#6706 - Murray V. Leisureplay - Commercial Remedies BCL

Murray v. Leisureplay

Facts

Issues arising out of the dismissal by the respondents (“MFC”) of the appellant, Mr Murray, as Chief Executive Director of MFC. That dismissal prompted Mr Murray to sue MFC under clause 17.1 of his service agreement dated 2 June 1998 with MFC (“the agreement”). This court is concerned only with the small number of issues in the action which are the subject of the present appeal and cross appeal. The first issue (“the penalty issue”) is whether the clause in the agreement providing for the payment of a year's gross salary in the event of termination of Mr Murray's employment without one year's notice is unenforceable as a penalty.

The relevant clause in the contract provided:

Liquidated Damages: In the event of a Wrongful Termination by way of liquidated damages the Company shall forthwith pay to the Executive a sum equal to one year's gross salary, pension contributions and other benefits in kind assuming that salary, pension contributions and benefits in kind had continued to be paid at the same rate as immediately prior to the date of Wrongful Termination.

Holding

Buxton LJ

Re-casting the “in terrorum language”

I respectfully agree with my Lady in her paragraph 47, citing the observations of Mance LJ in the Cine case, that the language of stipulations in terrorem sounds unusual in modern ears; and particularly when applied to a contract such as the present, where a company well able to look after itself employed to play a leading and entrepreneurial role in its affairs a Chief Executive who, as his evidence cited by my Lady demonstrates, was motivated by a desire to protect his own interests.

That insight requires a recasting in more modern terms of the classic test set out by Lord Dunedin in Dunlop [1915] AC at p86:

“The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage”

That recasting is to be found in the judgment of Colman J in Lordsvale Finance plc v Bank of Zambia [1996] QB 752 at 762G, a passage cited with approval by Mance LJ in paragraph 13 of his judgment in the Cine case [2003] EWCA Civ 1699:

“Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for the breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if the breach occurred.”

Negative Test – Is the clause not a penalty?

It is important to note that the two alternatives, a deterrent penalty; or a genuine pre-estimate of loss; are indeed alternatives, with no middle ground between them. Accordingly, if the court cannot say with some confidence that the clause is indeed intended as a deterrent, it appears to be forced back upon finding it to be a genuine pre-estimate of loss. That choice illuminates the meaning of the latter phrase. “Genuine” in this context does not mean “honest”; and much less, as the argument before us at one stage suggested, that the sum stipulated must be in fact an accurate statement of the loss. Rather, the expression merely underlines the requirement that the clause should be compensatory rather than deterrent.

Not a purely subjective test

That at first sight produces a simple solution in this case. It is agreed, or at least it is fairly clear, that Mr Murray's intentions were not of a deterrent nature. Does it therefore follow of necessity that this clause cannot be penal? The authorities demand a more complex approach.

Disapproving the comparison of actual loss and amount payable

In particular, the respondents pointed to the last part of the citation from Colman J, that a guide as to the existence of penalty is to be found in the comparison between the stipulated amount and the possible loss that might be sustained in the event of breach.

I venture to disagree with that approach because it introduces a rigid and inflexible element into what should be a broad and general question. It is also inconsistent with warnings by judges of high authority that, at least in connexion with commercial contracts, great caution should be exercised before striking down a clause as penal; and with the tests that they have postulated to that end.

And exclusive concentration on the factual difference between the liquidated and the contractual damages overlooks a principal test formulated by Lord Dunedin to identify a penalty, [1915] AC at p 87, that “It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”

Application to facts

Neither the literal wording of that test nor the spirit of it applies here. Mr Murray's terms were generous, but they were not unconscionable. As to the absence of any requirement of mitigation in clause 17.1, to which as we have seen the judge attached determinative importance, two comments have to be made. First, it must have been difficult to say with confidence at the time of entering into the contract what might happen to Mr Murray were he to be dismissed: provisions protecting an employee in the case of wrongful termination may take the form that they do because such an event can damage his future employability, at least in the short term. Second, in order to meet this criticism a pre-estimate of damages clause would have to be drafted to encompass not only the fact of mitigation in terms of income from other sources but also the duty to seek such mitigation Such a clause would directly invite disputes about the reasonableness of Mr Murray's behaviour after termination, of the kind that clauses stipulating the amount of compensation are precisely designed to avoid. As Tindal CJ put it in Kemble v Farren (1829) 6 Bing 141 at p 148, a dictum approved in the Dunlop case, even where damages...