What makes a contractual provision a penalty? The Makdessi/ParkingEye judgment has brought a modest refinement to the understanding of penalties, as set out in the Dunlop case referred to above. The Supreme Court considered the key precedent cases such as Dunlop but, after discussion, concluded that these are ‘considerations’ which may not apply to every case, and that asking whether the clause is a genuine pre-estimate of loss or a deterrent may be helpful for straightforward LDs clauses, but not necessarily for more complex provisions where a broader test is required. Instead, the real test to determine whether the clause is a penalty is whether the provision goes beyond the relevant party’s “legitimate interest”. The Court stated that, “the question of whether it is enforceable should depend on whether the means by which the contracting party’s conduct is to be influenced are “unconscionable” or (which will usually amount to the same thing) “extravagant” by reference to some norm”. The Court went on to state that “the true test is 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. The innocent party can have no proper interest in simply punishing the defaulter”.
In ParkingEye Ltd v Beavis , ParkingEye Ltd and the owners of the Riverside Retail Park in Chelmsford agreed to manage a car park together. ParkingEye put up several notices around the car park stating that any failure to comply with a two hour parking time limit would “result in a Parking Charge of GBP 85”. When Mr Beavis overstayed that two hour limit by almost an hour, he argued that the GBP 85 charge was a penalty at common law, and therefore unenforceable, and/or that the charge was unfair and unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (“the 1999 Regulations”). At first instance, the Court disagreed with Mr Beavis and held that the charge was enforceable. The Court of Appeal upheld that first instance decision. Mr Beavis appealed to the Supreme Court. Lord Neuberger and Lord Sumption gave a joint leading Supreme Court judgment on these appeals. In both cases the clauses were found to be enforceable, with the outcome attributable to the facts of each case. The Supreme Court declined to overturn the penalty rule as a matter of principle. Lord Clarke, Lord Carnwath, Lord Mance and Lord Hodge all agreed. Whilst Lord Toulson agreed that the appeal in Cavendish v El Makdessi should be allowed, he dissented in ParkingEye v Beavis , but on the grounds that there had been a breach of the 1999 Regulations, not on the basis of any difference of view as to the law on penalties.
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