Repayment clause

Case 6: The facts

When he left his job, Michael Zhang entered into a settlement agreement containing a clause which said he would have to repay the full amount of the settlement ($40,000) if he broke any of the agreement’s terms; these included terms relating to harassment and derogatory or unfavourable communication.

His former employer later claimed that Zhang breached the agreement (by making demands for money he said he was owed, and contacting members of staff), and issued proceedings to recover the full amount.

The ruling

The Court of Appeal held that fixed damages of $40,000 for breaching a “non-derogatory statement” clause were “plainly excessive”, as the losses resulting from any such statement may only be nominal.

The repayment clause therefore amounted to a penalty clause and was unlawful, the court said, although it added that the employer was entitled to bring a claim to recover any actual losses it could prove it had incurred.

CMC Group plc & others v Zhang [2006] EWCA Civ 408