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The uncertain future of the law on penalty charges by Henry Hickman and Jennifer Cassidy

02/10/15

Harcus Sinclair (Henry Hickman and Jennifer Cassidy) recently acted for Mr Barry Beavis, the appellant in the highly publicised case of ParkingEye Limited (Respondent) v Beavis (Appellant) UKSC 2015/0116.  In this case, Mr Beavis sought to have a £85 parking penalty charge overturned.  It was heard by a seven-judge panel at the Supreme Court alongside the appeal in Cavendish Square Holding BV (Appellant) v Talal El Makdessi (Respondent) UKSC 2013/0280 from 21-23 July 2015.  The hearing was watched online by 5,000 people on the UKSC website, a record for a Supreme Court case.  Harcus Sinclair acted for Mr Beavis on a pro bono basis.

In the case, the Supreme Court was asked to review and clarify the law on penalty charges, as well as to consider arguments relating to the Unfair Terms in Consumer Contract Regulations 1999 and the Protection of Freedoms Act 2012.

The doctrine on penalty charges

It is 101 years since the House of Lords established the modern law on penalty charges in the judgment in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1.  The House of Lords held that, when the court is asked to consider potential penalty charges, the question is whether the predominant purpose of a contractual clause is to deter a party from breaching the contract, or to compensate the other party for a particular breach with a genuine pre-estimate of loss which may result from that breach.  One of the factors considered in deciding whether a clause is a penalty charge is whether the sum specified is “extravagant and unconscionable”.

Facts and background (ParkingEye Limited v Beavis)

On 15 April 2013 Mr Beavis parked his car in a Chelmsford car park managed by ParkingEye Limited.  The car park allowed free parking for a maximum period of two hours.  Mr Beavis overstayed this period by 56 minutes and was subsequently charged a penalty fee of £85.

ParkingEye derives its income from this car park solely from the parking charges levied against motorists who breach the maximum period of free parking.  It appears that the charges are used to fund operating costs, to cover weekly payments to the site owner and to generate ParkingEye’s profit.  ParkingEye’s whole business model therefore relies upon motorists breaching the maximum parking period and incurring parking charges.

Mr Beavis contested the charge.  He argued that the £85 charge was not a genuine pre-estimate of loss and was an unenforceable penalty.

At first instance the Judge concluded that the predominant purpose of the parking charge was to deter motorists from breaching the parking restrictions.  However, he held that the penalty charge could be enforced as it was commercially justified.  Mr Beavis appealed this decision.

The Court of Appeal dismissed his appeal on the basis that, again, the parking charge was commercially justified (because, among other reasons, the car park provided benefits to the local community, such as to allow motorists a place to park near local amenities).  The Court of Appeal however did give Mr Beavis permission to appeal to the Supreme Court.  The Consumers’ Association, Which?, was also granted permission to intervene.  The appeal was expedited in order that it could be heard alongside the appeal in Cavendish v Talal El Makdessi.

Cavendish Square Holdings v Talal El Makdessi

This case concerned a multi-million dollar commercial contract for the sale of shares in the largest advertising and marketing communications group in the Middle East.  As part of the sale, Mr Makdessi entered into a contract that included a number of restrictive covenants preventing him from competing against the interests of the group.  Mr Makdessi breached two clauses of the contract, and Cavendish withheld further payments under the contract.

The Court of Appeal held that the clauses were not genuine pre-estimates of loss, were extravagant and unreasonable and could not be commercially justified.  The clauses were therefore found to be unenforceable penalties.  Cavendish appealed the decision.

The Supreme Court

Cavendish submitted to the court that the penalty charge doctrine, set out in Dunlop should be abolished entirely and that freedom of contract should prevail.  In the alternative it submitted that the doctrine should no longer apply to commercial contracts where sophisticated parties have equal (and substantial) bargaining power.

Mr Beavis, together with the Consumers’ Association (Which?), submitted that the penalty charge doctrine should remain good law.  Whilst Mr Beavis accepted that the doctrine might no longer be appropriate in some commercial contexts, the same arguments could not apply in a consumer case.  It was submitted that the £85 charge was not a genuine pre-estimate of loss, that its predominant purpose was to deter, and that the amount charged was extravagant and unconscionable.  Accordingly, Mr Beavis asked the Supreme Court to find that the charge was a penalty and therefore unenforceable.

Conclusion

The vast difference between the facts and circumstances in these two cases highlights one of the challenges faced by a legal doctrine.  In changing or clarifying the law on penalty charges, the court will consider the implications that the decision might have both in the commercial context, where the parties are advised and may have equal bargaining power, and the consumer context.  

Judgment is expected in late autumn 2015 and until then the future of the penalty charge doctrine remains uncertain.

 

Harcus Sinclair acted for Mr Beavis in ParkingEye Limited (Respondent) v Beavis (Appellant) UKSC 2015/0116 on a pro bono basis.  If you would like to find out more about this case, or if you are currently involved in a dispute and require legal assistance, please call the firm on 020 7242 9700, and a solicitor will be happy to speak to you.

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