United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR JOHN STILES (of Counsel) Legal Personnel and Management Services Merchants House 1-7 Leeds Road Windhill Bridge Shipley West Yorkshire BD18 1BP
For the Respondent	THE RESPONDENT NEITHER PRESENT NOR REPRESENTED


 


MR JUSTICE MAURICE KAY: This is an appeal by the respondent employer from a decision of an Employment Tribunal sitting in Leicester. The decision of the Employment Tribunal was sent to the parties on 23rd July 1999.

1. The origin of the case is that Mr Smith, the applicant in the Employment Tribunal, had been employed as a driver by the appellant company, which is a transport company. He started to work in November 1996.
2. We do not need to go into the detail of a problem that arose between Mr Smith and the appellant company. Suffice it to say that circumstances arose in February 1999 which led to Mr Smith resigning from the company. His case in the Employment Tribunal was that he had been driven to that by way of constructive dismissal as a result of a dispute about a bonus. The application to the Employment Tribunal was by Mr Smith as applicant claiming that he had been unfairly dismissed and relying upon the alleged constructive dismissal. In the event, the Employment Tribunal found that there had been no dismissal and that his unfair dismissal claim therefore failed.
3. What this appeal is concerned with was a secondary issue before the Employment Tribunal. It was a term of Mr Smith's contract of employment that in the event of his not giving notice of termination and working it, he would have to forgo some monetary benefit. The clause was in this form:

"If you wish to terminate your employment with us you must give us the period of notice quoted in your contract statement and work it. Unless agreed otherwise, failure to give the proper notice and work it will result in a deduction from your final payment equivalent to the number of days short."

4. Under his contract, Mr Smith was required to give four weeks notice. Following his resignation on the 23rd February 1999, Mr Smith did not present himself for work again and the appellant company refused to pay him payments which would otherwise have been due to him on that date, because the appellant company claimed a payment from Mr Smith equivalent to four weeks' pay.
5. The issue that arose in relation to this in the Employment Tribunal was whether that contractual provision was a lawful liquidated damages clause or an unlawful penalty clause.
6. The Employment Tribunal concluded that it was a penalty. The tribunal had heard evidence from a director of the appellant company, Miss Toothill. The decision of the Employment Tribunal contains this passage:

"13. … As accepted by Miss Toothill it bears no relation either in the manner of calculation or in value to any loss that the respondent may suffer which, because they are able to obtain other drivers relatively easily, is likely to be small. Moreover, as the contract does not restrict the respondent's loss just to the employee's wages for four weeks, it cannot be seen as a liquidated damages limit. Under the contract as drawn the respondent would be entitled to claim not only this sum but any actual loss that it may suffer. We consider in the context of this contract, as made at the outset, the intention of the clause is to deter employees from leaving without giving notice and to impose a penalty upon them for doing so. As such it is an illegal provision, which will not be enforced."

7. As a matter of general principle, a contract of employment may contain a lawful liquidated damages clause, provided that it is a genuine pre-estimate of loss or damage and not a penalty. Contracts of employment are governed by the same general principles set out in the authorities, the best known of which is Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co [1915] AC 79, where Lord Dunedin set out a number of well-known principles at page 86. We refer to some but not all of those principles. The ones to which we refer are as follows:

"1. Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage …

3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach …"

See also the decision of the Privy Council in Phillips Hong Kong v AG of Hong Kong (1993) 61 BLR 49. In the course of which Lord Woolf, giving the opinion of the Privy Council, referred to the judgment of Dickson J in the Supreme Court of Canada in Elsey v J G Collins Insurance Agencies Ltd (1978) 83 DLR at page 15 where he said:

"It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression."

8. It is an inherent risk of a lawful liquidated damages clause that the sum specified or calculable and recoverable may be more or less than the loss sustained. How then do these principles apply to this present case?
9. This is a case in which the clause in question did not have attached to it the express label of either "liquidated damages" or "penalty". It is a matter of pure construction of the contract.
10. It is of significance that the clause in this case did not seek to place any limitation on the right of the employer to recover damages for his actual loss in the event of its being greater than that specified in the clause and the calculation which it laid down. Thus, in the present case, the employee is in a position where if the actual loss turned out to be nil the employee is liable for the calculable sum, but if the actual loss is greater than the calculable sum he may face an unlimited claim for the balance. This is a matter which weighed heavily on the Employment Tribunal. It also weighs heavily on us.
11. In our judgment, it is difficult to see how in these circumstances the clause can represent a genuine pre-estimate of loss. Moreover, we agree with the implicit finding of the Employment Tribunal that the clause, by reason of this aspect of its application, is an oppressive clause because it takes a form which can be described colloquially as "heads I win, tails you lose."
12. In all the circumstances, we have come to the conclusion that the finding of the Employment Tribunal about this clause was correct. It did not represent a genuine pre-estimate of loss. It was a penalty clause and, as such, unenforceable.
13. In those circumstances, we find ourselves at one with the reasoning of the Employment Tribunal and this appeal is dismissed.
14. Leave to appeal to the Court of Appeal is refused. The appellant company can adapt their clause in the light of our judgment. Of course if they wish to they can ask the Court of Appeal for permission.