Penalty clauses - are they enforceable?
by Nicky
Penalty clauses are sometimes used by employers in an attempt to retain an employee for a certain period of time following a financial payout, usually in the case of bonuses. However, the question arises as to how enforceable are these clauses in reality?
The case of CMC v Zhang 2006 EWCA Civ 408 it was held that a clause in a compromise agreement was a penalty clause introduced as a deterrent intended to induce the employee not to breach any terms of the agreement. Breach of the terms would result in the monies being repayable. The House of Lords decided that this clause was not enforceable and that the sum of money must be an estimate of the damage, not extravagant and unconscionable compared to the actual loss following the breach. For more details click here.
Therefore, if an employer is intending to rely on a penalty clause then they would be wise to ensure that it is reasonable, narrow in scope and reflects a real estimate of the actual loss. Otherwise, if challenged, be prepared to lose!!!
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