UK: Golden Parachute Clauses: Court of Appeal Allows a Soft Landing

Last Updated: 20 October 2005
Article by Christopher Booth

Many executive service agreements contain ‘golden parachute’ or ‘liquidated damages’ clauses which provide for the payment of a predetermined amount where the agreement is terminated on short notice. Such a provision is unenforceable under general contractual principles if it amounts to a penalty clause. However, there has been little judicial guidance on exactly what this means in the employment context. However, in the recent case of Murray v Leisureplay plc the Court of Appeal made it clear that courts should be slow to strike down such clauses unless the sum payable is ‘extravagant and unconscionable’.

The facts

The case concerned the service agreement of Mr Murray, the respondent's chief executive, which provided for a twelve month notice period. However, in the event of wrongful termination (ie where the company terminated on no notice or on short notice) he was entitled to liquidated damages equal to one year's salary, pension contributions and other benefits in kind. This liquidated damages provision took no account of Mr Murray's duty to mitigate his loss by seeking alternative employment and so was likely to give him more than he would receive in a common law claim for damages for wrongful dismissal. As a result, when the Company subsequently dismissed Mr Murray on short notice they argued that they did not need to pay out under the clause because it was unenforceable as a penalty.

Was the clause a penalty?

The Court confirmed that a clause will be a penalty if its primary function is to deter a party from breaching the contract, rather than compensating the innocent party for the breach. However, the Court recognised how difficult it is, when drafting the contract, to estimate what would amount to genuine compensation in the event of wrongful dismissal some years down the line. Some leeway was therefore necessary and it was only if the clause was truly excessive that it would be struck down.

Practical Implications

The case gives useful guidance for those negotiating executive service agreements. It suggests that a golden parachute of up to one year's pay and benefits is likely to be enforceable - even if the clause makes no allowance for mitigation. However, fundamental problems with such clauses remain, particularly for listed companies as they go against corporate governance guidelines that compensation commitments on termination should avoid rewarding poor performance and reflect the director's obligations to mitigate loss. Consequently, employers should seek legal advice before agreeing to such provisions.

Statutory Grievance Procedures: What Constitutes a Statement of Grievance?

The statutory dismissal and grievance procedures, which lay down minimum procedures for dealing with workplace disputes, have now been in force for a year. Although it is too early to say whether these procedures have, as the Government intended, reduced the number of tribunal claims, it is clear that they have created a number of problems for employers.

One of these relates to the Step 1 statement of grievance which an employee must send the employer before commencing most types of tribunal claim. Unfortunately there is no statutory guidance on the form the statement should take and this is becoming a live issue in a growing number of cases. For example, in one recent case a tribunal held that there was no requirement that the claimant should have included the word 'grievance' or referred to the statutory procedures in his statement. In another, the tribunal held that a Solicitor's letter sent on behalf of the claimant to the respondent's lawyers could constitute a grievance letter. However, that was an unusual case as Solicitors were already involved prior to the grievance arising.

It is more likely that the statutory procedures were intended to require the employee to raise the grievance personally as this seems to accord more with the purpose of resolving disputes without resorting to litigation. Tribunal cases such as these do not create binding precedents and so clarification is needed from the EAT.

Practical Implications

Whilst uncertainty remains, the risk for employers is that they receive a letter from an employee (or his solicitor) and do not realise it is a grievance statement and so do not comply with the rest of the procedure. This could lead to liability to pay substantially increased compensation if the employee subsequently wins his case at tribunal. As a result, if you are in any doubt about the status of a communication from an employee, exemployee or his solicitor, you should seek legal advice immediately.

Do You Need To Know…?

New employment laws take effect on 1 October

A number of measures came into force on 1 October 2005. These include:

  • The Employment Equality (Sex Discrimination) Regulations which amend both the Sex Discrimination Act and the Equal Pay Act and, amongst other things, introduce a new definition of indirect discrimination;
  • The remaining provisions of the Employment Relations Act 2004. These changes include clarifying the extent of the employer's duty to give a union access to its workers pending a union recognition ballot and making some amendments to the information which unions have to give employers prior to industrial action;
  • An increase in the national minimum wage from £4.85 per hour to £5.05. At the same time the youth rate for 18-21 year olds went up to £4.25, whilst the rate for 16- 17 year olds remains unchanged at £3 per hour;
  • The new style tribunal forms (ET1 and ET3) became mandatory. Note that such forms will only be accepted if the form used is a paper copy provided by the Employment Tribunals Service (ETS) or is one completed on or downloaded from the ETS website. Any version not produced by the ETS (such as an in-house version) will not be accepted.

Maternity leave: keeping staff in the loop

Employers need to keep in contact with employees on maternity leave and should not leave them out in the cold - that is the message sent by the EAT in Athis v Blue Coat School.

In that case, whilst Mrs Athis was absent on maternity leave, the head posted details of the school's performance related pay scheme on the staff notice board. As a result, she was unaware she could make representations to the Head before he made his decision. She subsequently failed to get a pay rise. The EAT held that the failure to give Mrs Athis information which was available to other teachers in school could amount to sex discrimination. Employers should therefore check their systems to ensure that women on maternity leave are not overlooked, particularly on matters affecting terms and conditions of employment.

Cases referred to in this update:

Murray v Leisureplay plc [2005] EWCA Civ 963; Cooke v Secure Move Property Services Ltd ET 2400449/05; Aspland v Mark Warner Ltd ET 2200483/05; Athis v Blue Coat School EAT/90541/04.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.