Careful Drafting Can Save Millions of Pounds as Dismissal of David Moyes Demonstrates
The sacking of Manchester United manager David Moyes just ten months into a six year contract shows how important it is to have carefully drafted termination provisions in employment contracts.
Moyes’ £4 million-a–year contract was terminated by the club after a disastrous season which saw them lose to Sunderland in the semi-final of the Capital One Cup, to Swansea in the FA cup and to Bayern Munich in the quarter finals of the Champions League. They are now on course to finish in their lowest position in the Premier League since 1990 and will miss out on Champions League football next year for the first time since 1995.
Although Moyes’ contract had more than five years left to run, it is being reported that he is likely to receive compensation of one year’s salary, rather then being paid out for the whole of the balance of the contract. It is likely that the club has been able to reduce its liability to Moyes by including performance criteria in the contract which allowed it to terminate early if the performance conditions were not met.
This situation can be contrasted with other high profile football departures. Chelsea paid out £20 million to Jose Mourinho after he left the club with three years left to run on a five year £5 million-a year contract. Just eight months later Avram Grant received a pay out of £13.3 million after his four year contract was terminated. The level of these payments suggests that Chelsea had to pay out the contract in full and could not rely on early termination provisions.
Where a fixed term contract is terminated early, the employee is entitled to be compensated for their net loss of salary and benefits for the balance of the fixed term. They have a duty to mitigate their loss by searching for alternative employment, so if they find another job their earnings from that job will reduce the compensation the former employer has to pay. Sometimes the contract will expressly allow the employer to terminate the contract by making a payment in lieu of notice of the balance of the fixed term. If the employer exercises that right, it is normally obliged to pay the full salary for the balance of the fixed term, irrespective of whether the employee has another job to go to.
However, it is also possible to include a provision in a fixed term contract which allows the parties to terminate early, either generally, or at particular points in the contract or on particular grounds. The precise scope of the termination provisions is a matter for agreement between the parties and their breadth will depend on the relative bargaining power of the parties. Football clubs may be prepared to forego early termination provisions in order to attract their manager of choice but this will result in increased compensation being payable if things go wrong. With David Moyes receiving the backing of outgoing manager Sir Alex Ferguson and the obvious attraction for Moyes of following in Sir Alex’s footsteps, it is possible that this gave Manchester United the upper hand in the contractual negotiations, enabling them to negotiate the right to terminate his employment early if performance criteria were not met. If the reports are correct and Moyes is only entitled to one year’s compensation instead of five, the careful drafting of his contract has saved Manchester United somewhere in the region of a cool £16 million. Then again Manchester United would have preferred David Moyes to have been a success.
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