This article was first written for and published by LawInSport. Click here to view the original.
The storms following the recent autobiographical releases from Roy Keane and Kevin Pietersen1, which each contain arguably inflammatory comments by the individuals about their ex-employers, were perhaps a little predictable, but nonetheless provide interesting examples on the operation of sports stars’ termination agreements, in particular how confidentiality (gagging) clauses interact with both penalty clauses and competition law in the sphere of employment relationships.
The English Cricket Board (ECB) inserted a gagging clause into Pietersons termination package and, while mutual non-derogation clauses are common in many termination agreements, in practice little attention is paid to them, as proving a breach is often very difficult. It is rare that there will be clear evidence of a leak and where it came from.
Additionally, a requirement that all monies are repaid by an offending employee is likely to be a penalty clause. The essence of a penalty is that a sum is payable on breach of the agreement.
Historically if the sum payable on breach was extravagant or unconscionable in amount in comparison to the greatest loss that could conceivably be proved to have followed from the loss it will probably be a penalty.2 But more recently, the courts have held that factors like access to legal advice and equality of bargaining power may be a factor. Also that damages may be difficult to quantify or may not be full compensation because there is damage to reputation. So if a penalty clause does not accurately reflect the losses attributable to a breach, and are there simply to deter breaches and are, it is said, punitive it is likely to be a penalty. In contrast if the forfeit for breach is a genuine pre-estimate of loss it was more likely to be upheld.
There has, however, been a shift in the approach. In the latest Court of Appeal case of El Makdessi v. Cavendish Square Holdings BV and another3 the various factors referred to above were examined and approved and it was held that there may not be the old distinction between genuine pre-estimates and penalties: there may also be a `good commercial reason’ for the clause. Quite what that will be is clearly dependent on the facts of each case.
It is settled law that a clause protecting truly confidential information (trade secrets and business plans for example) must be reasonable as it would otherwise be a restraint of trade.4 A clause restricting free competition must, ordinarily, be reasonable in length, scope and there must be a legitimate underlying interest it seeks to protect in order to be upheld.
That is why there is usually the back-up in an employment relationship of other post termination restrictions preventing competition. Ordinarily the employer will try and use non-solicitation and non-compete obligations to restrain the employee but that will not be so easy in dealing with a pure gagging clause, albeit one with other attractive features such as a pay-off.
For the same principles to apply in a pure gagging clause it would, depending on the underlying interest that is to be protected, need to be of determinate length and specify what could and could not be done. One can think of more serious issues than the sensitivities of the ECB and England team in other areas such as privacy and child protection where longer, if not indefinite, periods, might apply.
If the clause is truly mutual there will be no real issue but the usual restraint of trade arguments could well apply, as well as those on how well the restriction is drafted and what can and cannot be done (known as `certainty’), and if the clause is a restraint of trade and void for public policy, as it restricts the individual’s economic activity, these arguments could come into play should an individual wish to challenge the clause.
Take Pietersen for example. Had he been offered a commentating job for the summer tests, could any such clause have restricted him in this? If the clause was that he could not disparage the ECB and England team members he would be severely constrained in his views on loose shots or poor bowling? It depends on the clause and also he may well have taken the view it was not worth the risk of jeopardising the other elements of the package.
A number of other factors will also go to the reasonableness of the bargain including the fact that the clause was entered into at the end of the relationship, for a payment and, one assumes, on legal advice. The Courts might not scrutinise such a clause too carefully. That may not always be the case though, and if the agreement was entered into at the start of the relationship, and had the effect of restraining an individual from post-employment activities, there would be powerful arguments against enforceability as inequality of bargaining power would hold more sway.
Care will have to be taken when drafting gagging clauses in the future or they may be meaningless.
Meanwhile the books sell.