Tullett Prebon Group Limited (“Tullett”), a City investment firm, entered into an employment contract with Mr El-Hajjali, a senior derivatives broker. The contract contained a “no-show” clause which stated that if El-Hajjali did not take up his new employment, he would pay Tullett a sum equal to 50% of his net basic salary plus 50% of the signing payment that Tullett had agreed to pay him. This equated to approximately £293,000. Shortly after signing the contract, El-Hajjali changed his mind about taking up employment with Tullett and decided to remain with his existing employer. Tullett estimated that El-Hajjali’s failure to take up employment with the company had lost it between £2.5 and £3.7m.
Tullett brought a claim in the High Court for liquidated damages for breach of the employment contract. Tullett sought to recover the £293,000 due under the “no-show” clause. El-Hajjali argued that the clause was a penalty clause rather than a liquidated damages clause and therefore void.
The High Court found in favour of Tullett and held that the clause was not a penalty clause. In making its decision, the court gave particular consideration to the fact that El-Hajjali had received expert legal advice throughout the employment contract negotiations and that, on the facts of this case, the parties had equal bargaining power.
The court said that only an amount which was extravagant or unconscionable when compared with the loss which was caused by the breach could be deemed to be a penalty. It found that Tullett had tried to mitigate its loss and therefore the correct measure of damages was the consequential loss rather than merely the cost of recruiting a replacement.
This decision is likely to have the greatest impact in sectors such as financial services and media where a high-level recruit will often be expected to generate a significant level of profit. More employers in these sectors may now be encouraged to include a “no show” clause in the employment contract when making a significant hire.
Businesses hoping to be able to rely on such a provision should take note of the pointers contained in the Tullett judgment. First, it is useful to be able to demonstrate relative equality of bargaining power and for both sides to have legal advice can help to achieve this. Also, a financial assessment of predicted losses should be prepared before the contract is finalised and agreed between the parties.
Finally, the aim of the clause should not be to deter a contractual breach but should be to compensate for a breach. As such, the amount of the liquidated damages must, at least, give the appearance of being at a reasonable level. Coming from the opposite perspective, an employer seeking to retain an employee who has been offered a post elsewhere should increasingly expect the cost of any liquidated damages to be included in the price they have to pay to retain the employee.
Nicholas Jew, partner, DLA Piper