The Supreme Court in the recent case of ParkingEye Ltd v Beavis has significantly departed from the previously well-established law relating to contractual penalty clauses.
A penalty clause is a term of a contract which is intended to punish the party who breaches the contract by inflicting a liability well in excess of the actual losses which would be suffered.
A term of a building contract which imposed an arbitrary £1,000.00 a day penalty for the work not being completed on time would be a classic example of a penalty clause.
Prior to the latest Supreme Court ruling, any clause which sought to pre-determine the level of damages payable upon breach would have to be a genuine estimate of the loss which would be suffered, not the kind of arbitrary figure included in the above example which in reality has no basis in any actual losses suffered as a result of the work being completed late.
In the ParkingEye Limited case, Mr Beavis challenged an £85.00 fine imposed by the car park operator for leaving his car parked in excess of the free period allowed. Mr Beavis claimed that the fine imposed amounted to a penalty as it was not a genuine estimate of the losses suffered by ParkingEye as a result of him having overstayed in the car park. Simply put, ParkingEye did not suffer £85.00 of losses for him having parked for longer than he should.
The Supreme Court judges, going against the established law on the point, rejecting Mr Beavis’ appeal and established a new test of whether the provision in question “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.”
A new two stage test was created. Firstly, whether any legitimate business interest is served and protected by the clause in question and secondly, if there is, is the sanction nevertheless extravagant, exorbitant or unconscionable?
In this case the Court decided that although the £85.00 charge was not a genuine estimate of the loss the parking company would suffer, it did have a business interest to protect and ,taking into account all of the circumstances, the charge was reasonable.
The Supreme Court’s new approach could have extensive implications on the law of damages and could affect a large number of cases across a wide range of disputes. All manner of contracts will now be looked at again to try and interpret potential penalty clauses in light of this new authority.