- That having a fixed term contract necessarily assists an employer in limiting employment law liabilities such as unfair dismissal, discrimination and other employment law rights
- Employees believing that they will necessarily be entitled to be paid the full amount of the contract term if it is terminated, thereby displacing the normal rules about mitigation of loss.
The 2 primary reasons employers may consider fixed term employment contracts are to seek to limit employment law rights for the reasons above, or to tie in highly sought after staff for a lengthy period. Ad regards the latter, these types of contracts are common with very senior executives and of course sports people.
However, careful consideration should be given to the commercial merits and needs of such a contract and as regards drafting, as the following recent high profile case suggests. This case, involving the very short term tenure as Blackburn Rovers football club manager of Henning Berg, is perhaps informative on both fronts.
Firstly, whilst fixed term contracts are very common for football managers as well as players, the logic of giving Mr Berg a lengthy fixed term contract was perhaps questionable. Whilst he was an excellent international player and had some success as a manager, he was not perhaps a particularly high profile or most sought after manager. Whilst stability is one thing, just because it is something of an industry norm to have a fixed term contract does not necessarily mean it’s right or necessary in every case. Ultimately, perhaps the most important factor in these cases is the bargaining position of the parties and whether there is a business imperative for an employer to tie down an employee for an extended period.
As regards the issue of whether, with a fixed term contract, the full term of the contract should be paid out, the Berg v Blackburn case is especially informative.
As part of the contract between Berg and Blackburn he was entitled to be paid the unexpired part of the fixed term if Blackburn terminated the agreement before the end of the fixed term. The key point to note is that this entitlement was not linked to a breach of contract by Blackburn. They had the right to terminate as long as they paid out the contract. This form of fixed damages are known as liquidated damages and can cause problems in terms of recoverability under English law if they are considered to be a penalty clause for breach of contract. The rationale for this is that damages for contractual breach should be proportionate to actual losses incurred and proved by the innocent party.
The case was rather peculiar also in that Blackburn tried to obtain leave of the court to withdraw an admission already made that they owed Mr Berg a sizeable sum of money and also sought to argue that the club’s Managing Director did not have authority to bind the owners on the terms of the fixed contract.
The club’s argument that the balance of the contract should not be paid out because it was a penalty clause was rejected by the court on the basis that the payment to Mr Berg was not based on breach of contract.
A possible irony of this situation is that, had Blackburn breached the contract it is arguable that this may have potentially dramatically worsened the position of the innocent party, Mr Berg. We say potentially because it is far from every case where a liquidated damages clause linked to a contract breach is unenforceable. So it is still possible that Mr Berg would have been fine.
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