Contractual damages clause not a penalty
Murray v Leisureplay plc, Court of Appeal, , 28 July 2005
Murray entered into a service agreement with Leisureplay where the company would pay him one year’s gross salary, pension contributions and other benefits in kind in the event of his employment being terminated without the contractual period of one year’s notice.
Following a dispute with the company, Murray’s service agreement was terminated with only seven and a half weeks’ notice and Murray brought High Court proceedings to recover damages in accordance with the service agreement.
The judge held that, as the relevant clause took no account of Murray’s duty to mitigate his damages, this rendered it a penalty clause, making it unenforceable.
An enforceable liquidated damages clause would have had to make a significant allowance for the income Murray was likely to make if freed from his commitment to the firm.
The Court of Appeal disagreed and allowed Murray’s appeal.
The clause had been agreed in a commercial context and the question of whether it was a penalty clause should be assessed with reference to commercial considerations.
The service agreement had been approved by the board and legal advice had been obtained.
Murray was subject to stringent competition covenants on termination and other disadvantages.
A crucial question to determine was whether the clause was imposed as a deterrent or whether it constituted a genuine pre-estimate
On the facts, the company could not show the clause was not a genuine pre-estimate of loss.
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