Part Two - Recent changes to the law of penalties – and their impact on Liquidated and Ascertained Damages (LADs)
ParkingEye, in contrast, raised the issue of penalty clauses at a consumer level. ParkingEye managed a car park at a retail park offering free parking for stays of 2 hours or less with a fixed fee of £85 for parking in excess of that timeframe. Mr Beavis, the claimant, was fined £85 when he stayed for just short of 3 hours. The point at dispute was whether the fine should be construed as a penalty clause under the contract in place between Mr Beavis and ParkingEye. If so, it should not be enforced.
A significant change of emphasis
In the conjoined appeal the Supreme Court held that:
“The true test is whether the impugned provision… 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”.
In both cases the contractual clauses were held to be enforceable as they effectively amounted to deterrents rather than penalty clauses.
In ParkingEye the fine was deemed to be a legitimate deterrent given the need to properly allocate parking in the town centre. In Cavendish, the importance to Cavendish of M's compliance with the restrictive covenants contained in the agreement meant that the clauses were deterrents, not penalties.
The correct test
The Supreme Court's ruling was clear that the penalty principle should not be abolished, however it was agreed that the traditional test set out in Dunlop should be rejected. The majority held that the correct approach is now as follows:
- the liquidated damages clause must be designed to protect a “legitimate interest”
- if it is, the clause will be upheld if the protection is not out of all proportion to the interests being protected and is not “extravagant” or “unconscionable”.
When calculating an appropriate LADs figure, an employer should have regard to the nature and extent of its interest in the contractor's performance of the contract within the agreed timeframes. If the LADs figure is at such a high level as to be “extravagant” or “unconscionable" then the contractor might be able to overturn it as a penalty.