Henning Berg, the former manager of Blackburn Rovers Football Club, has successfully claimed £2.25 million against his former employers in the High Court following the early termination of his contract.
Mr Berg was appointed by the club on a fixed term contract from November 2012 to June 2015. After just 57 days in charge, the club exercised its right under the contract to terminate his contract with immediate effect. Mr Berg claimed that under the terms of the contract he was due £2.25 million, being the remaining amount he would have been paid for the duration of the contract. His contract provided:
“In the event that the Club shall at any time wish to terminate this Agreement with immediate effect it shall be entitled to do so upon written notice to the Manager and provided that it shall pay to the Manager a compensation payment by way of liquidated damages in a sum equal to the Manager’s gross basic salary for the unexpired balance of the Fixed Period assuming an annual salary of £900,000...”
Blackburn Rovers argued the clause was a penalty clause and, therefore, unenforceable. However, the court held in favour of Mr Berg quoting from established case law:
"The clause was not a penalty clause because it provided for payment of money upon the happening of a specified event other than a breach of contractual duty...”
Whilst this case does not make new law, it serves as a reminder that the rule against penalties only applies where the trigger for payment is a breach of contract. Such a penalty clause would be unenforceable as its purpose is to apply undue force on another party to perform its obligations under the contract, with the penalty for breach being an extravagant sum. This can be contrasted with “liquidated damages”, the essence of which is to provide the non-defaulting party with a genuine pre-estimate of the loss they are likely to suffer as a result of a breach. In the case of Henning Berg v Blackburn Rovers FC and another there was no question of a breach of contract by either party; rather Blackburn Rovers FC had a contractual right to terminate the manager’s appointment early subject to making the relevant payment.