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23 July 2015

Overstaying Your Welcome: Penalty Clauses and Liquidated Damages

Chelmsford chip-shop owner Barry Beavis is, at the time of writing, pursuing his appeal to the Supreme Court in the final chapter of the saga ParkingEye Ltd v Beavis.

Mr Beavis parked at Riverside Car Park in Chelmsford.  This particular car park, which was run by ParkingEye Limited on behalf of the landowner, provided two hours’ parking free of charge to motorists, after which a charge of £85 would be levied against the errant driver who overstayed their welcome.  Mr Beavis stayed for nearly three hours and was duly sent a parking charge for £85.  Having refused to pay, ParkingEye Ltd pursued Mr Beavis in the County Court, where they succeeded in their claim against him.  Mr Beavis appealed to the Court of Appeal and his appeal was dismissed, the Court of Appeal finding in favour of ParkingEye Limited.

Mr Beavis is seeking to persuade the Supreme Court that the parking charge of £85 is unenforceable against him, as it amounts to a penalty and further, that the charge is unfair pursuant to the Unfair Terms in Consumer Contracts Regulations 1999/2083.

Whilst the outcome is eagerly awaited by consumer groups, there is potentially a broader application for businesses that use liquidated damages clauses within their Terms and Conditions.  The Court of Appeal was staunch in its defence of the commercial and public policy reasons for ensuring that free parking spaces were not blocked up with overstaying motorists and that the parking charge did carry an element of deterrence but in essence, there was a commercial justification in doing so.

With a further case regarding liquidated damages clauses – Cavendish Square Holdings BV v El Makdessi – to be heard by the Supreme Court later in the year, the sheer cost and scale of the litigation in just these two cases should be a timely reminder of some of the general principles governing the incorporation of liquidated damages clauses into contractual documents:

  1. Does the clause appear to be “extravagant” or “unreasonable” with the predominant purpose of deterring a breach of contract?  If the answer is yes, then the clause may be penal in nature;
  2. Are the parties negotiating on a level playing field i.e. have both been represented by professional legal advisers?  If so, it will be harder to argue that a liquidated damages clause is unreasonable;
  3. Consider the categories of loss that your liquidated damages clause is intended to cover.  Does the amount payable under the clause represent a genuine pre-estimate of your likely losses?  If it does, then the clause is much more likely to be enforceable;
  4. Is the clause commercially justified?  A clause that might appear to be a penalty may still be valid if there is a further commercial justification that attaches to it;
  5. Have the terms of the contract altered since the original liquidated damages clause was agreed?  If it has, you should ensure that the sums payable still represent a genuine pre-estimate of loss.

This is an evolving area of law and consequently, it is highly recommended that legal advice is taken.  For more information on liquidated damages clauses, please contact Tom Bailey on tbailey@steeleslaw.co.uk or 01603 598126.