Cases - Murray v Leisureplay

Record details

Name
Murray v Leisureplay
Date
[2005]
Citation
EWCA Civ 963
Legislation

Companies Act 1985

Keywords
Construction contracts - liquidated damages - employment - wrongful dismissal - whether penalty or liquidated damages clause
Summary

Mr Murray was an employee of the defendant company pursuant to a retainer which was determined by the defendant in disputed circumstances. Mr Murray contended that he had been wrongfully dismissed, thus entitling him to the payment of one year's salary pursuant to a 'liquidated damages' clause in the retainer (clause 17) The defendant alleged that clause 17 was penal and unenforceable. Having reviewed the authorities, Arden LJ suggested that a 5-fold test was appropriate when approaching the question of whether or not an LAD clause will amount to a penalty:

  1. To what breaches of contract does the contractual damages provision apply?
  2. What amount is payable on breach under that clause in the parties' agreement?
  3. What amount would be payable if a claim for damages for breach of contract was brought under common law?
  4. What were the parties' reasons for agreeing for the relevant clause?
  5. Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss...and, if he has shown the latter, is there some other reason which justifies the discrepancy between 2 and 3 above?

The Court of Appeal concluded that if an employer can recover more pursuant to an LAD clause than his actual proven loss, it may lead to conclusion that the clause is penal; equally it may not. Greater recovery may be justifiable on commercial grounds, i.e. to discourage the other party from breaching its contractual obligations. In the circumstances, the Court of Appeal ruled that clause 17 was not penal, drawing on (for example) the 'fierce restrictions on competition' imposed on Mr Murray by the contract, and the advantage to the defendant of avoiding wasting money on management time or lawyers' fees in working out the damages to be paid at common law in the event of a breach of the contract of employment.

Buxton LJ considered that the underlying principle of Dunlop could be recast in modern terms as a requirement that the LAD clause should be compensatory rather than deterrent. He went on to say (at 116):

'It is therefore necessary to stand back and look at the reality of this agreement. Although I agree that evidence about it is sparse, I am prepared to take judicial notice of the fact that an entrepreneurial company such as MFC...will often place a high value upon retaining the services, and the loyalty and attention, of that one man as its chief executive: to the extent of including in his "package" generous reassurance against the eventuality of dismissal. That such reassurance exceeds the likely amount of contractual damages on dismissal does not render the terms penal unless the party seeking to avoid the terms can demonstrate that they meet the test of extravagance posited by Lord Dunedin and by Lord Woolf.'