Last week the Supreme Court gave its judgement in the case of ParkingEye v Beavis in which it considered the issue of penalty clauses. This was the first time the law on penalties had been considered at this level, for a century.

Mr Beavis had been given an £85 parking ticket for overstaying a two hour period of free parking, by almost an hour. His case hinged on whether the fine charged by parking management company ParkingEye should be classed as a penalty and therefore unenforceable. No loss had been suffered by the car park owner or ParkingEye as result of Mr Beavis’ overstay.

The traditional test established in the classic 1915 case of Dunlop v New Garage considers whether such a charge is a genuine pre-estimate of the innocent party’s loss or a deterrent designed to deter a breach of contract? If held to be a deterrent, then up until now such charges have been classed as a penalty and therefore unenforceable, unless they could be justified as bearing some relation to the actual loss suffered. This applied notwithstanding that the parties had freely agreed the charges in advance and therefore interfering with freedom of contract.

The Supreme Court held, finding in favour of ParkingEye, that the law on penalties had not “weathered well” but stopped short of abolishing the long-established doctrine altogether, saying that it was necessary to protect parties from oppression from contracts which are not regulated in any other way. However the concepts of “deterrence” and “genuine pre-estimate of loss” were not helpful in modern times. Instead the “true test is whether the impugned provision is a secondly obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”

The Supreme Court considered whether there was a commercial justification for the parking fine and concluded that there was. The fines were beneficial to motorists themselves as they make parking spaces available to them which might otherwise be clogged up by long-stay users. Further the charge was neither extravagant nor unconscionable in the circumstances.

Interestingly the judges were also influenced by the Protection of Freedoms Act 2012, which confers on operators of private cars the right to recover parking charges from the registered keepers of vehicles, who wouldn’t necessarily be the person who parked the car and entering into the contract with the car park owner. The judges were of the view that such provisions in the 2012 Act strongly supported the conclusion that Parliament considered it to be in the public interest that parking charges such as the one given to Mr Beavis, should be recoverable, provided that they had been clearly brought to the motorist’s attention at the time he made use of the car park. In such circumstances they found it difficult to see on what basis it can be said that the charges which are not in themselves grossly unreasonable are to be treated as unenforceable at common law.

The landmark ruling has made a substantial change to the law of penalties and on the specific facts of the case provides clarity to motorists and car park owners alike. In a wider context, contracting parties will now have greater freedom to agree on the consequences of a breach of contract and it will be harder for parties to escape from such agreements that they have freely entered into. No doubt further clarification will be required from the courts as to what is considered “out of all proportion” to the legitimate interests of an innocent party when applying the new test and we will keep you updated as the case law develops.