The case which has stood as the authority on penalty clauses for the last century is Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd . It established a series of tests to be applied to a clause to ascertain whether it amounted to a penalty, and was therefore unenforceable, including:
- where the purpose of the damages is to serve as a deterrent for breach, this will indicate that the damage is not a genuine pre-estimate of loss;
- if the damage is “extravagant and unconscionable” compared to the actual loss suffered as a result of the breach, it will be considered a penalty; and
- it is not necessary to make a precise pre-estimate of loss, for the loss to be found to be a genuine pre-estimate.
In the intervening 100 years between Dunlop and ParkingEye, the question as to whether a clause will be deemed a penalty, has been considered on numerous occasions by the courts. The analysis of the Court in ParkingEye provides a useful commentary as to how the law has developed to adapt to the modern commercial environment. This modern approach was considered and applied by the Court in ParkingEye.
The facts in the case are that Mr Beavis parked in a car park managed by ParkingEye. The car park was subject to a maximum free parking period of two hours, which was clearly signposted. Mr Beavis overstayed this period by one hour and received an £85 parking ticket. Mr Beavis failed to pay and ParkingEye commenced court proceedings to recover the fine. The court of first instance ruled that Mr Beavis should pay the parking fine. Mr Beavis appealed the decision.
The Court of Appeal rejected the appeal upholding the lower Court’s decision. In reaching it’s the decision the Court of Appeal considered whether the £85 parking fine amounted to a penalty. It determined that whilst the £85 charge was there to serve as a deterrent to motorists overstaying the two hour time limit, and could not be considered to be commensurate to the likely damages which would be sustained as a result of the breach, it was not considered extravagant or unconscionable.
In placing greater emphasis on the consideration of whether the damage was extravagant or unconscionable the Court of Appeal followed the more modern and flexible approach, developed by the courts since Dunlop and as last applied in the case of El Makdessi, whereby the courts will now consider additional factors, including social and commercial factors, to conclude whether the provision was justifiable and enforceable.
What can be taken from the decision in ParkingEye is that the fundamental test, as to whether a liquidated damages clause is a penalty, is now less focussed on whether its purpose is to serve as a deterrent and will now turn on whether the damage is considered extravagant and unconscionable.