Mon, 9 Jan 2012 | By Ashley Lawson, Solicitor, Pannone

Recruiters are justifiably unhappy and out of pocket when candidates introduced by the agency are hired by the client without a fee being paid. This so called ’back door’ hiring is an all too common occurrence in recruitment but these fees are often not pursued in order to maintain relationships or are settled out of court.

The usual way to address the issue of backdoor hiring is to include in terms and conditions a requirement that the client pays more than the standard fee if an applicant is taken on without notification to the recruiter.

However, in a recent court case involving a leading national IT recruitment specialist and the defendant an IT computer support company
the court upheld the claim for the fee despite the lack of a signed set of terms and conditions and the defendant’s argument that the clause in question was a penalty-clause.

Penalties: the established law

When faced with a claim for a higher fee from a backdoor hire, the defendant will typically try to argue that the clause in question is a penalty and therefore unenforceable.

When considering clauses, which stipulate payments payable on a breach of contract, the traditional analysis is that a clause which aims to deter a breach of contract is an unlawful penalty, whereas a clause which aims to estimate the damages that a party will suffer from a breach of contract is lawful.

The High Court recently emphasised that a third class of clauses, those which provide for a sum to be paid which is greater than that which might be sustained on breach, but which is nonetheless commercially justifiable and does not have as its dominant purpose to deter the other party from breach, would also be permissible.

Recent case

Our client brought a claim for payment of a fee against its own client who had made a backdoor hire. Our client’s standard terms and conditions provided that the fee which would be payable where it had introduced an applicant who was later taken on in this way was significantly higher than would have been payable had its client been open about the engagement of the applicant from the outset.

The defendant’s position was that the clause, which stipulated the higher fee was an unenforceable penalty clause.

At trial, despite the fact that the terms and conditions had not been signed, the court found that a contract was in place in accordance with our client’s terms and conditions.

In this particular case, the court did not accept that, on the evidence available to it, the higher fee payable did amount to a genuine pre-estimate of damage. However, it concluded that the clause in question was nonetheless commercially justifiable deciding that:

• the defendant had breached the contract in failing to notify our client of the engagement of the applicant
• such a breach should be compensated by damages
• the amount specified as payable in the contract was neither extravagant nor unconscionable when compared with the greatest loss our client might suffer from the breach
• the contract was entered into freely between commercial parties
• ultimately, the clause was not a penalty clause and the court awarded our client the higher fee.

Summary

• where backdoor hires take place and clients face demands for higher fees as a consequence
• the uncertainties of the courts’ decisions on penalty clauses should be borne in mind by both parties when considering settlement of a claim
• in a contract between commercial entities, showing that a payment clause is unconscionable or extravagant and not commercially justifiable may be a hard task before the court
• similarly, showing that the clause is not a genuine pre-estimate of loss is insufficient to establish it is a penalty clause
• recruiters should be encouraged that clients can be held to the terms of the contract they originally agreed even if, as in this case, the terms and conditions were not signed by the parties.