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Penalty clauses: a question of context?

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Jason Rix

PSL Counsel


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06 July 2015

In ParkingEye Ltd v Beavis [2015] EWCA Civ 402, 23 April 2015,  a dispute about the non-payment of a GBP 85 parking fine the Court of Appeal has explored the fundamental principles of the rule against penalties and given an indication of the courts' understanding of the jurisprudence in this area.

Mr Beavis refused to pay a GBP 85 fine after overstaying the free parking period of two hours in a car park in Chelmsford managed, but not owned, by ParkingEye. The fine was displayed on various prominent signs. ParkingEye filed a claim in the county court for the unpaid fine. Mr Beavis alleged the fine was an unlawful penalty. Judge Maloney QC at first instance found in favour of ParkingEye. This is the appeal of that decision.

Reminder of the law on penalties

Moore-Bick LJ reviewed many of the significant cases on the rule against penalties, including Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 and Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co. Ltd [1915] AC 79 to derive the following general principles:

  • The essence of a penalty is a payment of money intended to deter; the essence of liquidated damages is a genuine pre-estimate of loss.
  • A sum payable on breach will be held to be penalty if it is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
  • It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.
  • Moore-Bick LJ also considered El Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 (reported in the January 2014 Litigation Review) and concluded that the modern approach is that a clause providing for the payment on breach of a sum of money that exceeds the amount that a court would award as compensation, or which requires a transfer of property for no consideration or at an undervalue, may not be regarded as penal if it can be justified commercially and if its predominant purpose is not to deter breach. However, there is now a greater measure of flexibility and a willingness to recognise the underlying principles on which the doctrine of penalties as a whole rests in order to determine the outcome in any particular case.

A question of context

The challenge that faced the court in this case was that the decisions in which the modern approach to the doctrine of penalties has been developed have largely concerned commercial contracts under which the parties' respective interests can usually be measured without too much difficulty in financial terms. Moore-Bick LJ felt that, if commercial justification means anything more than justification as compensation for financial loss of some kind (as it appeared to him it must), it was difficult to see why justification for payment of a sum unrelated to financial loss should depend solely on commercial as opposed to some other kind of consideration.

In purely financial terms, ParkingEye suffered no direct financial loss if an individual motorist overstayed the period of free parking, because it has no interest in the land over which the licence was granted and suffered no immediate loss in terms of income that might otherwise have been derived from another motorist using the car park, as it would if customers were charged a flat rate for using it.

Moore-Bick LJ acknowledged that one of the principal purposes of imposing a parking fine was to deter motorists from abusing the facility by staying beyond the period of free parking. Christopher Clarke LJ in El Makdessi, while not ruling out the possibility altogether, had found it difficult to conceive of a situation in which a clause could be commercially justifiable despite the fact that its dominant purpose was to deter. Moore-Bick LJ felt that his remarks were made in a different context and he had already recognised a tendency on the part of the courts to return to the fundamental test of extravagance and unconscionability. Ultimately, Moore-Bick LJ held that the judge at first instance, faced with a novel situation, felt  that the parking charge was not extravagant or unconscionable and that the contract was therefore enforceable at common law.  In Moore-Bick LJ's view the judge was right.

Sir Timothy Lloyd agreed. A provision of this kind should not be struck down, merely on the basis that it is a disincentive, or deterrent, against overstaying. This is different from an ordinary financial or commercial contract where terms which require the payment of compensation going far beyond that which the law allows, in the absence of any contract provision, should be struck down. The rules about penalties applied in the present case. If the charge was grossly disproportionate, it could fall foul of the rule. It would be extravagant and unconscionable. On the facts it was not.


In the present case it was possible to present the charges, as the judge did, as commercially justifiable, but Moore-Bick LJ held "in truth they are justified by a combination of factors, social as well as commercial".

In the commercial context a "dominant purpose of deterrence" has been equated to extravagance and unconscionability, but in another context that need not be the case. This, to the author, albeit in a non-commercial context, represents a novel interpretation of the rule against penalties (which the author confesses he had always assumed would have rendered parking charges unlawful).

The court noted that it could have been argued that the parking charge was no more than a conditional payment which the motorist could choose whether to incur or not. Had this been the case the authorities on penalties for breach of contract would have been of no relevance. This method of drafting a contract so that the payment is conditional and not referenced to a breach remains the cleanest way to avoid the rule against penalties.


Mr Beavis has appealed this decision and the appeal is to be heard by the Supreme Court on 21 July 2015 by seven Supreme Court Justices alongside the appeal of Makdessi. His appeal is part-funded by money raised on the crowdsourcing website Indiegogo.