Li v First Marine Solutions Ltd & Anor

A contractual sum payable on breach is enforceable as liquidated damages if, construed at the time of contracting and in its commercial and employment context, it is a genuine pre-estimate of likely loss rather than an excessive deterrent. The party alleging a penalty bears that burden.

Actual loss after breach does not determine the clause’s character. A clause may be upheld where the likely cost of urgently replacing a skilled employee made the stipulated sum a proportionate estimate. However, clauses permitting deductions for unworked notice must be construed carefully. They may instead merely withhold salary not earned for work not performed.

The claimant, a project engineer, resigned and initially refused to work her contractual one-month notice period. Her employer deducted one month’s salary from sums otherwise due under clause 12(1) of her contract. The Employment Tribunal held that the clause was an enforceable genuine pre-estimate of loss, rather than a penalty, and dismissed the relevant claim.

On appeal, the claimant challenged that conclusion and the Tribunal’s refusal to consider a late-produced invoice which might have suggested that replacement recruitment had begun before her resignation. The central issues were whether clause 12(1) was a penalty and whether the late document was relevant to that question.

1. Appeal dismissed. On the parties’ undisputed construction of clause 12(1), the Employment Tribunal was entitled to find that the claimant had left without working her notice and that the employer could deduct £5,000.

2. The penalty issue had to be determined by construing the contract in the circumstances existing when it was made, not by reference to the loss actually suffered after breach. The claimant bore the burden of showing that the stipulated sum was a penalty. The late invoice was therefore irrelevant to that issue. It was also incapable of supporting a constructive-dismissal case because the claimant had resigned without knowledge of it and thus not in response to the alleged breach.

3. The Tribunal was entitled to distinguish Giraud UK Ltd v Smith. This claimant performed a skilled and pivotal project-engineering role, had been recruited for her particular abilities, and might require urgent and costly replacement. The deduction reduced as more notice was worked. On those facts, a month’s salary was not necessarily excessive and could be a genuine pre-estimate of likely replacement loss.

4. Observations. These observations did not affect the result. In future cases, a deduction clause of this kind should not automatically be treated as a penalty or liquidated-damages clause. In its employment context, it may instead mean that an employee who leaves during notice receives salary only for the time worked. Construction depends on the individual contract and evidence.

• Employment Appeal Tribunal: dismissed the claimant’s appeal on 4 March 2014.
• Employment Tribunal at Aberdeen: by reasons given on 10 June 2013, dismissed the relevant claim and held clause 12(1) enforceable as a genuine pre-estimate of loss.