumers.

So be wary when you enter a car park - if you're a bit late back, you may find yourself well and truly penalised.