In the Tullett Prebon v El Hajjali case, Mr El-Hajjali negotiated the terms under which he would join Tullett Prebon. As is not uncommon, having heavily negotiated the terms on which he would move he then told his employer that he intended to leave. His employer then persuaded him to remain and Mr El-Hajjali notified Tullet Prebon that he would, after all, not be joining them.
In most cases where a person withdraws from a move, the prospective new employer chalks the cost both in money spent and, opportunity cost (since it has ceased looking in the market for other individuals) down to bitter experience (and probably makes a note never to make an offer to the individual again). However, in this case Tullett had inserted a liquidated damages clause in the contract which Mr El-Hajjali had signed. This provided that if he failed to resign and join Tullett as agreed he would pay them 50% of the net basic salary plus 50% of the signing fee that Tullett had agreed to pay him, (approximately £293,000 in total). During the course of the negotiations Mr El-Hajjali’s advisers drew his attention to the liquidated damages provision and its implications.
As a general principle of English law a clause which provides for liquidated damages, i.e. a genuine pre-estimate of the damages is enforceable although, a penalty which is excessive and bears no resemblance to the actual or potential loss is not. On analysis the court decided that it was a liquidated damages provision since it was calculated as a proportion of salary and was much less than the loss which Tullett could show had and would arise from El-Hajjali’s breach. Accordingly, judgment was given in favour of Tullett. No doubt the fact that Mr El- Hajjali had an indemnity from his current employers in relation to any damages awarded against him helped to persuade the court that it should enforce the terms of the contract.
Should an employer consider inserting a preestimated damages clause in a contract? The facts of the case are somewhat unusual and, in most cases, the cost of recovery and the time and management requirements of suing to recover for breach of contract from an individual who has decided not to join are not worth it. However, when recruiting a highly compensated individual or one who is key to the business it may be worth considering.
For individuals the lesson is a salutary one. In this case the court was prepared to enforce the terms of the contract and order payment. In cases where there is no pre-estimated loss provision an individual who withdraws having committed to a contract may still be at risk of a claim by the prospective new employer. The fact that employers rarely take action of this nature does not mean that the ordinary contractual principles of damages for breach do not apply.