Employment Update: Employment contracts

16 September 2008

“No show” clause enforced against employee.

In the recent case of Tullett Prebon Group v El-Hajjali the High Court had to consider whether a clause in a contract of employment requiring the employee to pay the employer approximately £500,000 if he did not report for work was enforceable or not.

The clause read "You agree (a) to take all such steps and do all such acts and things within your power and to execute all documents and papers as may reasonably be required by the Company to give full force and effect to this Employment Agreement and (b) to take up your employment with the Company as provided by this Employment Agreement and should you fail to do so, to pay to the Company, by way of agreed liquidated and ascertained damages, a sum equal to 50% of the net basic salary and (if any) 50% of your signing payment (if any) that the Company has contracted to pay to you during the Term of this Employment Agreement. You agree that this is a genuine pre-estimate of the Company's loss, given the loss of profit it will suffer as a direct consequence of the loss of your anticipated revenue generation under this Employment Agreement."

Was it simply designed to deter him from not turning up (an illegal penalty clause)? Or was it a reasonable provision to compensate the innocent party for a loss that was predictable and which could be pre-estimated?

The employee was a specialist broker in particular capital markets with a substantial revenue stream and an established client base. He had driven a hard bargain with Tullett Prebon. It had taken them much time and effort to secure his services. They had agreed to help him with legal costs if his current employer either put him on ‘garden leave’ or sought to enforce restrictive covenants by injunction.

In the event, five days after signing the contract, he decided not to move from his current employer. Tullett Prebon’s claim to enforce payment under the ‘no show’ clause succeeded.

In this particular case the employee had had expert legal advice, it was found that he had equal bargaining power. His signing payment and future salary level had been based directly on the amount of business that he would have brought with him and that Tullett Prebon had anticipated and now were not going to enjoy. There was no reason in principle why a contract of employment should not contain a liquidated damages clause.

Points to note -

  • When informed that their new recruit would not be joining them after all, Tullett Prebon had sought to obtain a replacement with his specialism but had failed. It was relevant to the court’s decision to award them compensation that they could show that they had tried to mitigate their loss.

  • The employee had argued that the company could not possibly quantify its loss but the court disagreed. In this case, where a substitute could not be found, the employer could, and had, measured the consequential loss to them of not gaining a key player in a very specialist market.