Golden Parachute Clauses: Court of Appeal Allows a Soft Landing

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.

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.

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.

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.

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.