Tullett Prebon Group Ltd v El-Hajjali

A prospective employment contract may contain an enforceable liquidated damages clause where the employee never starts work. The increased uncertainty in assessing loss does not prevent such a clause from operating. The clause is a penalty only where its predominant function is deterrence, or where the stipulated sum is extravagant and unconscionable compared with the greatest loss or range of losses that could conceivably follow breach. Difficulty in estimating loss, equal bargaining power, legal representation and a generous margin are relevant. Where no substitute employee can be found, consequential loss may be claimed instead of replacement cost.

The claimant inter-dealer broker sought damages after the defendant, having signed a prospective employment contract, decided to remain with his existing employer and never commenced work. The claim was principally for the agreed sum under clause 19.4, alternatively for assessed damages.

The court tried two preliminary issues: whether clause 19.4 was an unenforceable penalty and whether the defendant’s breach caused no recoverable loss. The central questions were whether a liquidated damages clause could validly apply to a prospective employee who failed to start, and what measure of loss was available where a replacement could not be obtained.

1. Clause enforceable. There was no reason in principle why a prospective employment contract could not contain a liquidated damages clause applying where the employee failed to commence work. The uncertainties inherent in prospective employment did not exclude such a clause.
2. Penalty test. The question was one of construction at the time of contracting. The agreed sum was a penalty if its predominant function was to deter breach, rather than compensate for loss, or if it was extravagant and unconscionable compared with the greatest loss or range of losses that could conceivably follow. The burden lay on the defendant. The parties’ equality of bargaining power, legal advice, consideration of the likely loss and the difficulty of estimating it were relevant, though none was decisive.
3. The parties had genuinely considered the commercial consequences of the defendant’s non-performance. The business projections, although imperfect and speculative, provided an adequate basis for assessing potential lost profit. The agreed sum was conservative and substantially below the probable loss. It was therefore not extravagant or unconscionable and was not predominantly deterrent.
4. A liquidated damages clause does not become a penalty merely because it may produce overpayment in particular circumstances. The parties are allowed a generous margin, particularly where precise pre-estimation is difficult.
5. Causation and loss. The claimants had made reasonable efforts to find a replacement and had failed. In those circumstances, consequential loss, rather than replacement cost, was the appropriate measure, subject to the claimants’ choice. The defendant’s causation argument failed.
6. Clause 19.4 was a valid liquidated damages clause. The defendant was liable for the agreed sum of £293,994.