When is a penalty not a penalty?

11 09 2008

Answer:  when it’s a liquidated damages clause.  Let me explain.  This isn’t another football article (although in passing let me just say how pleased I was to see Arsenal, sorry England, beat Croatia)   but a report on an interesting Court case decided this week.  Well, interesting to employment law nerds. 

The case involved Tullett Prebon, the City intermoney brokers, and one Mr El-Hajjali, who agreed to join them, signed his contract and then had second thoughts and didn’t go after all.  Tulletts successfully sued him for their losses – approximately £293,000 – incurred as a result of his “no show”.  Mr El-Hajjali had tried to argue that the clause in the contract requiring him to pay 50% of his net salary and 50% of the signing on payment he had negotiated was a penalty clause and thus illegal under English law.  The basic rule in most civil cases is that you can only recover compensation for money you have lost: it is very rare to be awarded punitive damages for another person’s default.  If a contract requires payment of a sum of money out of all proportion to the loss likely to be incurred by the “victim”, it is probably going to be deemed a penalty and the courts won’t enforce it.  On the other hand, if the specified sum is an accurate assessment of the losses that may be incurred the courts may view it as a liquidated damages clause and enforce it.  This is what happened in the High Court in this case. 

As ever, each case turns on its own facts.  In this instance, Tulletts won because the sum to be repaid had been carefully assessed, both parties had had legal advice through the contract negotiations, Mr El-Hajjali was a very well remunerated senior broker and the parties were deemed to have had equal bargaining power. These factors won’t often be present in most cases and I am not expecting to see a sudden rash of such claims.  However, it is likely that employers will start putting these clauses in contracts of employment more and more, as now happens with a clause often found in compromise agreements requiring repayment of all the termination payment if the departing employee breaches the terms of the agreement in any way.    From the employee’s perspective, the obvious way to avoid being on the wrong end of a claim is not to agree to the clause being in the contract in the first place if any doubt about taking the job offer up.  For employers concerned about having their time wasted by new recruits not turning up on the first day the sum to be recovered must be carefully assessed and be capable of justification. 

This article will appear in the “Docklands” and “Peninsula” newspaper week commencing 15th September 2008




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