A recent Supreme Court ruling centred on a parking fine may have far-reaching implications on the law of damages, which will affect a large number of cases covering a wide range of disputes.
Up to now, any clause you wished to include in a contract that set the level of damages you would receive if the other party breached had to be a genuine pre-estimate of the loss you would suffer.
If not, then the clause was likely to be struck out for being a penalty. This is an important distinction: a penalty clause is there to punish the breach of contract, rather than remedy it by reasonable reimbursement.
The legal test has been applied for a hundred years, following Dunlop Pneumatic Tyre Company v New Garage & Motor Company Ltd  AC 79. Now, though, following the case of ParkingEye Ltd. v Beavis  UKSC 67, there will be greater interpretation, on a case by case basis.
Mr Beavis appealed an £85 fine by ParkingEye Limited for leaving his vehicle at a car park beyond the two-hour free period shown on signs round the site. He claimed the fixed charge was a penalty, as it did not genuinely pre-estimate ParkingEye Limited’s loss and/or it contravened the Unfair Terms in Consumer Contracts Regulations 1999.
Rejecting Mr Beavis’ appeal, the Supreme Court ruled that the true test of a penalty is whether that clause “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.”
It went on to say that a new two-stage test should be applied:
1. Whether any (and if so what) legitimate business interest is served and protected by the clause; and
2. If so, is the provision made for the interest nevertheless extravagant exorbitant or unconscionable
The Court ruled that although the fee was not a genuine pre-estimate of loss ParkingEye would suffer (there would be no loss from an overstay), the sum was similar to other providers’ charges in the area and the car park was frequently used, despite signs warnings about overstaying. It decided that the penalty was reasonable, in these circumstances.
The changes to the law on penalty clauses may lead to an increase in cases: the new test is fact-specific and will require a court to decide whether there is a legitimate interest and whether a charge is ‘extravagant, exorbitant or unconscionable’ in the circumstances.
If you have any questions about the ruling, its implications for your business or yourself, please contact James Martin on 00 44 113 399 3425 or email email@example.com.