The Court of Appeal has recently considered a contractual term which was alleged to be a penalty clause and therefore unenforceable. In Parking Eye v Beavis  EWCA Civ 402the defendant was a motorist who was charged £85 after he overstayed a two hour parking limit in a car park at a retail centre. After the defendant ignored the requests for payment, the claimant, who managed the parking at the car park, issued proceedings to recover the sum. In response the defendant argued that the parking charge could not be enforced because it was a penalty and that it was unfair and unenforceable.
The judge at first instance held that the parking charge had the characteristics of a penalty in the conventional sense. However, it was a clause which was commercially justifiable because it was not improper in its purpose or manifestly excessive in its amount.
On appeal, the defendant argued that a contractual term that required a party to pay a sum of money on breach, which exceeded the loss which the other can reasonably be expected to incur was a penalty. The defendant highlighted that because the predominant purpose of the clause was to deter a breach the term could never be enforceable. The defendant also pointed out that the claimant only made a profit for its activities out of breaches of contract on the part of motorists using the car park and depended on making money out of the weaknesses and negligence of those motorists.
The claimant argued that the Court should consider the principles of extravagance and unconscionability and the charges were neither of these. Although the claimant did not suffer any specific financial loss if a motorist overstayed there were commercial justifications for the charge. If the claimant could not regulate the use of the car park it would risk losing its contract with the landowner. Although an individual breach of the rules was impossible to quantify in money terms the cumulative effect of many individual breaches would be significant in economic terms.
The Court held that the terms on which the claimant had contracted with the landowner were irrelevant. In the past the critical question was whether the sum in question was extravagant (or exorbitant) and unconscionable by comparison with the damages that could reasonably have been expected to be suffered by the injured party and not intended simply to deter from breach. However, this failed to take into account the fact that some clauses cannot be justified as liquidated damages in accordance with established principles but should nonetheless be enforceable because they are not extravagant and unconscionable and are justifiable in other terms. More recent case law reflected this approach.
Viewed in purely financial terms, the claimant had suffered no direct financial loss. However, the Court accepted that the claimant might suffer a loss indirectly. The claimant was required to manage the car park. An inability to deliver the service required by the landowner would be likely to result in the loss of the claimant’s contract, with consequential financial loss and damage to its commercial reputation. The claimant therefore had a commercial interest in the due observance of the parking terms. It would be wholly uneconomic to enforce a charge for a much more modest amount.
A clause which was principally a deterrent was not necessarily automatically extravagant and unconscionable. The term had to be examined from a number of different perspectives, including proportionality to actual loss, deterrence and commercial justification. Having regard to the level of charges imposed by local authorities and others for overstaying in public car parks the charge was not improper in its purpose or manifestly excessive in amount, It was commercially justifiable to both the claimant and from the point of view of motorists at large.
Here it was inappropriate to simply compare the amount of the payment with the direct loss suffered by the claimant. Although a clause which allowed the recovery of significantly more than the loss actually suffered would be a strong indication that the bargain was extravagant and unconscionable other factors may be present which would rob the bargain of that character.
Here the charges were commercially justifiable and were also justified by a combination of factors social as well as commercial. In a commercial context a clause which acted as a deterrent might be equated to extravagance and unconscionability but in another context that need not be the case.
The Court held it was difficult to see on what basis it could be said that the charges, which were not in themselves grossly unreasonable, were to be treated as unenforceable at common law. There were benefits in having free or cheap car parking available close to the shops for limited periods. That needed a mechanism to ensure that motorists did not overstay. The charge needed to act as a deterrent and justify collection.
The Court also considered whether the clause was fair pursuant to the Unfair Terms in Consumer Contracts Regulations 1999. It held that the claimant had not breached the requirement of good faith because the terms had been prominently displayed. The motorist had not been taken advantage of. The argument that the claimant was not acting in good faith by making a profit out of parking charges could not be accepted. Parking charges are a routine aspect of life. Although the full charge was incurred however brief the period of overstaying that was a familiar characteristic of municipal car parks.
The Court considered whether the imposition of the charge, in order to promote a regular turnover of vehicles for the benefit of the community as a whole, created a significant imbalance in the parties’ relationship which rendered the term unfair, given that a motorist was made aware of the term upon entry to the car park. The Court held that, provided the charge was not set excessively high, it did not. The amount payable here was not extravagant or unconscionable and the Court therefore would not decline to enforce the contract. The appeal was dismissed.
This case suggests that a penalty clause which does not reflect a party’s direct loss may be enforceable in certain circumstances. However, it is has been reported that the defendant has obtained permission to appeal the decision to the Supreme Court so we may have further guidance on these issues in the near future.