An £85 fine for exceeding a two hour parking limit is neither unfair nor unenforceable, the UK Supreme Court ruled today.  This won’t be a welcome decision for car owners but it will be for car park managers and landowners who may have had to re-negotiate car park contracts if the court had found otherwise.

In reaching their decision, the court redefined the test for deciding whether payment under a contract is a penalty and therefore unenforceable.    No longer will parties need to consider whether the charge is a genuine pre-estimate of damages but whether “the impugned provision is a secondary 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”.  In other words, the court is looking for a commercial justification and the charge must not be extortionate.

In the present case, chip shop owner, Barry Beavis had a contractual licence to park in a retail park in Chelmsford.  The terms were set out in notices posted at the entrance, including a two hour limit and an £85 charge if this was exceeded.  Mr Beavis overstayed by nearly an hour.  The car park was managed by ParkingEye, who demanded payment of the £85 charge.  Mr Beavis disputed that it was payable on the basis that it was excessive and therefore a penalty.

The Supreme Court found that the charge had two main objectives: (i) the management of the efficient use of parking space in the interests of the retail outlets and their users by deterring long stay or commuter parking and (ii) the generation of income in order to run the scheme.  On that basis, the court held that both ParkingEye and the landowners had a legitimate interest in charging overstaying motorists even if that extended beyond the recovery of any loss.

The court went further and said the charge was neither extravagant nor unconscionable having regard to practice around the UK and taking into account the clear wording of the notices.

This doesn’t mean carte blanche for car management companies demanding overstay charges. Supreme Court President, Lord Neuberger made it clear that:  “None of this means that ParkingEye could charge overstayers whatever it liked.  It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service.  But there is no reason to suppose that £85 is out of all proportion to its interests.”

Penalties have long been a bone of contention in commercial contracts.  This is the first time in a century that we have a definitive ruling on the scope and continued application of the doctrine in both commercial and consumer dealings.   The test has been redefined so that parties need to consider both whether the charge protects a legitimate interest and whether it is extortionate.  Yet, without government intervention, the thresholds remain open to interpretation.  What will be classed as extortionate and where will the limits lie? Whilst commentators pick over the bones of the case to gain further enlightenment, it’s business as usual in Chelmsford.