A recent case, ParkingEye, concerning a motorist’s appeal against a £85 charge for overstaying his two hour period of free parking in a private car park has (perhaps unexpectedly) potentially wide ramifications for the construction industry. The motorist in question, a Mr Beavis, argued in the Court of Appeal that the £85 charge constituted an unenforceable penalty, just as is sometimes argued in relation to liquidated damages clauses in construction contracts.

The law on penalties is old: a century old, to be precise and is set out in the Dunlop Pneumatic Tyre case. Dunlop states that:

  • where a breach consists of a failure to pay a sum of money, and payment made as a result of such breach stipulates a greater sum, this will be considered a penalty;
  • where a number of different breaches (minor and serious) would result in a single flat sum payable by way of compensation, the presumption is that this is a penalty;
  • the fact that it may be difficult to accurately pre-estimate the loss suffered as a result of the breach does not preclude an arrangement being deemed a genuine liquidated damages clause.

But in ParkingEye the Court of Appeal moved away from the century old Dunlop approach and considered a number of different factors, both commercial and social. In particular:

  • the operator may suffer indirect losses as a result of the terms on which it operated the car park and therefore had a valid commercial interest in deterring overstaying;
  • any smaller penalty would be uneconomic to enforce against defaulting motorists;
  • the obvious benefits to consumers and businesses in having free car parking available for limited periods can be achieved only if there is a mechanism to ensure that the facilities are not abused by overstaying;
  • whilst the £85 charge was a deterrent, it was not extravagant or unconscionable; and
  • it did not breach any duty of good faith (conditions of parking were clearly displayed) or take advantage of consumers’ weakness in misjudging time.

The appeal was dismissed and the £85 charge was upheld as enforceable. Although the fee was a deterrent beyond mere compensation for the innocent party, the additional factors considered led to the conclusion that the provision was justifiable. However, Mr Beavis has been granted permission to appeal the judgment to the Supreme Court and this appeal will be heard alongside that of Cavendish Square Holding BV v Talal El Makdessi (another case on penalties).

The High Court decision in the El Makdessi case was interesting because it, in effect, added an extra “limb” to the test to see whether a clause was a penalty. El Makdessi states that where  it was decided that even where an LDs clause cannot be shown to represent a genuine pre-estimate of loss suffered, it will not necessarily be unenforceable provided that:

  1. the clause is commercially justified; and
  2. its predominant purpose is not to act as a deterrent against breach by the contractor.

So in July, the Supreme Court has the chance to revise the law on penalties: if the Supreme Court decides to go down the El Makdessi route, employers may well find it much easier to argue that LD clauses are not penalties because, even if the LDs are not a genuine pre-estimate of loss, the employer will have the additional El Makdessi arguments based on commercial justification and the predominant purpose to fall back on.

Judgment is not expected straight away following the hearing on 21 July and we will do an update when it is published.