ParkingEye Ltd v Beavis

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Leading cases on penalty clauses and liquidated damages, handed down in tandem with Cavendish Square Holdings v El Makdessi [2015] UKSC 67, straying from and glossing over lord Dunedin's test in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd

ParkingEye Ltd v Beavis

Naughty Mr Beavis parked in a private car park which charged a £85 for motorists overstayed a two-hour free period. Mr Beavis overstayed. He wickedly did so by almost an hour. ParkingEye levied the £85 fine.

Truculent Mr Beavis would not pay. He had a friend who was a law student, by the sounds of it. Ratghern than paying an £85 fine he declared it an unenforceable penalty (or an unfair contract under the Unfair Terms in Consumer Contracts Regulations 1999).

ParkingEye said, “we'll see you in court, buster.

”My Beavis said, “you’re on. Let’s have a massive court fight .”

And lo, it came to pass that a piffling dispute over less than a monkey led fully seven law lords (Lords Neuberger, Mance, Clarke, Sumption, Carnwath, Toulson and Hodge) to create a 124 page judgment which forges a new path in English contract law.

A pair of veritable modern-day Alberti Haddocki.

Cavendish Square Holdings v El Makdessi

Mr Makdessi sold some shares to Cavendish. Cavendish agreed to pay Mr Makdessi further sums at various stages if he did not breach his restrictive covenants.

Naughty Mr Makdessi breached the restrictive covenants. Cavendish refused to pay. Mr Makdessi argued that this amounted to an unenforceable penalty clause.

Issues

The Supreme Court reviewed Lord Dunedin's famous dicta about a “genuine pre-estimate of loss” and thought it was a bit harsh.

They said this:

The true test is whether the impugned provision is a secondary obligation which 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. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.

So what counts as a ‘legitimate commercial interest’? Barclays v Unicredit had some things to say on this. What it is and whether a provision is proportionate to that interest, is a matter of fact.

This concept of proportionality tied to the innocent party’s legitimate interest is the real paradigm shift in the law. Courts must now consider what, if any, legitimate business interest is served and protected by a given clause, and then consider whether the clause is proportionate to such interest.

Second, the Supreme Court confirmed the principle that only “secondary” obligations, that come about upon breach of “primary” contractual obligations, can be penalties. What counts as a primary or a secondary obligation isn’t all that obvious. Was the obligation to sell shares a primary or secondary obligation?