The defendant signed an employment contract to join the claimants as a senior broker. He changed his mind and decided to stay in his existing job. The new employers sued for breach of contract. The defendant said that the claimants had refused to indemnify him should his employers claim under a restrictive covenant. He had been explicitly warned of the consequences of not going ahead after signing, but now said that the provision amounted to a penalty.
Held: ‘The fact that the parties state that the clause is not a penalty clause and the fact that they are of equal bargaining power are not decisive factors but they are certainly relevant to the consideration of the Court. It has to be borne in mind that it is clearly established that the burden of proving that a clause is a penalty clause lies upon the person who seeks to escape liability under it.’ There is no reason in principle why a pre-estimate of loss should not be in a contract of employment: this was a matter for assessment in each case. Here the defendant had failed to establish that the clause was a penalty.
Where each side had equal bargaining power and legal representation, ‘it is in my judgment only where a stipulated sum is extravagant or unconscionable in amount compared with the greatest loss or range of losses that could conceivably prove to follow breach that the clause should be held to be a penalty.’
Judges:
Nelson J
Citations:
[2008] EWHC 1924 (QB), [2008] IRLR 760
Links:
Jurisdiction:
England and Wales
Citing:
Cited – Clydebank Engineering Co v Castaneda HL 19-Nov-1904
The House considered a contract for the construction by a Scottish shipbuilder of four torpedo boats for the Spanish government. The contract provided that: ‘The penalty for late delivery shall be at the rate of andpound;500 per week for each . .
Cited – Cine Bes Filmcilik Ve Yapimcilik and Another v United International Pictures and Others CA 21-Nov-2003
The parties entered into agreements licensing the exclusive distribution of encrypted television channels within Turkey. A clause provided a calculation of damages for a breach amounting to the balance of licence fees due, and other penalties, . .
Cited – Lordsvale Finance Plc v Bank of Zambia QBD 20-Mar-1996
The court looked at a facility agreement opened by a bank in favour of the defendant which provided that in the event of default the defendant should pay interest during the period of default at an aggregate rate equal to the cost to the bank of . .
Cited – Philips (Hong Kong) Ltd v The Attorney General of Hong Kong PC 9-Feb-1993
After referring to two Australian cases on penalty clauses in contracts: ‘These statements assist by making it clear that the court should not adopt an approach to provisions as to liquidated damages which could, as indicated earlier, defeat their . .
Cited – Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd HL 1-Jul-1914
The appellants contracted through an agent to supply tyres. The respondents contracted not to do certain things, and in case of breach concluded: ‘We agree to pay to the Dunlop Pneumatic Tyre Company, Ltd. the sum of 5 l. for each and every tyre, . .
Cited – Robophone Facilities Ltd v Bank CA 1966
Parties to a contract should be free to stipulate not only primary obligations and rights but also the secondary rights and obligations, ie those which arise upon non-performance of any primary obligation by one of the parties to the contract, but . .
Cited – Elsey v J G Collins Insurance Agencies Limited 1978
(Supreme Court of Canada) The court considered the power to strike down a clause as a penalty: ‘It is now evident that the power to strike down a penalty clause is a blatant interference with the freedom of contract and is designed for the sole . .
Cited – Giraud UK Ltd v Smith EAT 12-Jan-2000
A contract of employment may contain a lawful liquated damages clause provided that it is not a penalty clause. . .
Cited – Ebbw Vale Steel Co v Tew CA 1935
The court considered the damages to be awarded where an employee left without the proper notice: ‘The Judge should ascertain the workman’s probable output during the time of default, find its selling value, deduct the expenses which would have been . .
Cited – Murray v Leisureplay Plc QBD 5-Aug-2004
The claimant sought payment of three years’ salary after termination of his service contract. He said that an agreement had been made by the company to purchase a ‘financial institution’, which would trigger the additional payments. The defendants . .
Cited – Jeancharm Ltd (T/A Beaver International) v Barnet Football Club Ltd CA 16-Jan-2002
The claimant contracted to supply football shirts to the defendant, but claimed that clauses in the contract with regards to late delivery and payment operated as penalties and so were void at common law.
Held: The sums set out were immodest . .
Cited – Anglia Television v Oliver Reed CA 1971
The television company had agreed with the actor defendant for him to appear in a production. He breached the contract. The company sought both loss of profits and for the expense incurred. The issue before the Court of Appeal was whether such . .
Lists of cited by and citing cases may be incomplete.
Contract, Employment, Damages
Updated: 18 July 2022; Ref: scu.272259