Supreme Court rules on private car park fines & penalty clauses

The Supreme Court, the highest court in England and Wales, recently reviewed the enforceability of fines issued by private car parks in the case of ParkingEye v Beavis.  The case concerned an individual who overstayed in a private car park by almost one hour and was charged £85.  The individual argued that the charge was an unenforceable penalty and unfair.  Historically, clauses that sought payment in the event of a breach of contract were only enforceable if the remedy sought was a genuine estimate of the loss which may be caused by the breach.  If the clause was designed to be a deterrent rather than to compensate the innocent party, it would be considered a penalty and therefore unenforceable.  In particular, when considering the clause, the Court would consider whether the remedy sought is “extravagant and unconscionable” when compared to the actual loss suffered.

The Supreme Court’s decision last week give us a more flexible approach to deciding whether a clause is a penalty.  The Court held that the charge was not an unenforceable penalty or unfair, concluding that ParkingEye had a legitimate interest in charging motorists that overstayed and, although the charge was higher than any loss suffered, it was not disproportionate to that interest.

In a separate appeal considering penalty clauses, Cavendish Square Holding v El Makdessi, the Court held that the penalty rule also applies to commercial contracts and highlighted that, although terms in commercial contracts may sometimes be harsh and severe, the fact that there was a legitimate interest to protect, could make such clauses enforceable.

In light of these cases, the Court set out the ‘true test’ for penalties which should be applied as follows:

• Is the penalty rule engaged?  i.e. does the clause regulate the remedy available for breach of a party’s primary obligations?
• Is there a legitimate interest served by the clause?
• If so, is the provision purporting to serve that interest out of proportion, whether being extravagant, exorbitant or unconscionable?

If the answer to each point is yes, the clause is likely to be deemed an unenforceable penalty.

In summary, parking charges can be enforceable provided they are proportionate and serve a legitimate interest.  Whether a charge is proportionate is likely to turn on how much the charge is and how it is imposed.

The new test provides for more flexibility when considering penalty clauses and highlights the importance of negotiating agreeable payments or remedies for breaches of contract in the first instance and, in the event of dispute, properly analysing the proportionality of such clauses.

If you would like to discuss this article in further detail, please contact Michael Downes on 0113 227 0291 or at michael.downes@gordonsllp.com.