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Index

Page

Flood liability and public authorities

Will Thomas 2 – 4

An employer’s right to snoop?

Sarah Hooton 5 - 8

European Single Procurement Document

Jennifer Grigg and Lynne Rathbone 9 - 10

Just the starting point…

Angela Konteas 11 - 12

New penalty clause test

Lynne Rathbone 13 – 16

CASTA

Angelica Hymers 17 - 18

The articles in this newsletter are for general information only. They do not represent legal advice. You should always take legal advice before pursuing any course of action discussed in this newsletter. If you would like to discuss any of this issues raised in this newsletter please call us +44 (0)115 976 6000.

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The months of December 2015 and January 2016 saw Storm Frank and Storm Desmond batter our shores and

bring record-breaking rainfall and flooding to parts of northern England, Wales and Scotland. These storms

were the latest in a series of destructive weather events which have occurred across the country in recent

years as we continue to grapple with the effects of climate change.

Whilst the media focuses on central government’s investment in flood defences and the insurance industry’s

response, it is increasingly apparent that this is an issue that is here to stay. As we look forward to more wet

and mild winters, it is worth recapping on the law surrounding flood liability and how public authorities

should act to ensure their potential liability is best managed in the future.

Natural nuisance

This article will focus on the common law surrounding flooding as a natural nuisance. It will not focus on

flooding which occurs as a result of an unnatural use of the land, i.e. flooding resulting from a breach of a

reservoir dam or artificial water body. Such flooding is ordinarily covered by the strict liability principle in

Rylands v Fletcher [1873] All ER Rep 1 and is outside the scope of this article.

Historically, the courts upheld the principle that flooding is natural and, as such, no-one can be blamed for

causing it. However, gradually the courts have come to recognise that in some cases it is often the

neighbouring land use rather than nature that is the cause of the flooding. The effect of this has been to put

increasing duties on parties to take action to avoid flooding in certain circumstances.

The current law on flood damage as a natural nuisance was most recently summarised in the Court of Appeal

case of Vernon Knight Associates v Cornwall Council (the Council) [2013] EWCA Civ 950. This case concerned

the liability of a local authority for floodwater which had escaped from its land onto neighbouring land.

There were flood hotspots on a local highway owned by the Council. During periods of excessive rainfall, it

was known that those hotspots often flooded. The Council, however, employed persons to attend to those

areas to check and clear debris from the highway drainage system.

On two occasions, the Council’s contractors, without explanation, failed to follow their normal practice and

debris was not cleared from the hotspot. During a period of excessive rainfall, this caused the hotspots to

flood and floodwater to escape onto neighbouring land.

The judge, having reviewed the authorities in relation to the liability of land owners for nonfeasance in

respect of natural nuisance, set out the following principles:

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i. A landowner owes a measured duty in both negligence and nuisance to take reasonable steps to

prevent natural occurrences on his land causing damage to neighbouring properties.

ii. In determining the content of the measured duty, the court will consider what is fair, just and

reasonable as between the two neighbouring landowners. It must have regard to all the

circumstances, including:

a. the extent of the foreseeable risk;

b. the available preventive measures;

c. the costs of such measures; and

d. the resources of both parties.

iii. Where the defendant is a public body with substantial resources, the court must take into account

the competing demands on those resources and the public purposes for which they are held. It may

not be fair, just or reasonable to require a public authority to expend those resources on

infrastructure works in order to protect a few individuals against a modest risk of property damage.

The court stated obiter that the availability of insurance to the neighbour who has sustained the damage is

unlikely to be relevant when considering the content of the landowner’s duty.

It was also noted that the common law did not operate in a vacuum and that several statutes (such as the

Public Health Act 1936 and the Water Resources Act 1991) contained provisions designed to help prevent

flooding. For instance, a statutory nuisance exists under s. 259(1)(b) of the Public Health Act 1936 where the

obstruction of water courses or drains impeded the proper flow of water so as to cause a nuisance.

Ultimately, the court held that even after making due allowance for the pressures on local authorities, the

duty on the Council did require it to keep the drains functioning on that particular stretch of highway in order

to prevent flooding to the road and neighbouring land.

Managing potential flood liabilities

In the case of Vernon Knight Associates, the process of determining the nature and content of a landowner’s

duty (if any) to prevent natural flood nuisances causing damage to neighbouring land was described as a

‘somewhat daunting multifactorial assessment’.

Therefore, whether a public authority is held liable for natural floodwater which escapes from its land onto

neighbouring land, will not always be easy to predict and will depend on the facts of each case.

However, where known flooding hotspots exist and could be managed by taking simple and obvious steps,

public authorities should take such steps. By example, ensuring that a reasonable system of inspection is put

in place to check and clear any drains or ditches which are known to, in times of excessive rainfall, overtop

onto neighbouring land would be prudent.

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Public authorities should also ensure that estate managers and officers are made aware of the law on flood

liability so that they may take such reasonable steps to manage flood risks as they deem appropriate.

By taking such steps, public authorities should be able to reduce any potential flood liability that may arise in

the future.

Will Thomas | +44 (0)115 934 2007 | will.thomas@brownejacobson.com

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The European Court of Human Rights (ECtHR) handed down its decision in Bărbulescu v Romania last month in

a case which considered an employee’s right to privacy under Article 8 of the European Convention on Human

Rights (ECHR) compared against an employer’s right to monitor a work-related email account. Some of the

media reports suggest that the case gives employers much more free reign to monitor (or snoop) on their

employees during employment. But is this in fact the case?

Article 8 of ECHR

Article 8(1) - everyone has the right to respect for his private and family life, his home and his

correspondence.

Article 8(2) – there shall be no interference by a public authority with the exercise of this right except such

as is in accordance with the law and is necessary in a democratic society in the interests of national security,

public safety or the economic wellbeing of the country, for the prevention of disorder or crime, for the

protection of health or morals, or for the protection of the rights and freedoms of others.

Background of Bărbulescu

The employer informed the employee that his email account showed that he had used the internet for

personal purposes. This was denied by the employee who claimed that he had only used his email account for

work purposes. When presented with a 45 page transcript of his personal communications to his brother and

fiancé (over an 8 day period), the employee asserted that by accessing his correspondence, his employer was

accountable under the Romanian Criminal Code.

The employee was dismissed by his employer for sending personal emails from his work email account during

working hours. The employer’s policy (of which the employee was aware) was that the email system could

not be used for personal use at all.

The employee challenged his dismissal in the Bucharest County Court but his case was dismissed. He appealed

to the Bucharest Court of Appeal but his appeal was also dismissed. He then appealed to the ECtHR.

Decision of the ECtHR

The ECtHR held that Article 8 was engaged here. It was not disputed that there was an absolute prohibition

on using the employer’s computers and resources for personal purposes. With this in mind, the ECtHR went

on to consider whether there was still a reasonable expectation that the employee’s communications would

not be monitored. Here, there was a dispute between the parties as to whether prior notification of

monitoring had been given. The content of the communication had been accessed and related, among other

things, to subjects such as the employee’s health and sex life. The employer also appeared to have accessed

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both the employee’s work and personal Yahoo Messenger accounts. The ECtHR was satisfied that the

employee’s private life and correspondence were affected by the measures taken and that Article 8(1) was

engaged.

In this case, the employer was a private company; the focus of the ECtHR was not, therefore, on the

employer but on whether the State had, in the context of its positive obligations under Article 8, struck a fair

balance between the employee’s right to respect for his private life and correspondence and his employer’s

interests. It therefore limited its findings to the monitoring of the employee’s communications within the

framework of disciplinary proceedings. In particular, the employee had not sought to argue that other laws

which provided remedies for breach of privacy were inadequate.

The ECtHR noted that both the County Court and the Court of Appeal attached particular importance to the

fact that the employer had accessed the employee’s email account in the belief that it had contained

professional messages (as alleged by the employee). (As an aside, it makes no comment on the accessing of

the employee’s personal email account in this context.) The transcript appeared only to have been relied

upon to support the alleged disciplinary breach (i.e. the sending of personal messages during work time) and

not to set out or detail the content of the messages. Lastly, the ECtHR held that it was not unreasonable for

an employer to want to verify that an employee was completing their professional tasks during working hours.

It held that the employer’s monitoring was limited in scope (it did not look at other data or documents on the

computer) and was proportionate.

In view of the above, the ECtHR held that there was nothing to indicate that the State had failed to strike a

fair balance, within their margin of appreciation, between the employee’s right to respect for his private life

and his employer’s interests and accordingly no breach of Article 8.

Impact of the decision

The impact of this particular decision is probably fairly limited within the UK, given the low number of

employers who will now have an absolute prohibition on the use of work computers/telephones for personal

use. It must also be viewed in the context of existing case law in respect of Article 8:

Halford v UK - there was a breach of Article 8 when an Assistant Chief Constable’s telephone calls were

intercepted. There was no evidence that she had been given any warning that calls made would be liable to

interception and she had been given two telephones, one specifically designated for her private use.

Copland v UK – there was a breach of Article 8 when an employee’s telephone, email and internet usage was

monitored. No warning in respect of potential monitoring was given, nor was there a policy in respect of

monitoring.

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There is also existing UK legislation (for example the Data Protection Act 1998 and the Regulation of

Investigatory Powers Act 2000) which limit the extent to which employers can monitor their employees’

communications.

The Information Commissioners’ Employment Practices Code gives specific guidance in respect of the

monitoring of employees and stresses both the importance of impact assessments before any monitoring

takes place and of making employees aware of what monitoring is taking place and why it is taking place

(unless covert monitoring can be justified).

Practical steps

In view of the pace of developments within social media and technology as a whole, it would worth checking

whether existing policies remain suitable for purpose. For example, any policies should:

Clearly set out when employees may or may not use the employer’s telephone, email or internet

systems for private communication – for example, is use to be banned altogether, restricted to

particular times or restricted to any amount? As devices continue to become more portable, consider

whether any further restrictions are required outside of normal working hours.

Clearly set out whether employees are permitted to make use of their own devices during working

time for personal use.

Identify whether there are any restrictions on the types of material that can be accessed or copied,

or included within correspondence.

(If personal communication is allowed) set out how any such communication should be marked.

Identify any restrictions on the use of social media particularly where comments are attributed to the

employer or where the employer is otherwise identifiable. This should also link into other policies

such as those dealing with bullying and harassment.

Set out any prohibitions on downloading software and reminders about breaching copyright.

Explain what monitoring will take place, how it will be conducted and what it will be used for. It

would also be worth identifying any safeguards or limitations in place – for example, that monitoring

will only take place by particular individuals or after particular authorisation has been given.

Explain the potential consequences of any breach of procedure by an employee.

Lastly, by way of reminder, although Bărbulescu concerned a private company and therefore the ECtHR was

considering only the States involvement in the subsequent court proceedings, public authorities are under an

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obligation to comply with the ECHR by virtue of section 6 of the Human Rights Act 1998. Public bodies will

therefore need to ensure that they are not interfering with the right to private life save where the provisions

of Article 8(2) apply.

Sarah Hooton | +44 (0)115 976 6033 | Sarah.Hooton@brownejacobson.com

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On 5 January 2016, the European Single Procurement Document1 (ESPD) was adopted by the European

Commission2 in accordance with Article 59(2) of Directive 2014/24. The ESPD came in to force in England,

Wales and Northern Ireland on 26 January 2016 and it is intended to reduce the administrative burden of

bidders for public contracts and thereby aid small and medium-sized enterprises (SMEs).

Currently, many contracting authorities require all potential bidders to provide full documentary evidence at

the start of a procurement to prove that they meet the criteria for the contract, are financially suitable and

are able to complete the work (although the Lord Young reforms have had some impact on this). This can be

time-consuming and costly, particularly for SMEs who may not have the resources to prepare the relevant

documentation. The ESPD will unify the systems used across all member states.

The ESPD is intended to allow tenderers to electronically self-declare that they meet the conditions, and

contracting authorities must accept the ESPD as preliminary evidence that the tenderer does not meet the

conditions for exclusion and does meet the relevant selection criteria for the contract (Public Contract

Regulations 2015 (PCR), Regulation 59(1)). Contracting bodies can require tenderers to provide supporting

documents at any time in the process when “it is necessary to ensure the proper conduct of the procedure”

(PCR, Regulation 59(8)) and must require the tenderer to submit up-to-date supporting documents before the

contract is awarded.

A free, web-based system is being developed for member states and businesses because, after 18 October

2018, there will be an obligation on all member states to use electronic communication. Until that time, the

date of which is dependent on when the relevant member state implements mandatory e-submission, the

ESPD may be completed manually and then sent electronically.

Annex 1 of Regulation 2016/7 provides instructions on the use of the ESPD, for example when it can be used,

exclusions due to misrepresentation, and what information will be needed. Annex 2 contains a standard

format for the form which can be used until the web-based system is online.

Elżbieta Bieńkowska, the Commissioner responsible for Internal Market, Industry, Entrepreneurship and SMEs,

stated that:

"By reducing the volume of documents needed, the European Single Procurement Document will make it

easier for companies to take part in public award procedures. Public administrations will benefit from a

wider range of offers ensuring better quality and value for money."

1 Contained in the Commission Implementing Regulation (EU) 2016/7, published 06.01.2016 2 http://europa.eu/rapid/press-release_MEX-16-4_en.htm

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We are still awaiting guidance from Crown Commercial Services on how the ESPD will work

with their standard Pre-Qualification Questionnaire; the documents cover many of the same

requirements.

Please view Regulation 2016/7 in full here.

Jennifer Grigg | +44 (0)1392 458773 | jennifer.grigg@brownejacobson.com

Lynne Rathbone | +44 (0)1392 458739 | lynne.rathbone@brownejacobson.com

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The Communities and Local Government Committee’s report ‘Devolution: the next five years and beyond’3

was published just days after the Cities and Local Government Devolution Act 2016 (the Act) came into force.

The inquiry spanned four months and heard evidence from a range of experts, politicians, academics and

think tanks. The report makes a number of strong recommendations and it is now for the government to

provide its response to the challenges laid down by the Committee.

The Committee’s recommendations include that the government should clarify once and for all its long-term

objectives for devolution and the means by which success will be measured. Use of terms such as ‘joint

working’ and ‘co-commissioning’ in devolution deals should be challenged or at least considered a first step

towards fuller devolution. There was support for the principle of ‘devolution by default’ across all

government departments. All of which paints a picture of a less-than-joined up Whitehall which is not yet

speaking about devolution with one voice. It is interesting that Department for Communities and Local

Government' (DCLG) still talks about “radical decentralisation of powers” rather than using the term

devolution.4 Many would say there is a fundamental difference between the two terms.

While central government needs to get to grips with its changing role, local authorities are already at various

stages of their devolution journey. Some are now finalising details of collaborations with neighbouring areas,

mainly though not exclusively through combined authority structures. We are helping some of our clients with

preparation of the statutory scheme as well as helping them to establish governance and constitutional

arrangements. Some local authorities are considering some form of public consultation to share details of the

deal, which we think is important given the potential for further change and reform in future. As we have

noted in previous articles, one particular aspect of the Act as it progressed through Parliament, and as

highlighted in the Committee’s report, is the lack of public engagement and consultation to date. Although

mainstream newspapers were quick to report on Greater Manchester’s ‘£6bn NHS budget devolution’ back in

February 2015, there has been little interest since in the Act and the implications of some of its provisions by

the media, leading to a corresponding lack of awareness about the ‘devolution revolution’ amongst the

public.

Looking ahead, the pressure will soon be on for combined authorities to leverage their position and deliver

the savings and efficiencies needed to meet the targets on which their devolution deal is predicated.

Considering that most of the ‘low hanging fruit’ has been exhausted, this will be no easy task. The scale of

combined authorities is likely to lend itself to sharing of functions across some if not all constituent

members; it seems almost inevitable that shared services will be foisted on local authorities that do not

3 http://www.parliament.uk/business/committees/committees-a-z/commons-select/communities-and-local-government-committee/inquiries/parliament-2015/planning-and-productivity-1/ 4 https://www.gov.uk/government/news/radical-shake-up-of-power-puts-communities-in-control

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already have it. Yet, although the Local Government Association reported last year that shared services had

saved almost £500m since 20125, that is still not enough to match the scale of the cuts to come.

In January we held a roundtable for heads of legal from a number of local authorities to discuss the impact of

austerity and devolution and the rise of shared services as a response to the cuts. The message we heard is

that legal departments are stretched almost to breaking point; the additional work resulting from

establishing combined authorities and working through devolution deals is only adding to the pressure. This is

all new ground, there is no support or guidance from the government and resources are stretched ever more

thinly.

In our view, another issue which may yet come out of the woodwork relates to existing shared services or

outsourcing arrangements which come into conflict with a combined authority’s longer term plans to

‘centralise’ the spend across its constituent members in order to leverage efficiencies. The rise in shared

services and outsourcing in recent years has occurred in parallel with the development of combined

authorities and there are bound to be instances where the boundaries of such arrangements are not

coterminous with each other. This could mean that local authorities need to extricate themselves from

arrangements which may not, in the case of shared services or other collaborative approaches, be formally

and legally documented, or from arrangements which involve joint ventures or trading companies, or which

require negotiation and possibly financial payments to exit contracts. The situation may be further

complicated where one or more of the participants decide they do not wish to unpick the arrangement.

It is likely the risks associated with this have not yet been identified; it is a level of detail below that of the

headline terms of devolution deals. But once the deals are done and the savings targets are agreed, this may

be a further headache for legal departments and local authorities to contend with.

Angela Konteas | +44 (0)115 976 6097 | angela.konteas@brownejacobson.com

5 http://www.publicfinance.co.uk/news/2015/05/council-shared-services-have-saved-%C2%A3462m-2012-lga-finds

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The Supreme Court has reconstructed (but refused to extend or remove) the test for penalties in the joined

judgement of Cavendish Square Holding B.V. v Talal El Makdessi (Cavendish) and ParkingEye Limited v Beavis6

(ParkingEye), the first change to the test in around 100 years. The decision has removed the distinctions

between a penalty, a deterrent, and a genuine pre-estimate of loss, and replaced it with a test considering

whether the clause is proportionate to the innocent party’s legitimate business interest.

Background

Prior to this decision, the test was largely taken from Lord Dunedin’s judgement in the case of Dunlop Tyres7.

Lord Dunedin stated four principles which he thought “may prove helpful, or even conclusive”8 when

considering penalty clauses. His four principles were as follows (emphasis added):

1. it will be a penalty if the sum stipulated for is extravagant and unconscionable in amount in

comparison with the greatest loss that could conceivably be proved to have followed from the

breach;

2. it will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum

stipulated is a sum greater than the sum which ought to have been paid;

3. there is a presumption that it is a penalty when a single lump sum is made payable by way of

compensation, on the occurrence of one or more or all of several events, some of which may occasion

serious and others ‘but trifling’ damage; and

4. 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.

Lords Neuberger and Sumption stated that this test was unhelpful and made "unsatisfactory distinctions"9

between a penalty and a genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a

deterrent. They also described the penalty rule as “an ancient, haphazardly constructed edifice which has

not weathered well”10 and which has been read in an over-literal manner for the past century.

The cases

In Cavendish, Mr Makdessi was selling a controlling stake in his company to Cavendish Square in staged

payments, two of which were to be made post sale based on the operating profits of the group. The terms of

the agreement state that if Mr Makdessi breaches the anti-competition covenants in the agreement then he

6 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67 7 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 8 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, page 87 9 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 31 10 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 3

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lost the right to the remaining balance of the purchase price (over $44m) for his shares and he became

obliged to sell his remaining, minority, shareholding to Cavendish Square for an amount excluding any value

for goodwill. He challenged the enforceability of these penalty clauses. At the first instance, the clauses

were found to be enforceable but this was overturned by the Court of Appeal (CoA). The CoA found that the

clauses were unconscionable because there was not a pre-estimate of loss, it was unreasonable compared to

any likely damages and there was no commercial justification.

In ParkingEye, a consumer contract was involved. Mr Beavis overstayed the 2 hour maximum time limit of the

car park by 56 minutes and was issued with a charge. The time limit was well advertised around the car park

and a sign stated that “Failure to comply... will result in a parking charge of £85". He challenged the parking

charge of £85 (or £50 if he paid within 14 days). He claimed that the charge was an unenforceable penalty at

common law and/or that it was unfair and unenforceable under the Unfair Terms in Consumer Contract

Regulations 1999 (UTCCR). The claim was rejected on both counts at first instance and at the Court of Appeal

because the charge was not considered to be a penalty.

The decisions

In both cases the Supreme Court allowed the appeals and found by majority that the clauses in question were

valid and enforceable.

The Supreme Court allowed the appeal in Cavendish, stating that the penalty rules did not apply because

they were primary rather than secondary obligations. The clause regarding payment of the final instalments

was a price adjustment clause. Whilst this did not relate to the actual loss caused by the breach of the

contract, Cavendish had a ‘legitimate interest’ in the adherence of the restrictive covenant to protect the

goodwill of the group. The clause regarding the forced sale of his shares at net asset price “reflected the

reduced consideration which Cavendish would have been prepared to pay for the acquisition of the business

on the hypothesis that they could not count on the loyalty of Mr Makdessi”11. The court could not assess the

value of the goodwill and therefore the actual loss that Mr Makdessi’s breach caused. Despite the fact that

this did not reflect the loss attributable to the breach, it was considered a deterrent rather than a penalty so

the clauses are enforceable.

The Supreme Court found in respect of ParkingEye that the £85 was a charge for contravening the terms of a

contractual licence, and this charge was not extravagant or unconscionable. The penalty rule is engaged,

unlike in Cavendish where it was not, but it was not considered a penalty because there was a legitimate

interest in charging motorists who were in breach which “extended beyond the recovery of any loss”12.

ParkingEye had an interest in the charge because it provided the costs and a profit margin for the provision of

11 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 81 12 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 99

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the parking scheme. The landowner had interest in it to ensure proper management of the parking. Beavis

raised an additional argument that the charge was unreasonable under Unfair Terms in Consumer Contracts

Regulations 1999 but this argument was dismissed.

The new test

The courts will now look at whether the clause in question imposes a consequence on the party that breached

which is “out of all proportion to any legitimate interest of the innocent party”13 and the innocent party’s

interest should be in some performance or alternative, rather than merely punishing the defaulter. In

straightforward damages cases that interest will not extend beyond compensation and therefore the Dunlop

test is sufficient but in other cases the innocent party’s wider interests must be taken into account.

If a secondary obligation imposes a detriment on the contract-breaker that is proportionate to any legitimate

interest of the innocent party in the enforcement of the primary obligation then it will not be considered a

penalty and the clause will therefore be enforceable. The courts will look at the context of the agreement,

particularly from a commercial aspect. The Supreme Court has removed the presumption that a payment

clause that is not a pre-estimate of loss is penal, as long as the amount is not disproportionate. The new rule

does not take the fairness of the primary obligation into account, only the secondary obligation if the primary

obligation is breached. The appeals were very different from one another (one being a contractual licence

and the other a more complex, commercial contract) so this suggests that the new test will cover a wide

range of contracts. Contracting parties will be testing the boundaries of this new rule in the not too distant

future which is likely to increase the amount of negotiation in contracts, particularly with regards to

incentivising clauses.

The Supreme Court highlighted that:

the real question is whether a clause is penal, not whether it is a pre-estimate of loss. A clause not

being a pre-estimate does not make it penal.

the enforceability of a clause will depend partly on whether it is unconscionable or

extravagant(which will usually amount to the same thing).

The decision in Cavendish also established that if a provision in an agreement takes effect in circumstances

other than a breach of contract then the penalties test will not apply at all, depending on the substance of

the contract. This may be achieved by very careful drafting.

The decision in ParkingEye has caused some debate, with Mr Beavis and Which? commenting that this ruling

could lead to an increase in fines for everyday occurrences such as missed appointments and overusing Wi-Fi.

13 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 32

16

It is too early to say whether the ruling will result in higher fines but the UTCCR and the Consumer Rights Act

2015 give some protection to consumers.

The Supreme Court declined the abolishment of the penalty rule and also refused to extend it to cover

clauses that would apply in circumstances other than a breach of contract.

The impact

The revised test will probably be welcomed by innocent parties who may have greater confidence as to the

enforceability of their clauses, although it is not yet known quite how the courts will interpret the new test.

Trying to predict the actual losses that would occur due to a breach is an almost impossible task for the vast

majority of contractors. The new test provides clarity as well as increased flexibility which will amplify the

chances of a clause being enforceable. The case also carries an undertone of wider commercial

considerations, suggesting that the new test may be construed more widely in freely negotiated terms

between equal parties.

The concept of a ‘legitimate interest’ looks to be a fertile ground for future dispute. It might be helpful for

parties to highlight the interest they are trying to protect within the agreement to ensure its importance is

recognised. This may allow more incentivising clauses to be included and should usually mean that what the

parties have agreed will be upheld.

For non-negotiated contracts, such as the car parking charge in the case of ParkingEye, it is up to the party

who is trying to impose a provision to make it clear what will happen if the primary obligation is breached,

and ensure that there is a legitimate business interest such as the one demonstrated in ParkingEye. Charges

for parking, even if they are principally a deterrent, may be permitted as long as they are proportionate and

conscionable with regards to a commercial justification for them.

The Supreme Court, while refusing to abolish the rules of penalty clauses, did not follow in Australia’s

footsteps. The High Court of Australia recently extended the penalty clause provision to include clauses that

would be implemented on an event other than a breach of contract. They justified this decision “by the fact

that the rule “being an inroad upon freedom of contract which is inflexible… ought not to be extended”, at

least by judicial, as opposed to legislative, decision-making”.14

Lynne Rathbone | +44 (0)1392 458739 | lynne.rathbone@brownejacobson.com

14 Cavendish Square Holding B.V. v Talal El Makdessi and Parking Eye Limited v Beavis [2015] UKSC 67, paragraph 43

17

NHS bodies buying healthcare services within the scope of the National Health Service (Procurement, Patient

Choice and Competition) No 2 Regulations 2013 (Patient Choice Regulations) still have until 18 April 2016 to

make use of the Public Contracts Regulations 2006 (2006 Regulations) which allow these authorities to

purchase services falling within Part B of the 2006 Regulations without following the full rigour of the

Regulations.

Such authorities may be interested to hear of the recent case of Consorzio Artigiano Servizo Taxi e

Autonoleggio (CASTA) and Others v Azienda Sanitaria Locale di Cirie, Chivasso e Ivrea (ASL TO4) (CASTA) in

which the European Court of Justice considered whether an Italian law permitting the direct award of a

contract for transport services for dialysis patients to a voluntary organisation without prior advertisement

was contrary to EU law. In this context, a direct award means the award of a contract without prior

advertisement of the opportunity and without a procurement process. The key questions for the court to

answer were:

1. Is it permissible to make a direct award of medical transport services to a voluntary organisation

under EU law?

2. If it is, must the contracting authority carry out a comparison of tenders from other economic

operators to try and limit its exposure to inefficient costs?

3. Must voluntary organisations which receive the direct awards of contracts be subject to limitations on

their market share and the commercial activity which they undertake?

In answer to the first question, the Court considered the particular law and gave a rather complex answer. In

essence, the answer depends on whether Directive 2004/18 applies or whether the contract is subject only to

the principles underlying the TFEU. For those who have put consideration of the old regime behind them, a

contract will be subject to Directive 2004/18 (and in England and Wales, the Public Contracts Regulations

2006) if it is a contract for services which are Part A services, or which are Part B services where the

contracting authorities believes that there may be interest from suppliers in other EU member states for

bidding for the contract. A contract will be subject only to the principles underlying the TFEU (transparency,

equal treatment, non-discrimination, mutual recognition) if it is for Part B services in which there is unlikely

to be interest from suppliers in other EU member states. However, for the purposes of English and Welsh

contracting authorities, the circumstances in which the PCR 2006 may apply are even narrower – as discussed

above, only contracts for the purchase of healthcare services for NHS bodies falling within the scope of the

Patient Choice Regulations will be subject to the PCR 2006.

If Directive 2004/18 applies (and in the UK, if the PCR 2006 apply) then it is not permissible to make a direct

award of such a contract because this has the potential to be detrimental to undertakings in other EU

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member states which would not have the opportunity to bid for the contract. If Directive 2004/18 does not

apply (and accordingly, if the PCR 2006 do not apply) (and the only circumstances in which it would not apply

are where the contract is for Part B services under the PCR 2006 and would not be of interest to providers in

other member states, or if an exemption from the Directive applies) then it may be permissible to make a

direct award. This is not new law and although the case was considered in the context of the direct award of

a contract to a voluntary organisation, it would seem to apply equally to the direct award of contracts to

other organisations. However, it appears unlikely that there will be many occasions in which a contracting

authority finds itself able to make a direct award of healthcare services.

The ECJ went on to confirm that, where Directive 2004/18 does not apply (and accordingly a direct award is

permissible), there is no requirement to compare offers from other bidders –a contract may be awarded to a

voluntary organisation without any form of procurement process. However, the direct award must in fact

contribute to a budgetary efficiency and the contract must put in place provisions to ensure that efficiency is

achieved. Accordingly, the award of a contract by direct award to a voluntary organisation for reasons other

than that there is likely to be a saving in awarding to that entity are unlikely to be satisfactory. This is in line

with the ECJs judgment in a similar recent case, Azienda sanitaria locale No.5 ‘Spezzino and Others v San

Lorenzo societa cooperative sociale and Others (Case C-113/13).

In answer to the third question, the ECJ confirmed that the activities of the voluntary organisation must

comply with national law, but from an EU perspective there is no requirement that such activity is regulated

or limited, although the court then went on to say that commercial activity carried out by voluntary

organisations must be marginal and carried out in pursuit of their voluntary activity.

Although these questions were asked in response to a question about the ability to make a direct award to a

voluntary organisation, the answer to the first question appears to be applicable to the direct award of Part B

services generally as it reflects the established principle that where there is unlikely to be cross-border

interest for a below threshold contract for Part B services it is permissible to make a direct award of such a

contract. For NHS bodies still using the PCR 2006, the guidance on making such awards to voluntary bodies

may be useful, although of course the relevance of this judgment is time limited because after 18 April 2016,

the PCR 2006 will no longer be available for use.

Angelica Hymers | +44 (0)115 976 6092 | angelica.hymers@brownejacobson.com