It’s never a happy day when you discover that a candidate introduced by your agency has been hired by your client without your knowledge and without a fee being paid. “Back door” hiring is an all too frequent occurrence in recruitment, but often these fees are not pursued (usually just in order to maintain your relationship with your client) or are settled out of court.
The normal way to cover off back door hiring is to include in your terms and conditions (or ensure that its included in your client’s terms) the requirement that your client pays more than the standard fee if they take on an applicant you’ve introduced without advising you of that fact within a specified number of days (14 or even less is not uncommon).
However, a recent court case involving a leading national IT recruitment specialist and a defendant IT computer support company, the Court upheld the claim for the fee despite the fact that the recruiter lacked a signed set of terms and conditions. The Court rejected 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 back door hire, a 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 where the dominant purpose is not 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 back door 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 fashion was significantly higher than it would have been 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.
In Court, 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, whilst the Court did not accept, based on the evidence available to it, that the higher fee payable amounted to a genuine pre-estimate of damage, it did conclude that the clause in question was nonetheless commercially justifiable and decided 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 freely entered into between commercial parties
- ultimately, the clause was not a penalty clause and the Court awarded our client the higher fee.
Summary
- where back door hires take place and clients face demands for a higher fee as a consequence, understand your negotiating position
- 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 as a penalty clause
- recruiters should take heart that clients can be held to the terms of the contract they originally agreed even when, as in this case, those terms and conditions were not signed by the parties
- the uncertainties of the Courts’ decisions on penalty clauses should be borne in mind by both parties when considering settlement of a claim
- always ensure that you have provided your client with terms and conditions – whilst you might not need to have them signed, you have to demonstrate that they have been provided!
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