Background

Liquidated damages clauses must represent a genuine pre-estimate of loss or risk being found to be unenforceable as a penalty clause. Liquidated damages clauses under which the employer must pay a specified sum to an employee for terminating employment in breach of contract are increasingly used in senior employment contracts, and have been enforced by the Courts (Murray v Leisureplay plc 2005). Some employment contracts contain ‘no show’ clauses which provide for payments by the employee to the employer for failing to start work after having entered into an employment contract.

Facts

The employee was identified as a suitable candidate for a senior and specialised broking role. The employer calculated the likely revenue he would produce and negotiated his remuneration based on this and his likely start date. The employee took extensive legal advice on the date on which he was likely to be released from his current employer based on his contract, and on the terms of the new employment contract, including the ‘no show’ clause. He was advised it was likely to be enforced against him if he changed his mind about the job.

He was subsequently persuaded not to leave his current employer. The employer sued him for £300,000 which was the sum payable under the ‘no show’ clause pursuant to the formula which had been agreed. They had in fact incurred a loss of in excess of £2,500,000 and they could demonstrate that they had tried but failed to find a replacement for the employee.

The employee claimed the clause was a penalty and therefore unenforceable. Based on the facts, the Court upheld the payment as a valid liquidated damages provision. They considered that in comparison with the loss sustained the sum was not ‘extravagant or unconscionable’ one of the established tests for determining whether or not a clause is a penalty. They also took into account the fact that the employee had a strong bargaining position and that he had been legally advised before signing the contract.

Importantly the Court did not accept that damages should be limited to the cost of replacing the employee. They saw no reason that consequential losses should not be recovered in circumstances where a replacement cannot be found immediately.

Effect on employers

This is potentially significant for employers. Although ‘no show’ clauses are only likely to be relevant in limited cases, they may become used more frequently, particularly for senior and specialised roles. Also, the Courts’ comments about the extent to which damages can be recovered from employees who act in breach of contract may encourage more employers to take action against not only employees who do not start work having signed an employment contract, but also employees who leave their jobs in breach of contract, causing financial loss.

Tullett Prebon Group Limited v Ghaleb El-Hajjali [2008] EWHC 1924 (QB)