In this blog post, we consider the impact of the recent Supreme Court decision in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis (Beavis).
The Supreme Court welcomed the opportunity to consider the “penalty rule” in two cases at the opposite end of the financial spectrum. As well as further clarifying the position with regard to contractual penalties, both through the application of principles to the facts and through further explicit guidance, Beavis is an important reinterpretation of consumer protection law.
In Cavendish Square v El Makdessi, the court held that neither clause subject to challenge was a penalty clause. In Beavis, the court found that the penalty rule was engaged but that the operative clause was not a penalty. The court gave valuable guidance as to what could constitute a legitimate interest of a party (or third party) seeking to uphold a clause. This blog post addresses the commercial impact of Beavis before going on to consider the ramifications of the decision for consumers.
The facts
ParkingEye Ltd operated a car park owned by a third party and near a retail park. Signs at the car park set out the terms of the contract entered into when customers parked there. As far as relevant, these terms were that the maximum permitted stay was two hours and a breach of any of the terms would result in a charge to the customer of £85. Mr Beavis parked there for two hours and 56 minutes. His argument was that the £85 charge was an unenforceable penalty, and that it was an unfair term as described in the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations).
Penalties and Beavis
The Supreme Court decided that the £85 was not an unenforceable penalty at common law, as it was not out of all proportion to ParkingEye’s legitimate interest in the performance of the contract.
Beavis is commercially significant because the judgment of the court demonstrates the potential width of “legitimate interests”, which need not be financial and could, probably, include social interests. It was conceded by ParkingEye that the predominant purpose of the charge was to deter overstaying, and that its recoverable loss (but for that clause) would be nominal only. The facts of the case demonstrate emphatically that the dichotomy between a penal clause and a pre-estimate of loss has been dispensed with. Even on these facts, in our view the outer limits of the rule have not been reached.
The judgment is also significant because the court considered whose legitimate interest may be taken into account in assessing the relevant clause. Lords Neuberger and Sumption held that:
“The penal character of this scheme cannot depend on whether the landowner operates it himself or employs a contractor like ParkingEye to operate it. The motorist would not know or care what if any interest the operator has in the land, or what relationship it has with the landowner if it has no interest. This conclusion is reinforced when one bears in mind that the question whether a contractual provision is a penalty turns on the construction of the contract, which cannot normally turn on facts not recorded in the contract unless they are known, or could reasonably be known, to both parties.”
In Lord Mance’s formulation, the outcome of the test depends on assessing “all of the interests obviously involved”.
In our view, this seminal judgment provides welcome clarity as to the applicable test, yet the introduction of a legitimate interest test enlarges the scope to avoid what would otherwise, and conventionally, have been an unlawful penalty clause. It is clear that deterrent clauses are permissible if they are not out of all proportion to the interest being protected. The legitimate interest in question need not even be that of one of the contracting parties.
The Regulations
The Regulations give effect to European Council Directive 93/13/EEC of 5 April 1993. Regulation 8(1) states that an unfair term is not binding against a consumer. Regulation 5(1) states that a contractual term which has not been freely negotiated is unfair if “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer (emphasis added).”
The interpretation of this provision by the CJEU in Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa was considered in the leading judgment in Beavis of Lords Neuberger and Sumption, with which Lord Toulson dissented.
Significant imbalance
Aziz states that “it must in particular be considered what rules of national law would apply in the absence of an agreement between the parties in that regard” when considering whether there is a significant imbalance in the parties’ rights and obligations.
The leading judgment in Beavis states that this question “depends mainly on whether the consumer is being deprived of an advantage which he would enjoy under national law in the absence of the contractual provision”.
This raises two points.
First, the question posed by the Supreme Court is substantively different to that contemplated by the CJEU. This much is clear by a comparison with Lord Toulson’s dissenting judgment, in which he compared the £85 to the damages ParkingEye could recover in breach of contract or trespass but for the charge. By contrast, Lords Neuberger and Sumption do not undertake a direct comparison, per se, but ask whether a consumer has been “deprived of an advantage”, that is whether any of the consumer’s rights have been excluded. This is a much-restricted reading of Aziz.
Secondly, the Supreme Court’s gloss on Aziz emphasises the importance of this (now subtly different) test. In Aziz, the factor must be given “particular attention”; in the leading judgment in Beavis, the answer to whether there is significant imbalance “mainly depends” on the point. Again, by contrast, Lord Toulson states only that the court is “required to evaluate” the matter.
Taken together, it seems clear that these two developments water down the “significant imbalance” test under the Regulations. The interpretation given to this test in Beavis will make it more difficult for consumers to challenge clauses such as these. The first point, in particular, makes it unclear when such a challenge could be successful without establishing that the challenged provision is an exclusion clause of some description.
Good faith
Aziz states that the test for good faith is:
“whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations.”
This is the subject of the main difference between the majority and Lord Toulson’s dissenting judgment in Beavis.
The closing words of the lead judgment encapsulate the reasoning of the majority:
“In our opinion, a hypothetical reasonable motorist would have agreed to objectively reasonable terms, and these terms are objectively reasonable.”
Lords Neuberger and Sumption drew on the fact that similar charges are common in car parks, and that the signage clearly identified the existence of the £85 charge. There was also further reference to ParkingEye’s “legitimate interest” in the scheme.
Lord Toulson’s judgment applies a strikingly different analysis. In Lord Toulson’s judgment, the good faith test places the burden on the non-consumer party, contrary to the position in relation to penalty clauses. He states that the “seller or supplier” must demonstrate that it could reasonably expect the contract to have been freely entered, rather than the consumer having to justify an interference with freedom of contract. In his judgment, he states that it was not open to the court to depart from Aziz in this way, and hints that the matter may require a preliminary reference to the CJEU.
Conclusion
In order fully to understand the commercial significance of the development of the law of penalties in this case, it is important to read the judgments of the Supreme Court fully in respect of both cases, Makdessi and Beavis. Further to that, the lead judgment in Beavis appears to restrict the rights of consumers to challenge clauses as unfair in a way which may be open to future challenge in the CJEU.
Though the Regulations have now been repealed, the replacement provisions in the Consumer Rights Act 2015 are substantially the same. In our view, the result in Beavis would have been the same if the wording of the Act had been considered, and would have been equally open to challenge in the CJEU.
