Penalty clauses

When settling claims, employers quite often try to include, alongside a confidentiality clause, a term that says if you breach the confidentiality clause, you will have to repay the settlement sum in full. Any such term is extremely unlikely to be enforceable. The sum is often said to be due “as a debt,” which sounds very stern and official but won’t make it any easier to enforce.

Penalties and liquidated damages

It is well-established in contract law that a term in a contract that requires a party who breaches the contract to pay a specific sum to the other is only enforceable if it is a genuine estimate of what the breach of contract will actually cost the innocent party. So if your contract requires you to give 3 months’ notice of resignation, then a clause that says if you leave without notice you will have to repay your previous 12 months’ salary in full will be an unenforceable penalty clause – unless for some reason it really will cost your employer that much if you leave early.

If on the other hand your contract says that if you leave without notice, you will have to pay your employer £3,000, and £3,000 is a genuine estimate of the additional cost to them of employing an agency temp while they recruit to fill your post, that is a ‘liquidated damages’ clause, and enforceable.

Similarly with confidentiality clauses. It will rarely cost your employer anything – more than some annoyance and possibly embarrassment – if you breach the confidentiality clause in the agreement settling your claim. It is certainly most unlikely that a court would uphold their claim to the return of the whole settlement sum: see CMC Group plc v Michael Zhang EWCA [2006] Civ 48.

You may find this a useful bit of learning if you receive a penalty notice from the company running a private car park, too.

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