Payment on contractual termination "not a penalty"

Summary: One of the defining points about a penalty is that it is payable on breach. In an application to withdraw an admission, the High Court has held that a payment of £2.25m on termination of a contract could not constitute a penalty on the grounds that the trigger for payment was early termination and not breach. The contract in question was for a fixed term but express provision was made to allow one party to bring it to an end during that fixed term. As a separate point, there could be no doubt that a managing director of a public limited company had implied or usual authority to sign the agreement in question: Henning Berg -v- Blackburn Rovers Football Club & Athletic PLC [2013] EWHC 1070 (Ch).

"The law relating to penalty clauses is entirely immaterial". The contract in question was a service agreement between an individual, Henning Berg, and Blackburn Rovers Football Club & Athletic PLC appointing Mr Berg as the club's manager. It was intended to run for a fixed period, but included a clause allowing Blackburn to terminate within that period "...provided that it shall pay to the Manager a compensation payment by way of liquidated damages in a sum equal to the Manager's gross basic salary for the unexpired balance of the Fixed Period..." Just over a month following signature, Blackburn did in fact terminate and argued that the £2.25m which Mr Berg claimed under this clause could be a penalty and, as a result, unenforceable beyond the extent of Mr Berg's actual loss. The court quickly pointed to the fact that, according to the express terms of the contract, Blackburn was perfectly entitled to bring the arrangement to an end during the Fixed Period, the only condition being that if it did so it had to pay a sum of money to Mr Berg. Blackburn was therefore not in breach of contract, and as the essence of a penalty is that it is triggered by breach, the law on penalties did not apply. The rules about penalties are intended to prevent a claimant recovering a payment on breach which differs hugely from the loss it has actually suffered - in contrast, it has never been the task of the courts to intervene in poor commercial bargains.

Contract clearly within managing director's implied or usual authority.
Mr Shaw, Blackburn's managing director, signed the agreement on behalf of the club. Although there was space for another signature, no other corporate officer signed, and it was accepted that the agreement was binding despite the absence of a second signature. However, it was unarguable to say that Mr Shaw did not have implied or usual authority to sign employment contracts on Blackburn's behalf. As managing director, he had been held out by the club as having the usual authority of someone holding that office, and it was well established in the football industry that it is "perfectly normal and proper" for managing directors, and finance directors, of clubs to negotiate and sign managers' contracts on behalf of their clubs. The question of whether Mr Shaw's actual authority was limited to offering a contract with a lower termination payment was a potential issue as between Mr Shaw and either the club or Mr Berg and was not material to Mr Berg's claim against the club.

Please click on the links below for the other articles in the February 2010 commercial contracts newsletter: