Just to recap: Mr Beavis outstayed his welcome in a ‘free’ car park. He was landed with a hefty bill. He tried to persuade the court that penalty clauses should not be allowed. The Supreme Court used the ParkingEye case to take a fresh look at the law in this area.

Here is what the Justices said.

Because of the difficulty of applying the four tests on the facts of ParkingEye, the judges approached the penalties question using the following logical steps.

First, the judges said that because the rule against penalties lacked an adequate theoretical underpinning was sometimes difficult to apply. It was therefore necessary to rethink the rationale of the Dunlop case.

Second, people had misunderstood what Lord Dunedin was saying. He was not proposing a set of rules to be used in every case but a set of tests that would often, but not always, be of assistance. There must therefore be some underlying rationale for the rule which could be applied where the four tests did not help. The law could reimagined by going back to the early case law and looking for alternative explanations put forward by other judges at the time which might offer an underlying rationale of the rule against penalties.

Third, the judges said, the underlying rationale was to be found in the overlooked judgment of Lord Atkinson in Dunlop. He had said ‘the essential question for the court is whether the clause under attack is “unconscionable or extravagant.”‘

Fourth, in deciding whether something is unconscionable and extravagant,  the court said that it would need to look carefully at the objective that the clause was designed to achieve: was it simply a punishment for failure to comply or was it really trying to encourage one party to do what they have already agreed to do? The former was not acceptable, the latter was.

Fifth, the court needed to consider whether there was a reason which explained the clause: whether the clause could be explained in terms of the commercial objectives of the parties.

Application: The objective of ParkingEye was to fund the efficient management of free parking. This was a legitimate commercial objective. The scheme benefitted the supermarket, the landlord, the customers who wanted free car parking and, of course ParkingEye who made money out of it.

So where does this leave us? The four tests are too difficult to apply to complex commercial transactions.  But the rule against penalties can be seen to fufil a useful role because it prevents someone from getting more than they bargained for. Damages for breach can be agreed in advance provided that they amount to no more than a genuine pre-estimate of the loss. Parties are free to structure their deals commercially within that overall framework. So in complex cases the commercial context is everything.

This can produce surprising results. Given that the damages were supposed to amount to a genuine pre-estimate of loss, one would have expected ParkingEye’s £85 charge to have been struck down. But looked at from a commercial viewpoint, the £85 charge underpinned both the commercial viability of ParkingEye’s operation and, crucially, the commercial viability of the operations of the landlord and the supermarket, as well as underpinning the availability of large amounts of free parking. Given that there is no such thing as a free lunch, or free parking for that matter, the court had to decide who was going to pick up the bill. So next time you use ‘free parking’ make sure that you don’t overstay your welcome. You might save yourself a small fortune in the process.