A high-profile Supreme Court decision on a disputed £85 parking charge has led to a big change to the law on liquidated changes, which could have a major bearing on construction contracts.
There has been a significant amount of press attention around a case called ParkingEye v Beavis, which involved a chip shop owner from Chelmsford.
The basic facts of this story are that Mr Beavis over-stayed by almost one hour in a car park that stipulated that parking was free for two hours, but after that a parking charge of £85 would be levied.
Mr Beavis refused to pay the parking charge and this dispute ended up being heard in the Supreme Court, together with a commercial case called Cavendish Square Holding BV v Talal El Makdessi, as both cases highlighted important legal issues in respect of the law on penalties.
From the interest generated by Mr Beavis’ case, it was evident that the topic of parking charges was certainly emotive
But it may not have been clear to the public that what was being dealt with was a liquidated damages provision and case law spanning 100 years.
As many readers will know, the law on liquidated damages was that, to be enforceable, such a provision had to represent a genuine pre-estimate of the loss the innocent party was likely to suffer.
In the negotiation of construction contracts, this would usually prompt agonising calculations by employers trying to figure out what possible losses they would incur for contractor delay and how this could be distilled into losses attributable to each section of the works or the works as a whole.
Further still, not only did the liquidated damages have to represent a genuine pre-estimate of loss, but they also had to avoid a primary or sole function of deterrence, forcing compliance with the contract.
Supreme Court decision
In Mr Beavis’s case, it was argued that as the car park was free for two hours, and his breach did not cause any loss to ParkingEye as another motorist could take his space free of charge or the space could remain empty, the clause was a penalty.
The £85 charge was precisely what we were led to believe was prohibited – a clear deterrent to breach that was unrelated to any genuine pre-estimate.
“The law on liquidated damages has significantly changed and is no longer concerned with genuine pre-estimates”
The Supreme Court considered that while the penalty rule was engaged by the lack of a genuine pre-estimate and clear deterrent intent, ParkingEye had a legitimate interest in the enforcement of the parking charge.
Those interests included those of the nearby retail outlets and the wider public who might use the car park.
Also, it was confirmed that there was no reason to suppose £85 was out of all proportion to those interests.
Change to the law
Despite the outcry from tabloid newspapers, this means that the law on liquidated damages has significantly changed and is no longer concerned with genuine pre-estimates.
Now the law is focused on whether a provision which “imposes a detriment on the contract breaker is out of all proportion to any legitimate interests of the innocent party”.
As a consequence, we can expect the development of these provisions in construction contracts to move towards including what are clear deterrents to contractors on the basis of what will be termed the “legitimate interests” of their employers.
Theresa Mohammed is a dispute resolution and litigation partner at law firm Trowers & Hamlins