April 2016 Credit Management magazine

THOSE FACING A PARKING PENALTY CHARGE
CLEARLY EXPLAINED IN A NOTICE WILL HAVE
TO KEEP A SENSE OF PROPORTION.
is a penalty or acceptable liquidated
damages has been a topic for judges over
many years. They have had to decide
how much they can interfere in a freely
negotiated contract.
The Law Lords considered these issues
in Dunlop Pneumatic Tyre Company v New
Garage and Motor Company Ltd (1915) AC
79. The defendant had agreed to a resale
price maintenance agreement, illegal now,
and there was a financial consequence if it
failed to comply. It would pay £5 for every
tyre, etc., sold in breach of the contract.
It further agreed that this sum was to be
liquidated damages ‘and not as a penalty.’
Lord Dunedin commented that ‘the
expression used is not conclusive,’ and
now it was for the Court to ascertain
the position. He added, ‘the essence of
liquidated damages’ is a genuine preestimate
of damage. He continued by
stipulating four tests, which in summary
are: (a) a provision is penal, if it stipulates
an amount ‘extravagant or unconscionable’
in comparison to the greatest loss that
conceivably followed from the breach
of contract; (b) if a breach involved the
non-payment of money, a penal provision
required the payment of a larger sum; (c) a
provision would be presumed to be penal
if it was payable in a number of events
of varying gravity; and (d) it would not be
penal just because it was impossible to
pre-estimate the true loss.
Lord Dunedin then turned to the facts
of the case, and pointed out that, if the
defendant had sold just one inner tube
below the agreed resale price, news about
the undercutting would circulate. It would
be impossible to estimate the damage to
the sales organisation of Dunlop, so it was
reasonable to quantify the damage to £5
for each sale in breach of the agreement.
It was a fixed albeit not an extravagant
figure in these circumstances because of
Dunlop’s wider interests.
of the law on penalties. They noted that
it was ‘an interference with freedom of
contract’.
They therefore considered abrogating
the penalty rule, but observed that it was
‘a long-standing principle of English law’,
and that it was common to most ‘major
systems of law’. As long ago as the 17th
century in Strode v Parker (1694) 2 Vern
316, for example, there were proceedings
for the foreclosure of a mortgage, where
it was held that an increase of the interest
from five to 5.5 percent following a breach
NOT SO SIMPLE
Despite the uncertainty of applying each
case to the particular circumstances,
the principle is otherwise clear. In the
Makdessi case the judges of the Supreme
Court apparently disagreed. Lords
Neuberger and Sumption thought that
the English penalty rule was ‘an ancient,
haphazardly constructed edifice which has
not weathered well’. They pointed out that
some people wanted it to be demolished.
They also considered Lord Dunedin’s
four tests in the Dunlop case as being
‘considerations which might prove helpful’.
Lords Neuberger and Sumption concluded
that the tests would be useful in simple
cases, but were not sufficient for complex
ones. They were worried about what they
described as the ‘artificial categorisation’
was penal.
The Australian courts, however, have
extended the principle. As a result of the
decision in Andrews v Australia and New
Zealand Banking Group Ltd (2012) 247
CLR 205 there is now an ‘Andrews Test’,
whereby a provision may be penal even if
it is not triggered by a breach of contract.
The Supreme Court judges in London did
not want to follow this practice.
They agreed that the law relating to
penalty clauses still ‘had a place’ Lord
Hodge concluded that ‘the correct
test’ was ‘whether the sum or remedy
stipulated as a consequence of a breach
of contract is exorbitant or unconscionable
when regard is had to the innocent
party’s interest in the performance of the
contract’. The test now seems to be ‘out
of proportion’ rather than a pre-estimate
of loss. Lord Dunedin’s definitions in the
Dunlop case are no longer as significant as
they once were.
BAD NEWS FOR PARKERS!
The result is that the clause in the case
concerning the sale of shares was not a
secondary provision. It was primary, so it
could not be treated as invalid, because
otherwise the contract would have to be
rewritten. The parties moreover had freely
negotiated the terms of the contract.
Car parkers overstaying their welcome
also had to pay up. There were plenty
of notices in the area, and they had the
benefit of free parking for two hours. The
restriction prevented the car park from
being used by commuters and long-stay
users in general. The decision is helpful
to credit managers of companies looking
after car parks, although car park users
must clearly be informed of any restrictions.
More generally, however, anyone
drafting a commercial contract does not
have to be so concerned in a secondary
clause about considering a pre-estimate
of loss in the event of a breach of the
agreement. He or she will have to ensure
that any resulting payment is not out of
proportion to the legitimate interest of
the injured party. Those facing a parking
penalty charge clearly explained in a notice
will have to keep a sense of proportion.
The recognised standard in credit management www.cicm.com April 2016
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