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Penalties - or not?

30 Nov 2015

The Supreme Court decision in the consolidated appeals of El Makdessi and ParkingEye has provided some clarity in the complex area of the rule against penalties. It held that the relevant contractual clauses in El Makdessi and ParkingEye were not unenforceable penalties, and therefore the relevant charges could be levied. The court also held that there was no breach of the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”). (Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67).

The longstanding rule against penalties provides that a contractual clause which is a penalty is unenforceable. It was last considered by the House of Lords in 1915 in Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co. Ltd. [1915] AC 847. That case established tests for determining whether a clause was a genuine pre-estimate of loss (and enforceable) or a penalty and a deterrent (and unenforceable).

The recent Supreme Court decision did not abolish the rule against penalties or explicitly reconstruct or extend it. However, it was held that the real question is whether the charge being levied is unreasonably excessive, and not whether it is a pre-estimate of loss. The judgment means a charge may be deemed reasonable even if it greatly exceeds the cost to the trader: the trader is allowed to recover its costs, add an element for deterrence, and a further element for profit.

The El Makdessi case related to a substantial commercial contract, while ParkingEye case involved a consumer who disputed a parking “long stay” charge raised it as a separate issue under the UTCCR. In that case it was held that the relevant term was not within the basic test for unfairness.

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