It is common to see in a Compromise Agreement a clause to the effect that the compensation monies will be repayable in the event that the employee breaches any of the commitments it makes to the employer in the Agreement.
In the recent case of CMC Group plc v Zhang the Court of Appeal held that the clause in the settlement agreement signed by Mr Zhang which stated that the full US $40,000 settlement amount would be repayable if he broke any terms in the agreement was a penalty clause and therefore void and unenforceable.
CMC Group plc thought that Mr Zhang had breached the terms of the settlement agreement relating to non-harassment and derogatory remarks and sought to reclaim the US $40,000 settlement amount. The Court of Appeal held that fixed damages of US $40,000 for Mr Zhang's alleged breach was excessive and therefore the clause was a penalty clause. It was still open to CMC Group plc to pursue Mr Zhang for damages arising from his breach of the settlement agreement.
It remains to be seen whether CMC Group will appeal this decision to the House of Lords. In the meantime lawyers are likely to be considering whether they can amend their standard wording to avoid a finding that their repayment clause constitutes a penalty and not a genuine pre estimate of loss.
