Penalty clause is unlawful

Giraud UK Limited v Smith unreported June 2000, EAT

Smith’s contract contained an express clause which provided that, if Smith failed to give four weeks’ notice or failed to work his notice, Giraud could deduct from his final salary a sum equivalent to the amount of notice not given or worked. Smith resigned and left employment immediately. Giraud then withheld a sum equivalent to four weeks’ pay. Although Smith’s subsequent constructive dismissal claim was unsuccessful, the tribunal held the clause was a penalty clause and unenforceable.

Giraud appealed, arguing the clause was a lawful liquidated damages clause. The EAT found

that the clause enabled Giraud to deduct up to four weeks’ pay if the relevant notice was not given (or worked), irrespective of whether Giraud suffered any actual loss. Further, Giraud had an unlimited right to recover damages from Smith if its actual loss exceeded four weeks’ pay.

There had been no genuine pre-estimate of loss by Giraud and the purpose of the clause was to deter employees from leaving without giving notice. Consequently, it was a penalty clause and unenforceable. The appeal was dismissed.


Advance notice of changes could constitute a breach of contract


Nelson v Kingston Cables Distributors IRLB 645 EAT

While on maternity leave, Nelson was informed by letter that she would be required to perform a different role on her return to work. She refused to accept the changes and resigned but her constructive dismissal claim was dismissed.

The tribunal held Nelson had acted prematurely. Nelson had not returned to work and so had not actually been given a different role.

Nelson successfully appealed. The tribunal had erred in two respects. First, it failed to make a clear finding about whether the new role constituted a fundamental change giving rise to a possible repudiation by Kingston. Second, it failed to consider whether the letter constituted an anticipatory repudiation of the contract.

The EAT considered the letter was a clear indication there would be a fundamental change to Nelson’s role on her return to work and that Nelson had to accept this role if she returned from maternity leave. Further, the letter could be interpreted as Kingston’s advance intention not to be bound by its original contract. This could give rise to an anticipatory repudiatory breach enabling Nelson to treat the contract at an end. The case was remitted back to the tribunal.

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