The rule against penalties is an exception to the principle that parties are free to contract as they please. Is it still required and, if so, does it need to be restricted, or perhaps even extended to reflect modern legal thinking? Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67; [2015] PLSCS 309 gave the Supreme Court the opportunity to consider these issues for the first time in a hundred years and will provide practitioners with plenty to consider, especially as the lengthy judgments were not unanimous on all points.
The contrast between the amounts at stake in each case could not have been more striking and indicates the importance of the decision for businesses and consumers alike. Cavendish concerned sums that ran into the millions, whereas Parkingeye, which we focus on here, concerned an £85 fine imposed on a motorist who took advantage of two hours free parking in a private car park and overstayed his welcome by an hour.
Parking schemes like this are common throughout the United Kingdom, but charges for overstaying are not subject to any statutory rules or limits. Consequently, the case turned on the law that applied to the contract between the parties. In return for free use of a parking space for up to two hours, the motorist had accepted that he must comply with the rules regarding the use of the car park, which were clearly advertised, and leave on time – or pay a charge. However, the motorist now claimed that the charge was, in fact, an unenforceable penalty.
Having rejected the suggestion that it should abolish or expand the rule against penalties, the court embarked on a wide-ranging review of the law. Importantly, it confirmed that the rule applies only to contractual clauses operating on breach of contract. It does not affect parties’ primary obligations. However, it does control the remedies that are available for breach of contract, enabling the court to consider whether obligations to pay money, transfer assets, or to forfeit a deposit following a breach are out of all proportion to any legitimate interest of the innocent party (whose interest may extend beyond the recovery of pecuniary compensation).
The rule against penalties was engaged in Parkingeye. The £85 charge was imposed because the motorist had broken his contract and was unrelated to any loss suffered by the car park operator, which actually stood to gain. However, the operator had a legitimate interest in levying the charge. It was commercially justifiable, not only from the viewpoints of the operator and the owner and occupiers of the retail park, but also of the vast majority of motorists who enjoyed short-term free parking, at the expense of defaulters, in spaces that might otherwise be clogged up by long-stay users.
The court did not consider the £85 charge to be excessive, exorbitant or unconscionable. The charge was not dissimilar from the charges imposed by local authorities and was less than the maximum recommended by the industry’s code of practice. Furthermore, the fact that the car park was well used suggested that the charge was not unreasonable. And, finally, exactly the same considerations demonstrated that the charge was not unfair for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999.
The last word goes to Lords Neuberger and Sumption, who stated that the risk of having to pay fines like this is wholly within a motorist’s control and that all that is needed is a watch.
Allyson Colby is a property law consultant
