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Penalties: Another new approach
17 June 2015

The recent case of ParkingEye Ltd v Beavis [2015] has shown that even where a claimant has not suffered any direct financial loss, a court will take into account other commercial factors in determining whether a sum is an unenforceable penalty.

The traditional approach is that in order to be enforceable, the sum payable must constitute a genuine pre-estimate of loss and not amount to a penalty. A clause will be a penalty if the payment to be made is "extravagant and unconscionable" in comparison with the actual loss suffered as a result of the breach. This approach has been challenged by the courts in recent years for being too simplistic. In El Makdessi v Cavendish Square Holdings BV and another [2013], the courts applied a second stage to the test by considering whether the clause requiring payment was commercially justifiable. The court held that the dominant purpose of the clause was as a deterrent and that it was not commercially justifiable and therefore was unenforceable as a penalty.

In ParkingEye, which centred on a consumer contract, the courts adopted an even more flexible approach. In this case, a motorist had objected to paying a parking fine of £85 (for overstaying a permitted period of free parking) on the basis that the charge was an unenforceable penalty.

Although the sum payable did not compensate the car park operator for financial loss and was therefore akin to a penalty, the clause was commercially justifiable and there were various social and commercial factors which led the court (at first instance) to find that the clause was enforceable and the fine payable as a result. By parking in the car park, motorists did so on the terms displayed and the £85 charge was needed to deter people from over-staying. The purpose of the charge was not "improper" and the amount was not "manifestly excessive."

The motorist appealed the decision and the case was heard by the Court of Appeal. The Court viewed the fine as a deterrent but reasoned that this was required to prevent people from abusing the system. Further, the fine was not "extravagant" or "unconscionable" and if it were any lower, it would not be economic to enforce. The Court also considered the Unfair Terms in Consumer Contracts Regulations 1999 and concluded that these had not been breached.

This may not be the last we hear of this as ParkingEye is due to be heard by the Supreme Court in July alongside El Makdessi which is also being appealed. However, the recent cases highlight that the courts are moving away from the more rigid, traditional approach used to determine whether a provision is a penalty and will look at other commercial factors and justification.

In view of this, don't be too quick to judge a sum payable as a penalty simply because it is not a genuine pre-estimate of the actual loss that could be suffered. Take other commercial factors into account to determine whether the sum is commercially justifiable.

For more information about the issues in this article or to find out more about how the Commercial & Technology team can help you please contact Sarah Williamson on 0118 952 7247 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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