Crowe Horwath (Aust) Pty Ltd v Loone

[2017] VSC 163

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION
EMPLOYMENT AND INDUSTRIAL LIST

S CI 2016 02982

CROWE HORWATH (AUST) PTY LTD (ACN 006 466 351)	Plaintiff and Defendant by Counterclaim
v
ANTHONY LOONE	Defendant and Plaintiff by Counterclaim

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JUDGE:	McDonald J
WHERE HELD:	Melbourne
DATE OF HEARING:	13 to 16 February and 21 February 2017
DATE OF JUDGMENT:	4 April 2017
CASE MAY BE CITED AS:	Crowe Horwath (Aust) Pty Ltd v Loone
MEDIUM NEUTRAL CITATION:	[2017] VSC 163

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CONTRACT – Contract of employment – Enforceability of covenant in restraint of trade – Legitimate interest of employer in protecting its goodwill in its clients – Severance – Whether geographic restraint severable – Covenant severed – Balance of covenant enforceable – Whether contract of employment terminated by reason of defendant’s acceptance of plaintiff’s repudiatory conduct – Whether restraint of trade covenants survived termination effected by defendant’s acceptance of plaintiff’s repudiation of contract – Interlocutory injunction restraining defendant from providing accounting services to clients of plaintiff discharged.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr A Moses SC and Mr N Harrington	Mills Oakley
For the Defendant	Mr J Bourke QC and Mr A P Rodbard-Bean	Marsh & Maher

HIS HONOUR:

Introduction

1. In November 2000, the Launceston accounting firm Garrotts was acquired by Investor Group Ltd.  At the time, Anthony Loone was a partner of the firm.  In the ensuing years there were a number of changes in the trading name and ownership of the Investor Group Ltd.  In August 2012, the business traded under the name Crowe Horwath Australia (‘CHA’).  On 1 November 2012, Mr Loone entered into a contract of employment with CHA as Managing Principal of CHA’s Launceston office (‘the Contract’).  The registered office of CHA is in Melbourne.  Thus, although the focus of the current proceedings has been concerned with Mr Loone’s employment in Launceston, neither party contended that the plaintiff’s claim was not properly commenced in the Supreme Court of Victoria.

1. In January 2015 CHA was acquired by Findex Group Ltd.  Much of the evidence in the current proceedings concerned the impact of that acquisition upon the contract entered into by Mr Loone on 1 November 2012.  Mr Loone contends:

(i)         that during the period from late 2015 until July 2016, CHA engaged in conduct which constituted a repudiation of the Contract;

(ii)       that the conduct, viewed in isolation or cumulatively, entitled him to terminate the Contract on 12 July 2016;

(iii)      that the restrictive covenants (which he contends are unenforceable as unreasonable restraints of trade) are of no legal effect post the termination of the Contract on 12 July 2016.

1. I have concluded that the restrictive covenants in cl 3.1 of sch 2 of the Contract are enforceable, save for the geographic restraint in cl 3.1(c).  However, cl 3.1(c) is severable.  Notwithstanding that the clause is enforceable, Mr Loone terminated his contract of employment on 12 July 2016 by accepting the repudiatory conduct of CHA.  As a consequence, the restraints prescribed in cl 3.1 are of no legal effect.  I have rejected CHA’s contention that irrespective of any repudiatory conduct, the restraints survived the termination of the contract.

1. The current proceedings were heard over five days in February 2017.  In September 2016, the Court granted an interlocutory injunction restraining Mr Loone from providing accounting services to 89 clients with whom he had had direct dealings in the 12 months prior to July 2016.  As a consequence of the findings set out above, Mr Loone is entitled to an order discharging the injunction granted on 26 September 2016. 

1. During the course of the trial in February 2017, the Court had the benefit of comprehensive evidence and submissions.  It must, however, be observed that Mr Loone advanced submissions on whether the Contract had been repudiated which were not advanced during the interlocutory hearing in September 2016.  Further, submissions which were advanced during the interlocutory hearing were not pressed during the trial in February this year.  It is unnecessary to express any conclusion in this judgment as to what consequences, if any, flow from this change of position.  That issue will potentially fall for determination in further proceedings which address whether Mr Loone has an entitlement to damages by reason of this judgment and the discharge of the injunction granted on 26 September 2016.

The restraints in the contract are enforceable

1. Clause 3.1 of sch 2 of the Contract contains the following restrictive covenants:

3.        Restrictions

3.1Having regard to the acknowledgements set out in clause 1 of this Schedule 2, you will not, during the Restraint Period, either directly or indirectly, on your own account, jointly or with any other person or as an employee or otherwise:

(a)canvass, solicit, entice away or interfere with, or endeavour to canvass, solicit, entice away or interfere with, any Client for the purposes of having services of the nature provided by the relevant Group Member provided by anyone other than a Group Member;

(b)undertake or perform for a Client work of a kind which involves the provision of services which are, in whole or in part, the same as or similar to the services provided by the Company or any Group Company;

(c)if you were employed as a Principal, Associate Principal, Managing Principal, Chief Executive, Regional Chief Executive or Executive at the time of, or at any time during the 12 months prior to, the termination of the Employment – Engage in any business, activity or operation which is the same as, substantially similar to or competitive with the Business, or any material part of the Business, and which is based within a 5 kilometre radius of either:

(i)the location at which you were based immediately prior to the termination of the Employment;  or

(ii)if you worked out of more than one location – all locations out of which you regularly worked in the 12 months prior to the termination of the Employment;

(d)interfere with the relationship between any Group Member and any of their Clients, Group Employees or Contractors;  or

(e)approach, solicit, encourage or induce any Group Employee or Contractor to leave their employment or cease their engagement;

(f)counsel, procure or otherwise assist any person to do any of the acts referred to in this clause.[1]

[1]Exhibit P1: Plaintiff’s Court Book, 161-2.

1. Clause 3.1(a) and (b) imposed restraints in respect of a ‘Client’.  Client is defined in cl 31.5 of the Contract as:

an entity or person who is or was a client of a Group Member with whom you had direct dealings during the 12 months immediately prior to the cessation of the Employment.[2]

[2]Ibid 155.

1. The restraints in cl 3.1 operate during a ‘Restraint Period’.  This term is defined in cl 31.20 as:

the period commencing on the date of cessation of the Employment (however that termination may occur) and for a period of:

(a)       12 months;

(b)       9 months;

(c)       6 months;

(d)      3 months.[3]

[3]Ibid 157.

1. A covenant in restraint of trade will be unenforceable if it does more than is reasonably necessary to protect legitimate interests of the covenantee.[4]  CHA has a legitimate interest in protecting its client base.  In Lindner v Murdock’s Garage, Latham CJ stated:

Where an employee is in a position which brings him into close and personal contact with the customers of a business in such a way he may establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of his business, a covenant preventing him from accepting employment in a position in which he would be able to use to his own advantage and to the disadvantage of his former employer the knowledge of and intimacy with the customers which he obtained in the course of his employment should, in the absence of some other element which makes it invalid, be held to be valid.[5]

[4]Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, [18], [50] (‘Wallis Nominees’).

[5](1950) 83 CLR 628, 636.

1. The passage set out above was cited with approval by the Victorian Court of Appeal in Birdanco Nominees Pty Ltd v Money.[6]

   [6](2012) 36 VR 341, [44] (‘Birdanco’).

1. Prior to his departure on 12 July 2016, Mr Loone was the senior employee in CHA’s Launceston office.  He had been employed by CHA since late 2000.  He was a long standing senior employee.  I have no hesitation in concluding that during the period of his employment he developed very close professional relationships with his clients.  As an accountant he would have assumed the mantle of a trusted advisor.  Even if he had been subject to a restrictive covenant restraining him from soliciting clients based on cl 3.1(a), there is a high likelihood that post July 2016 clients, of their own volition, would have left CHA and sought out Mr Loone so that he could provide accounting services.  CHA had a legitimate interest in protecting the goodwill in its business constituted by its client base.  That legitimate interest was protected by cl 3.1(b) which prevented Mr Loone post termination of employment from undertaking or performing work for a Client, work of a kind which involves the provision of services which are, in whole or in part, the same as or similar to the services provided by CHA.

1. An issue arose in the proceedings as to the meaning of the phrase ‘direct dealings’, in the definition of ‘Client’.  Mr Moses SC, who appeared with Mr Harrington for CHA, submitted that ‘direct dealings’ was not confined to direct personal dealings between Mr Loone and clients.  Rather, he submitted that ‘direct dealings’ included any client in respect of whom Mr Loone was recorded in CHA’s business records as having had any involvement, irrespective of whether this involved personal dealings.[7]  Based on CHA’s business records, Mr Moses submitted that there were approximately 880 clients with whom Mr Loone had ‘direct dealings’ in the 12 months prior to 12 July 2016.[8]

   [7]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 13 February 2017) T6 L24 – T7 L9, T9 LL11–25.

   [8]Ibid T9 LL11–25, T22 L27.

1. I reject Mr Moses’ submission regarding the meaning of ‘direct dealings’ in the definition of Client.  Clause 3.1(b) is enforceable as a valid restraint because CHA has a legitimate interest in protection against the loss of clients with whom Mr Loone had developed a close personal relationship through his employment.  On the other hand, CHA does not have a legitimate interest in protection against competition, per se.  If the effect of cl 3.1(b) read in conjunction with the definition of Client was to prevent Mr Loone from providing services to clients with whom he had not had any direct personal dealings, the clause would be unenforceable as an unreasonable restraint of trade.  So construed, cl 3.1(b) would do more than what is reasonably necessary to protect CHA’s legitimate interests.

1. Further, there is a direct nexus between the reasonableness of the restraint period of 12 months and the meaning of ‘direct dealings’ in the definition of Client.  In Birdanco, the Court of Appeal upheld the validity of a three year restraint period.  Robson AJA stated:

Justice Heydon suggests a test that has particular relevance in this case: ‘how soon the hold of the old employee over customers will weaken: that is, what is the time that would have to elapse before a branch manager who has quit the territory would no longer be able to return and acquire his business?’ 

In my view, it is probable that Mr Money would still retain some material level of attachment necessarily formed with a client by providing ‘the Services’ after an almost six year break in providing those services.  Mr Money would have a degree of knowledge of the client’s affairs that would avoid the client having to explain and disclose its financial structure and history, something it would have to disclose if it retained somebody unaware of its circumstances.  Part of the attraction of the client of retaining Mr Money would by the attachment that was formed when he was employed by Bird Cameron in providing ‘the Services’ to the client.

In my opinion, three years is a reasonable time during which Bird Cameron was entitled to protection against Mr Money exploiting the goodwill he created for the benefit of Bird Cameron when providing ‘the Services’ to clients of Bird Cameron.[9]

[9](2012) 36 VR 341, [82]–[84].

1. The test formulated by Heydon J and cited with approval by the Court of Appeal in Birdanco directs attention to what is a reasonable period of time during which CHA is entitled to protection against Mr Loone exploiting the relationship which he built up with clients of CHA over an extended period of time.  This in turn directs attention to the nature of the relationship between Mr Loone and the clients he dealt with. 

1. I have concluded that cl 3.1 operates in respect of clients with whom Mr Loone had direct dealings in the sense of direct personal dealings.  The relationship which Mr Loone developed with these clients by reason of personal contact was such that it would take at least 12 months for his connection with those clients to weaken.  Accordingly, if the concept of direct dealings is confined to direct personal dealings, a 12 month restraint is not invalid by reason of exceeding that which is reasonable to protect CHA’s legitimate interest in its goodwill in its clients.  However, if, as contended by CHA, the ‘direct dealings’ extended to 881 clients, a restraint period of 12 months would exceed that which is reasonable to protect CHA’s legitimate interests.  I accept Mr Loone’s evidence that he did not have personal dealings with the overwhelming majority of the 881 clients identified by CHA as clients with whom he had had direct dealings.[10]

   [10]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T310 LL19–20.

1. Clause 3.1(c) imposes a geographic restraint on Mr Loone preventing him from engaging in competitive activities with CHA within a 5 kilometre radius of CHA’s Launceston office.  In the current proceedings, CHA does not press for an injunction based on cl 3.1(c).[11]  It contends that cl 3.1(c) is severable.[12]  For his part, Mr Loone submitted that the geographic restraint imposed by cl 3.1(c) is not severable and constitutes an unreasonable restraint of trade.[13]  He contends that if cl 3.1(c) is not severable then the presence of that restraint in cl 3.1 has the effect that cl 3.1 in its totality is rendered invalid and unenforceable.[14]

   [11]Ibid (13 February 2017) T11 LL11–14.

   [12]Ibid (21 February 2017) T530 LL5–12.

   [13]Ibid (13 February 2017) T40 L23 – T41 L12.

   [14]Ibid (21 February 2017) T543 LL8–14.

1. Unlike cl 3.1(a) and (b), the restraint in cl 3.1(c) upon Mr Loone engaging in business in competition with CHA is not underpinned by any client connection.  On the other hand, cl 3.1(c) does not operate as a blanket prohibition upon Mr Loone engaging in competitive business activities.  To this extent it is not a prohibition against competition, per se.

1. Clause 3.1(c) is capable of severance without altering the nature of the employment contract and without any modification to cl 3.1 other than by excision.  As such, cl 3.1(c) falls within a category of restraint clause which may legitimately be severed.[15]  Mr Bourke QC, who appeared with Mr Rodbard-Bean for Mr Loone, submitted that the Court should exercise its discretion to refrain from severing cl 3.1(c) because the clause acts ‘in terrorem by exposing employees to the threat of litigation’.[16]  I do not accept this submission.  Mr Loone was the senior employee in CHA’s Launceston office and had been for many years.  Clause 3.1(c) must be construed in the context of CHA’s legitimate interest in protecting its goodwill in the event of Mr Loone’s departure from the company.  Although cl 3.1(c) goes further than is necessary to protect CHA’s legitimate interests, it is not legitimately characterised as a clause which acts in terrorem in respect of an employee of Mr Loone’s senior standing.

   [15]SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516, [46]; Wallis Nominees (2013) 45 VR 657, [93]–[95].

   [16]‘Anthony Loone’s Closing Submissions’ dated 20 February 2017, [265], quoting IF Asia Pacific Pty Ltd v Galbally (2003) 59 IPR 43, [201].

1. I accept CHA’s submission that cl 3.1(c) is capable of being severed.  Prima facie, the restraints in cl 3.1 are otherwise valid and enforceable.  This prima facie position is subject to the following questions:

(iv)       was Mr Loone’s contract terminated on 12 July 2016 by reason of him accepting CHA’s repudiatory conduct?;

(v)        if so, do the restraints in cl 3.1 nevertheless continue to operate post termination of the contract?

CHA’s repudiation of Mr Loone’s contractual rights under clause 7.5 of the contract

1. Clause 7.5 of the Contract provides:

The bonus you may be eligible to get forms a discretionary component of your Remuneration.  The Company will determine from time to time, at its absolute discretion, the amount of any bonus payment that may be made to you. This amount will be determined by consideration of various performance parameters including but not limited to your personal performance, the performance of the Group and the broader economic conditions.  You will be eligible to receive a bonus in any year if, and only if, you are in the employ of the Company at the time the bonus is to be paid and you have not, prior to that time, given or been given notice of termination of your employment.[17] 

[17]Exhibit P1: Plaintiff’s Court Book, 148.

1. Mr Loone contends that CHA engaged in conduct which in two respects constituted a breach of its obligations under cl 7.5, and which entitled him to accept such conduct as terminating the Contract.  First, Mr Loone contends that on 1 July 2016 his superior, Mr Bruce Roberts, informed him during a telephone conversation that CHA, in the assessment of the Launceston bonus pool, would not be taking into consideration the work which had been undertaken by Mr Loone in facilitating the acquisition by CHA of a Launceston accounting firm, the Davey Financial Group (‘DFG’).[18]  Mr Loone submits that CHA failed to assess his bonus entitlement in accordance with mandatory assessment criteria prescribed by cl 7.5.[19]  Second, Mr Loone contends that during a presentation by senior executives on 9 June 2016, he was informed that CHA proposed to alter the bonus system by withholding 20 per cent of annual bonus payments for a period of three years.[20]  Mr Loone submits that although cl 7.5 conferred upon CHA a discretion to determine the amount of any bonus payment, once the amount was determined, CHA was obliged to pay that amount in full during the relevant bonus year.[21] 

   [18]‘Anthony Loone’s Closing Submissions’ dated 20 February 2017, [162].

   [19]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T433 LL10–16.

   [20]‘Anthony Loone’s Closing Submissions’ dated 20 February 2017, [110].

   [21]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T433 LL10–16, T434 L27 – T435 L1.

1. In October 2014, Mr Loone commenced discussions with Mr Davey, the principal of DFG, regarding the acquisition of DFG by CHA.  The acquisition was finalised in late August 2015.[22] CHA paid $2.2 million to acquire DFG.[23]  Mr Loone was the ‘main person’ from CHA involved in effecting the DFG acquisition.[24]  The acquisition of DFG was budgeted to generate $1.086 million in its first full year of operation.[25]  For the financial year ending 30 June 2016, the DFG acquisition contributed approximately $440,000 net profit to the Launceston office profits.[26]  Mr Loone estimated that the DFG acquisition was worth a minimum of $200,000 for the Launceston bonus pool for distribution amongst himself and other Principals in CHA’s Launceston office.[27]

   [22]Ibid (15 February 2017) T236 LL29–31.

   [23]Ibid T238 L21.

   [24]Ibid LL22–23.

   [25]Ibid LL4–5.

   [26]Ibid (16 February 2017) T404 L27.

   [27]Ibid T400 L16.

1. As a result of the DFG acquisition, one financial advisor and 10 accounting staff previously employed by DFG were integrated into CHA’s Launceston office.[28]  Mr Loone devoted at least 600 hours to the acquisition of DFG.[29]  His superior, Mr Roberts, was very supportive of the acquisition.  Mr Roberts understood the benefits that the acquisition could bring both financially but also in terms of DFG’s talent and the ability to take advantage of additional staff utilising CHA’s existing premises.[30] 

   [28]Ibid (15 February 2017) T237 LL1–3.

   [29]Ibid L14.

   [30]Ibid LL18–21.

1. On 1 July 2016, Mr Loone received a telephone call from Mr Roberts.  Mr Roberts told Mr Loone that he, Mr Roberts, had been told by Michael Wilkins that the profitability flowing from the DFG acquisition would be excluded from the calculation for the Launceston bonus pool.[31]  Mr Wilkins is a senior executive of CHA who has overall management responsibility for all of CHA’s 112 offices located around Australia and New Zealand.  Mr Roberts also told Mr Loone that Mr Wilkins had said that the DFG acquisition would be excluded from the bonus pool because Findex had bought the business and should therefore get the benefits of the acquisition.[32]  Mr Roberts told Mr Loone that Mr Wilkins had stated that there should be no adjustment to the bonus pool in respect of Mr Loone’s involvement in the acquisition because this was part of his role as Managing Principal of the Launceston office.[33]  Mr Loone made contemporaneous notes of his discussion with Mr Roberts on 1 July 2016.  Relevantly, those notes include the following:

   [31]Ibid T293 L25 – T294 L2.

   [32]Ibid T295 LL2–4.

   [33]Exhibit D1: Defendant’s Court Book, 813, 814A.

No adj for MP involv – part of role.[34]

As expanded and explained in his typed file note of 1 July 2016, this entry is recorded as:

No adj (adjust) for MP (managing principal involvement – part of role.[35]

[34]Ibid 813.

[35]Ibid 814A.

1. Mr Loone’s contemporaneous notes of his discussion with Mr Roberts on 1 July 2016 also includes a note:

BR (Bruce Roberts) – old ch model.[36]

[36]Ibid.

1. Mr Loone’s evidence is that this note records Mr Roberts agreeing that the DFG acquisition should have been included in the Launceston bonus pool.[37]  Mr Loone’s evidence was that the exclusion of the DFG acquisition from the Launceston bonus pool had a significant adverse impact upon the quantum of his bonus, as he was a benefactor of that pool.[38] 

   [37]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T294 LL29–31.

   [38]Ibid T294 L4, T295 LL26–29.

1. Mr Wilkins was cross-examined regarding the statements attributed to him by Mr Roberts during the conversation with Mr Loone on 1 July 2016.  Mr Wilkins stated that he did not recall any conversation with Mr Roberts prior to 1 July 2016 during which he had told Mr Roberts that the DFG acquisition would not be taken into account when fixing Mr Loone’s bonus.[39]  Mr Wilkins agreed that the DFG acquisition would need to be taken into account when considering Mr Loone’s personal performance and the performance of CHA as a whole.[40]  Mr Wilkins’ evidence was that the DFG acquisition was ultimately taken into account for the purposes of determining the quantum of the Launceston bonus pool when the bonus was paid in late August 2016.[41]  However, he also gave evidence that the DFG acquisition was in fact taken into account prior to Mr Loone’s departure on 12 July 2016.[42]

   [39]Ibid (14 February 2017) T186 LL11–13.

   [40]Ibid T187 LL4–11.

   [41]Ibid T188 LL2–6.

   [42]Ibid T189 LL12–13.

1. It is impossible to reconcile Mr Wilkins’ evidence with the account given by Mr Loone of his telephone conversation with Mr Roberts on 1 July 2016.  That account, together with Mr Loone’s contemporaneous notes, supports a finding that on 1 July 2016 Mr Roberts told Mr Loone that Mr Wilkins had stated that there would be no adjustment to the quantum of the Launceston bonus pool to take account of the profit arising from the DFG acquisition and no adjustment of the pool to reflect Mr Loone’s role in relation to the acquisition. 

1. It was put to Mr Loone in cross-examination that during the conversation with Mr Roberts on 1 July 2016 he was told that Mr Roberts was uncertain as to how the bonus pool would be made up.  It was put to Mr Loone that his note of the conversation: ‘Bruce not sure’,[43] was a reference to Mr Roberts expressing uncertainty as to whether the DFG acquisition would be included in the bonus pool.[44]  Mr Loone denied this.  He stated that his note was a reference to uncertainty regarding the payment of a bonus to an ex-employee, Dallas Frost, who had resigned prior to 1 July 2016.  He said an issue was raised by Mr Roberts as to whether Mr Frost’s bonus entitlement would remain in the Launceston pool to be distributed among other Principals.[45]  I accept Mr Loone’s evidence on this point.  Mr Loone’s contemporaneous notes of his discussion with Mr Roberts on 1 July 2016 are unequivocal in recording Mr Roberts’ statement that the DFG acquisition was to be excluded from the Launceston bonus pool and that no adjustment was to be made to reflect Mr Loone’s personal involvement in the acquisition.  Further, the note is unequivocal in recording Mr Roberts’ statement that ‘Findex bought business so should get rewards/profits’.[46]

   [43]Exhibit D1: Defendant’s Court Book, 814A.

   [44]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 16 February 2017) T398 LL22–28.

   [45]Ibid T398 L28 – T399 L3.

   [46]Exhibit D1: Defendant’s Court Book, 814A.

1. To the extent that reliance is placed on the evidence of Mr Loone’s discussion with Mr Roberts on 1 July 2016 as evidence of the truth of the statements made by Mr Roberts, the evidence is hearsay.  No objection was taken to the admissibility of the evidence.  However, in order to succeed in his claim that the statements made by Mr Roberts constituted a repudiation of the contractual obligations imposed upon CHA by cl 7.5, it is not necessary for Mr Loone to establish that Mr Wilkins did in fact tell Mr Roberts that:

(a)   the DFG acquisition would not be included in the Launceston bonus pool;

(b)   that there would be no adjustment to the bonus pool to reflect Mr Loone’s involvement in the acquisition.

1. Rather, in determining whether the statements made by Mr Roberts constituted repudiatory conduct by CHA, the question is whether CHA manifested an unwillingness to perform a contractual obligation imposed by cl 7.5.  The resolution of that question does not turn upon whether the statements made by Mr Roberts as to what he was told by Mr Wilkins were in fact true.  Rather, it turns upon:

(a)       whether Mr Roberts told Mr Loone what he, Roberts, claimed he had been told by Mr Wilkins; and

(b)      if so, whether the statements manifest an unwillingness by CHA to perform the contractual obligations imposed by cl 7.5.

1. I would in any event conclude that the evidence of Mr Loone as to his discussions with Mr Roberts is admissible as to the truth of the discussion between Mr Roberts and Mr Wilkins; ie I accept it as evidence that Mr Roberts was in fact told by Mr Wilkins that:

(a)   there would be no adjustment to the Launceston bonus pool to reflect profitability flowing from the acquisition of DFG;

(b)   there would be no adjustment to the bonus pool to reflect Mr Loone’s personal involvement in the acquisition;

(c)    that as Findex had paid for the DFG acquisition it should get the rewards/profits flowing from the acquisition.

1. No objection was taken nor submission advanced by CHA that Mr Loone’s evidence of his conversation with Mr Roberts was admissible only for non-hearsay purposes.  Had an objection been taken to the admissibility of the evidence as to the truth of the statements attributed by Mr Roberts to Mr Wilkins, and had that objection been upheld, Mr Loone could have taken steps to lead direct evidence regarding those matters.  For example, he could have sought the issue of a subpoena requiring Mr Roberts to attend to give evidence.

1. CHA had ample opportunity to object to the admissibility of Mr Loone’s evidence on the ground that it was hearsay.  Its failure to do so constitutes a waiver of any right to object to the evidence, having been admitted, to be treated as evidence for all purposes.[47]  Further, there is the failure of CHA to call Mr Roberts to give direct evidence regarding his conversation with Mr Loone on 1 July 2016.  There is a direct inconsistency between the evidence of Mr Wilkins that the DFG acquisition was in fact taken into account in the assessment of the Launceston bonus pool prior to Mr Loone’s departure on 12 July 2016;[48] and the evidence of Mr Loone of his discussion with Mr Roberts on 1 July 2016; ie that Mr Wilkins had told Mr Roberts that the DFG acquisition was to be excluded from the calculation of the Launceston bonus pool.  This inconsistency called for an explanation.  No explanation was provided for the failure to call Mr Roberts.  I infer that had Mr Roberts been called to give evidence regarding the contents of his telephone conversation with Mr Loone on 1 July 2016, that evidence would not have assisted CHA’s case.[49]

   [47]R v Clark (2005) 13 VR 75, [18]–[21] (Maxwell P); Hughes v National Trustees, Executors & Agency Co of Australasia Ltd (1979) 143 CLR 134, 153 (Gibbs J); Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd [2010] VSC 2, [12]–[14].

   [48]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 14 February 2017) T189 LL12–13.

   [49]See Jones v Dunkel (1959) 101 CLR 298, 312, 320–1.

1. Mr Moses submitted that there was no basis for any finding of repudiation based upon the discussion between Mr Loone and Mr Roberts on 1 July 2016.  First, he submitted that cl 7.5 conferred an absolute discretion upon CHA as to what amounts, if any, were to be included in the bonus pool.[50]  Second, he submitted that there was no evidence that Mr Roberts had in fact told Mr Loone that his work performance would not be taken into account in determining his bonus.[51]  Third, he submitted that the discussion on 1 July 2016 was too remote in time from the end of August when the bonus was due to be paid.[52]

   [50]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T481 LL1–4.

   [51]Ibid T493 LL24–27, T495 LL23–31.

   [52]Ibid T481 LL23–30, T485 LL21–26.  

1. Clause 7.5 confers upon CHA an absolute discretion as to the quantum of any bonus payment to be made to Mr Loone.  However, the exercise of that discretion is subject to a mandatory contractual obligation that ‘[t]his amount will be determined by consideration of various performance parameters including but not limited to your personal performance, the performance of the Group and the broader economic conditions’.  Mr Loone’s contention that CHA repudiated the Contract is not based upon the quantum of his bonus.  Rather, he contends that in the assessment of his bonus CHA failed to have regard to the mandatory criteria prescribed by cl 7.5.[53] 

   [53]Ibid T433 LL10–16.

1. If CHA failed to undertake the promised contractual process for the assessment of Mr Loone’s bonus, such failure could constitute a breach of contract, notwithstanding the fact that the quantum of any bonus is subject to CHA’s absolute discretion.[54]  The fact that cl 7.5 confers an absolute discretion upon CHA does not preclude a finding that a failure by CHA to have regard to the prescribed criteria in determining the quantum of any bonus payment would constitute a breach of cl 7.5.

   [54]Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357, [5]–[10] (Allsop P, Beazley JA agreeing).

1. Mr Moses submitted that Mr Loone’s evidence of his discussion with Mr Roberts on 1 July 2016 does not support a finding that Mr Loone had been told that his bonus assessment would not be in accordance with the terms of the Contract.  Mr Moses submitted:

The evidence was— this is what Mr Loone said he was told— that the profitability arising from the Davey tuck-in would be excluded from the pool calculation for Launceston, nothing about his performance, Your Honour.  So we’re talking here about chalk and cheese, about the terms of the contract and what he was told.  Nothing Your Honour has said at all, with the greatest respect, traverses what is in the contract because the evidence is different from the way it’s been put by our friends.  It is apt to mislead.  You have got to go back to what he was told.[55]

…

The complaint here is that on 1 July Mr Roberts said, allegedly, that the moneys arising from the profit on the acquisition would not go into the pool calculation for Launceston.  That is a different proposition from asserting that his personal performance was not to be taken into account.[56]

[55]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T489 L29 – T490 L8.

[56]Ibid T495 LL25–31.

1. Contrary to Mr Moses’ submission, Mr Loone’s account of what he was told by Mr Roberts falls squarely within the terms of the criteria prescribed by cl 7.5.  Mr Loone’s contemporaneous note of his discussion with Mr Roberts records that he was told that there would be no adjustment to the Launceston bonus pool to take account of his role in the DFG acquisition because this was part of his role as a Managing Principal.

1. In addition to the express statement which was made by Mr Roberts on 1 July 2016, there is the practical consideration that Mr Loone expended between 300 and 600 hours on the DFG acquisition for the financial year ending 30 June 2016.  Mr Loone told Mr Roberts on 1 July 2016:

… if I hadn’t have invested 600 hours of time into the acquisition, I could have been generating revenue which would have then flowed into the bonus pool.[57]

[57]Ibid (15 February 2017) T294 LL14–16.

1. Mr Loone told Mr Roberts on 1 July 2016:

I said that is unfair that my time is not being reflected here because I had the opportunity— I would have done something else because one of the main motivations of the Davey acquisition was to increase the bonus pool for the Launceston principals.[58]

[58]Ibid LL17–22.

1. I accept Mr Loone’s evidence that by 30 June 2016 he had expended hundreds of hours of time in relation to the DFG acquisition.  I accept his evidence that he was told by Mr Roberts on 1 July 2016 that the work he undertook on the DFG acquisition was not going to be taken into account in the assessment of the Launceston bonus pool of which he was a beneficiary.  Clause 7.5 required CHA to have regard to Mr Loone’s personal performance in the assessment of his entitlement to a bonus.  Clause 7.5 did not confer upon CHA the right to excise from the assessment of Mr Loone’s personal performance a project on which he had expended hundreds of hours.

1. Mr Moses submitted that the telephone discussion on 1 July 2016 was too remote in time from the end of August when the bonus was due to be paid to constitute repudiatory conduct.  He submitted:

The issue is this, Your Honour – I come back to it – those matters were yet to be considered.  They were to be considered in August.[59]

[59]Ibid (21 February 2017) T487 LL2–4.

1. I accept that the bonus was not due to be paid until the end of August.  However, the assessment of Mr Loone’s bonus entitlement by reference to the prescribed contractual criteria had to be undertaken prior to the end of August when the bonus payments were actually made.  Discussions between Mr Loone and Mr Roberts in late June and early July 2016 were part of the process for establishing the size of the Launceston bonus pool out of which Mr Loone’s bonus was to be paid.  Mr Loone’s evidence of his discussion on 1 July 2016 with Mr Roberts was as follows:

The purpose of that, Mr Roberts said that we were trying to put context around it, we were determining what the STI was going to be, as in a pool for Launceston, and Mr Roberts said that Mr Wilkins had said that the profitability arising out of the Davey acquisition would be excluded from the STI pool calculation for Launceston.[60]

[60]Ibid (15 February 2017) T293 L27 – T294 L2.

1. The statement made by Mr Roberts on 1 July 2016 was not an anticipatory breach of contract.  Rather, it was a breach of the contractual obligation imposed upon CHA by cl 7.5 at the time the obligation was due to be performed. 

1. If I am wrong in reaching this conclusion, and the obligation to assess Mr Loone’s bonus entitlement in accordance with the criteria prescribed by cl 7.5 had not accrued in early July 2016, I would nevertheless conclude that the statement made to Mr Loone by Mr Roberts on 1 July 2016 constituted an anticipatory breach.[61]  Mr Loone was entitled to accept the statement of Mr Roberts as repudiatory, notwithstanding that the bonus was not due to be actually paid until the end of August 2016.

   [61]Afovos Shipping Co SA v Pagnan [1983] 1 WLR 195, 203.

1. CHA’s refusal to comply with the mandatory criteria prescribed by cl 7.5 was such as to convey to a reasonable person in the position of Mr Loone renunciation by CHA of a fundamental obligation under the contract.[62]  Mr Loone’s entitlement to receive a bonus payment was subject to the exercise of CHA’s discretion as to quantum.  Nevertheless, it constituted a significant component of his remuneration.  For the year ending 30 June 2014 his bonus payment was $66,757.[63]  For the year ending 30 June 2015 Mr Loone’s bonus payment was $86,296.[64]  His base salary for the 2015 financial year was $281,667.[65]  In Actrol Parts Pty Ltd v Coppi [No 2],[66] Bell J cited with approval the following statement by Judge LJ (Nourse and Tuckey LJJ agreeing) in Cantor Fitzgerald International v Callaghan:[67]

Where however an employer unilaterally reduces his employee's pay, or diminishes the value of his salary package, the entire foundation of the contract of employment is undermined. Therefore an emphatic denial by the employer of his obligation to pay the agreed salary or wage, or a determined resolution not to comply with his contractual obligations in relation to pay and remuneration, will normally be regarded as repudiatory.[68]

[62]Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621, [77]; Whittaker v Unisys Australia Pty Ltd (2010) 26 VR 668, [32]; Cameron v Asciano Services Pty Ltd [2011] VSC 36, [45]; Fishlock v Campaign Palace Pty Ltd [2013] NSWSC 531, [126].

[63]Exhibit D1: Defendant’s Court Book, 253.

[64]Ibid 257.

[65]Ibid.

[66][2015] VSC 694, [40].

[67][1999] 2 All ER 411.

[68]Ibid 420. See also Clark v Nomura International [2000] IRLR 766, [38].

1. The principle set out above is applicable in the present case.  Mr Roberts’ statement to Mr Loone on 1 July 2016 that the Launceston bonus pool would not be adjusted to reflect his involvement in the DFG acquisition constituted a refusal by CHA to comply with its contractual obligations regarding the assessment of Mr Loone’s bonus entitlement.  CHA’s stated intention not to comply with the agreed mandatory criteria for the assessment of the bonus undermined the contract of employment and constituted a repudiatory breach.  The financial impact of the decision was significant.  It significantly decreased the size of the Launceston bonus pool of which Mr Loone was a beneficiary.

1. CHA submitted that ‘the Defendant cannot rely on the 1 July “event” as a trigger point for any assertion of [final] repudiation. It was not a repeated repudiation which was identical’.[69]  In support of this submission, CHA refers to the judgment of Mandie J in Marks v CCH Australia Ltd.[70]  I reject CHA’s submission that Mr Loone could not rely upon the advice he received on 1 July 2016 regarding the non-inclusion of the DFG acquisition in the Launceston bonus pool.  It is correct that this conduct was of a different character to the diminution in Mr Loone’s management responsibilities which underpins the alleged loss of position breach discussed below.  However, this is of no consequence. Viewed in isolation, the advice which Mr Loone received on 1 July 2016 was repudiatory conduct which entitled Mr Loone to terminate the Contract.  Alternatively, the conduct was cumulative with the proposed changes to the remuneration model which are discussed below.  Both these matters involved a breach of cl 7.5.  In any event, as discussed below, I do not accept the judgment in Marks if it stands for the proposition that an employee can only rely upon cumulative repudiatory conduct as justifying termination where the conduct is identical.

   [69]‘Plaintiff’s Closing Submissions’ dated 20 February 2017, [2.63](b)(ii).

   [70][1999] 3 VR 513, [55] (‘Marks’).

1. Mr Moses submitted that there was no basis upon which the Court could conclude that Mr Loone accepted CHA’s conduct as bringing the Contract to an end.  He submitted that the telephone conversation between Mr Loone and Mr Roberts on 1 July 2016 was irrelevant because Mr Loone had already decided by at least 30 June 2016, if not earlier, that he would leave CHA and set up his own accounting business.[71]  Mr Moses submitted that Mr Loone had made up his mind to go by 30 June 2016 and was ‘stonewalling’.[72]  In support of this submission Mr Moses relied upon a file note which had been made by Mr Loone of a discussion which he had with Michael Wilkins over dinner on 30 June 2016:

   [71]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T483 LL14–23.

   [72]Ibid T483 LL20-23, T484 LL7-12.

a)MW and I sat together and during dinner I gave him some examples of frustrations – eg

i)        lengthy recruiting process had lost new people

ii)        marketing over rides, non communication of staff changes

iii)we spoke of Danielle Maxwell and how she seems to have no regard for local leadership – MW said “knowing Patto (nickname?) the way I do, that doesn’t surprise me”

iv)how “blanket policies” and “one size fits all” approach don’t always work – especially when there are differing issues such as capital city vs regional, large vs small, accounting vs financial planning, good managers and not so good managers, etc etc

v)hence the need for MP’s & P’s to have some discretion to act in the best interests in their known areas

b)I felt I needed to give him some examples so he didn’t feel stonewalled and hence on notice that I would be leaving.[73]

[73]Exhibit D1: Defendant’s Court Book, 769.

1. Mr Moses put to Mr Loone in cross-examination that his file note was evidence that he had already decided to leave CHA by 30 June 2016.[74]  Mr Loone responded:

I had made the decision, Mr Moses, that I couldn’t stay and I had to work out whether I was actually going to implement that decision.[75]

He also gave evidence:

At that stage I’d made a decision that I did not want to stay.  I was then intending to take some time with my wife to work out – it’s quite a significant decision – to decide whether I’d actually implement that and, if I did, at what particular time, meaning would it be – would I give it a few months, would I do it straightaway.  We discussed quite a number of different options that I was going to consider with my career.[76]

[74]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T322 L16 – T324 L1.

[75]Ibid T324 LL1-4.

[76]Ibid (16 February 2017) T328 L25 – T329 L2.

1. Mr Loone commenced one week’s annual leave on 4 July 2016.  He returned to the workplace on 11 July 2016.  On the morning of 12 July 2016 he advised Mr Roberts of his decision to leave.  He gave the following evidence as to the main factors that caused him to arrive at the decision to leave:

The main factors were they changed my role so significantly, I didn’t have the autonomy that I’d asked for and accepted in 2012 when I became the managing principal, and that I just didn’t have the decision-making capabilities to make a difference in the office.  In addition to that, obviously my remuneration was also changing very significantly … Because they were excluding the Davey acquisition profitability in the size of the pool.[77]

[77]Ibid (15 February 2017) T296 LL16-25.

1. On the morning of 12 July 2016, Mr Loone sent Mr Roberts an email in the following terms:

Dear Bruce

As per our phone discussion, I wish to confirm my decision to leave Crowe Horwath with immediate effect.

There is nothing personal in my decision, and I greatly value the friendships with you and my work colleagues forged over many years.

As discussed with you, I am leaving because Findex have not fulfilled their obligations to me under my employment contract, and after taking a short break, I will be embarking on a plan to build a new business.

My decision has been made because of the numerous events, especially in regard to the implementation of the Family Office program and the new Remuneration and Equity models.

Findex’s new management and operating models are not what I agreed to when I was offered and signed on as Managing Principal for Launceston in 2012.  They have resulted in a fundamental change to the management discretion I sought and was given by WHK at that time, and I believe the calculation of my remuneration is also an unacceptable major change.

I cannot accept what has occurred, and have determined to leave straight away.

I will clear out my office today and ask only that I keep my mobile phone … which is the only number I have used for almost 20 years.

As discussed, I will advise the Principal group at a meeting we had pre-planned for this morning.

Could you please call to discuss any other matters that need to be addressed today.

Kind regards

Anthony.[78]

[78]Exhibit D1: Defendant’s Court Book, 815-6.

1. At the conclusion of Mr Loone’s cross-examination, the following exchange took place between myself and Mr Loone:

   His Honour: Thanks.  Can I just ask you, Mr Loone, if you hadn’t made the decision before 30 June that you were going to leave, what was the catalyst for you to actually make the decision which you did convey on 12 July?

   Mr Loone:  This very page we’re looking at, Your Honour.  It was like the final straw.  It was where they – Mr Wilkins had said to Mr Roberts, and Mr Roberts then said to me, that the Davey acquisition was not going to be included which amounted to a minimum of $200,000 to the Launceston principal group, and I felt that was the last straw.  I had been accumulating some intent to think about the future beyond Crowe Horwath, but really I hadn’t made the decision to absolutely leave and to do something about it until I went away with my wife and talked it over, because it had such an impact on our family.[79]

   [79]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 16 February 2017) T400 LL8-22.

2. By leaving on 12 July 2016 rather than waiting another six weeks, Mr Loone passed up the opportunity to receive a bonus of approximately $100,000 which would have been paid at the end of August.[80]  As to why Mr Loone did not simply stay in employment until the end of August and receive that bonus, he stated:

This goes back to the timing of – I decided I didn’t want to stay and one of the considerations that I discussed with my wife was do I just hang out for a period of time, get my bonus, but when that meeting occurred on 1 July, I just thought I can’t stay here, I don’t trust them, and I left.[81]

[80]Ibid T406 LL11–12.

[81]Ibid LL14–19.

1. As at 30 June 2016 Mr Loone had made a decision that he would be leaving CHA.  However, he had not made a decision as to the exact timing of his departure.  This is not surprising given that, as at 30 June 2016, he had a legitimate expectation that he would be receiving a bonus payment.  Further, as at 30 June 2016, he was not aware that the size of that bonus payment would not take into account his involvement in the DFG acquisition and/or the contribution of that acquisition to the profitability of the Launceston office. 

1. Mr Moses put to Mr Loone in cross-examination that his evidence that he decided to leave CHA on 12 July 2016 was a lie.[82]  Mr Moses put to Mr Loone that he had already made a definite decision that he would be leaving by 30 June 2016.[83]  I do not accept Mr Moses’ submission that Mr Loone lied when giving evidence that he only made the decision to leave Crowe Horwath upon his return from leave on 11 July 2016.  I accept Mr Loone’s evidence that he had made a decision by 30 June 2016 that he would be leaving at some stage in the future but had not made a definite decision as to the timing of his departure.  I accept his evidence that the ‘final straw’ which prompted the decision to leave as conveyed to Mr Roberts on 12 July 2016, was his telephone discussion on 1 July 2016 when he was told of the exclusion of the DFG acquisition from the Launceston bonus pool.  The fact that Mr Loone had made a decision as at 30 June 2016 that he would be leaving CHA at some point in the future did not preclude Mr Loone from relying upon the advice he received on 1 July 2016 as a basis for terminating the Contract. 

   [82]Ibid (15 February 2017) T323 L9 – T324 L4.

   [83]Ibid T324 L5.

1. Mr Loone telephoned Mr Roberts at about 9.30 am on 12 July 2016:

I said to him that I was ringing to tell him that I was leaving, that I felt Findex and Crowe Horwath had not fulfilled their obligations to me and they’d changed my role, changed my REM, as in my remuneration, and I no longer had the autonomy that I’d signed on for and I couldn’t accept that … Mr Roberts said to me that there were others in the same boat and he accepted that – he said that he agreed that all of those things had changed.[84]

[84]Ibid T297 LL18–28.

1. The email which Mr Loone forwarded to Mr Roberts on the morning of 12 July 2016 made specific reference to changes to his remuneration:

My decision has been made because of the numerous events, especially in regard to the implementation of the Family Office program and the new Remuneration and Equity models.  …  I believe the calculation of my remuneration is also an unacceptable major change.[85]

[85]Exhibit D1: Defendant’s Court Book, 815.

1. It is clear from the matters set out above that at the time of terminating the contract, Mr Loone specifically relied upon the changes to his remuneration as a basis for the termination.

1. For reasons set out earlier in this judgment, I have concluded that the advice which was provided to Mr Loone on 1 July 2016 by Mr Roberts constituted a repudiation of the Contract because it evidenced the intention of CHA not to comply with the mandatory criteria to the assessment of Mr Loone’s bonus, prescribed by cl 7.5 of the Contract.  This conclusion is not altered by the evidence that Mr Loone gave that he had been told prior to July 2016 that the quantum of his bonus for the financial year ending 30 June 2017 had been guaranteed by CHA.[86]  If the quantum of the bonus for the year ending 30 June 2016 was reduced by reason of the non-inclusion of the DFG acquisition, the guarantee given to Mr Loone in respect of the 2017 financial year does not preclude a finding that CHA engaged in repudiatory conduct on 1 July 2016.  Further, as discussed below, the guarantee which was given to him prior to 12 July 2016 was subject to the proviso that, in accordance with CHA’s new remuneration model, 20 per cent of Mr Loone’s bonus in each financial year would be deferred for a period of 3 years.

   [86]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 16 February 2017) T384 LL17–20.

1. There was a delay of 11 days between 1 July 2016 and Mr Loone’s departure on 12 July 2016.  I do not consider that by reason of this delay Mr Loone affirmed the Contract and was thereby precluded from accepting CHA’s conduct as bringing the Contract to an end on 12 July 2016. 

1. 1 July 2016 was a Friday.  On 4 July 2016, Mr Loone commenced one week of annual leave, returning to work on 11 July.  In Western Excavating (ECC) Ltd v Sharp,[87] Lord Denning MR stated:

If the employer is guilty of conduct which is a significant breach going to the root of the contract of employment; or which shows that the employer no longer intends to be bound by one or more of the essential terms of the contract; then the employee is entitled to treat himself as discharged from any further performance. If he does so, then he terminates the contract by reason of the employer's conduct. He is constructively dismissed. The employee is entitled in those circumstances to leave at the instant without giving any notice at all or, alternatively, he may give notice and say he is leaving at the end of the notice. But the conduct must in either case be sufficiently serious to entitle him to leave at once. Moreover, he must make up his mind soon after the conduct of which he complains: for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged. He will be regarded as having elected to affirm the contract.[88]

[87][1978] IRLR 27 (‘Sharp’).

[88]Ibid [15].

1. A question arises, based on the reasoning of Denning MR, whether, by reason of the delay of 11 days between 1 July and 12 July 2016, Mr Loone should be taken to have affirmed the Contract. Notwithstanding the reasoning of Denning MR in the above passage, subsequent authorities suggest that mere delay in accepting repudiation of a contract of employment does not amount to affirmation where the employee makes his or her objection to the repudiatory conduct clear.

1. In WE Cox Toner Ltd v Crook,[89] Browne-Wilkinson J considered the passage from Sharp set out above. His Honour noted the difficult position of an employee faced with repudiation by an employer:  by continuing to work for any period of time, the employee risks affirming the contract.   His Honour stated:

   [89][1981] ICR 823 (‘Crook’).

If one party (‘the guilty party’) commits a repudiatory breach of the contract, the other party (‘the innocent party’) can choose one of two courses:  he can affirm the contract and insist on its further performance or he can accept the repudiation, in which case the contract is at an end.  The innocent party must at some stage elect between these two possible causes:  if he once affirms the contract, his right to accept the repudiation is at an end.  But he is not bound to elect within a reasonable or any other time.  Mere delay by itself (unaccompanied by any express or implied affirmation of a contract) does not constitute affirmation of the contract;  but if it is prolonged it may be evidence of an implied affirmation:  Allen v Robles [1969] 1 WLR 1193. Affirmation of the contract can be implied. Thus, if the innocent party calls on the guilty party for further performance of the contract, he will normally be taken to have affirmed the contract since his conduct is only consistent with the continued existence of the contractual obligation. Moreover, if the innocent party himself does acts which are only consistent with the continued existence of the contract, such acts will normally show affirmation of the contract. However, if the innocent party further performs the contract to a limited extent but at the same time makes it clear that he is reserving his rights to accept the repudiation or is only continuing so as to allow the guilty party to remedy the breach, such further performance does not prejudice his right subsequently to accept the repudiation: Farnworth Finance Facilities Ltd v Attryde [1970] 1 WLR 1053.

It is against this background that one has to read the short summary of the law given by Lord Denning MR in the Western Excavating case [1978] ICR 221. The passage, at page 226:

Moreover, he must make up his mind soon after the conduct of which he complains:  for, if he continues for any length of time without leaving, he will lose his right to treat himself as discharged.

is not, and was not intended to be, a comprehensive statement of the whole law.  As it seems to us Lord Denning MR was referring to an obvious difference between a contract of employment and most other contracts.  An employee faced with a repudiation by his employer is in a very difficult position.  If he goes to work the next day, he will himself be doing an act which, in one sense, is only consistent with the continued existence of the contract, ie he might be said to be affirming the contract.  Certainly, when he accepts his pay packet (ie further performance of the contract by the guilty party) the risk of being held to affirm the contract is very great:  See Saunders v Paladin Coachworks Ltd (1967) 3 ITR 51.  Therefore, if the ordinary principles of contract law were to apply to a contract of employment, delay might be very serious, not in its own right but because any delay normally involves further performance of the contract by both parties.  It is not the delay which may be fatal but what happens during the period of the delay:  See Bashir v Brillo Manufacturing Co [1979] IRLR 295.

Although we were  not referred to the case, we think the remarks of Lord Denning MR in the Western Excavating case are a reflection of the earlier decision of the Court of Appeal in Marriott v Oxford and District Co-operative Society Ltd (No 2) [1970] 1 QB 186. In that case, the lawyer repudiated the contract by seeking to change the status of the employee and to reduce his wages. The employee protested at this conduct but continued to work and receive payment at the reduced rate of pay for a further month, during which he was looking for other employment. The Court of Appeal (of which Lord Denning MR was a member) held that he had not thereby lost his right to claim that he was dismissed. In the Western Excavating case Lord Denning MR explains, at page 227, that the case would now be treated as one of constructive dismissal.  This decision to our mind establishes that, provided the employee makes clear his objection to what is being done, he is not to be taken to have affirmed the contract by continuing to work and draw pay for a limited period of time, even if his purpose is merely to enable him to find another job.[90]

[90]Ibid 828–9.

1. In Crook, the employee was held to have affirmed the contract of employment. In that case, a period of seven months had elapsed between the employer’s repudiatory conduct and the employee’s purported acceptance of the repudiation. Browne-Wilkinson J noted that there must be some limit to the amount of time an employee can continue to work and draw a salary from his or her employer before he or she will be taken to have affirmed the contract.[91] However, his Honour held that it was unnecessary to reach a conclusion on whether seven months’ delay surpassed this threshold. His Honour instead concluded that the employee had affirmed the contract on the basis that he had issued an ultimatum to his employer six months after the repudiatory conduct yet had remained in employment for one month after his employer had refused to comply with this ultimatum.[92] Importantly, Browne-Wilkinson J concluded that the tribunal below had erred in considering delay to be the only relevant consideration as to whether there had been an affirmation of the contract.[93]

   [91]Ibid 830.

   [92]Ibid 830-1.

   [93]Ibid 830.

1. Crook was cited with approval by Hodgson CJ in Harris/D-E Pty Ltd v McClelland’s Coffee & Tea Pty Ltd.[94] His Honour also cited with approval Bashir v Brillo Manufacturing Co,[95] another English authority in which an employee was held not to have affirmed an employer’s repudiatory conduct by reason of a delay in bringing the contract to an end.  In Bashir, an employee alleged repudiation by an employer in that the employer refused to allow him to continue as a supervisor and instead offered him a job with less pay and lower status.  The employee was away sick for about two and a half months after this act of the employer and accepted sick pay during that period.  However, throughout the period the employee or his advisers were saying very positively that the employee did not accept the new position which the employer had sought to offer him, and the sick pay collected was at the same rate as he was entitled to as a supervisor.  In those circumstances, the Employment Appeal Tribunal found that the employee had not affirmed the variation in the contract of employment, and was still entitled to accept the employer’s repudiation at the end of the two and a half month period.

   [94][1999] NSWSC 128, [81].

   [95][1979] IRLR 295 (‘Bashir’).

1. The principle that mere delay does not necessarily constitute affirmation of a contract of employment is in line with the principles governing affirmation of contracts in general. In Sargent v ASL Developments Ltd,[96] Mason J stated:

A person confronted with a choice between the exercise of alternative and  inconsistent rights is not bound to elect at once.  He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side.  An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other…  So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.[97]

[96](1974) 131 CLR 634.

[97]Ibid 656 (citations omitted).

1. In Harpham v Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing & Allied Services Union of Australia,[98] Tracey J stated: 

It may be accepted that the CEPU repudiated Mr Harpham’s contract of employment when it substantially reduced his remuneration package in 2009:  see Cantor Fitzgerald International v Callaghan [1999] 2 All ER 411 at 420-1.  Moreover, after 1 July 2009, the CEPU breached Mr Harpham’s employment contract by paying him less than the sum that had been contractually agreed in September 2008. 

The CEPU, dealing evidently with the eventuality that its breach was repudiatory, submitted that Mr Harpham ‘elected to continue in employment’.  I would accept that submission.  At the point of repudiatory breach, Mr Harpham could have elected to terminate the contract:  see Romero v Farstad Shipping (Indian Pacific) Pty Ltd (2014) 231 FCR 403 at 435-6.He did not, however, do so.  He chose to remain in his position as an organiser for over three years.  During this period further variations to his remuneration occurred and were not objected to by him.  While an immediate decision was not required on 1 July 2009 (cf Rigby v Ferodo Ltd [1988] ICR 29) his protracted on-going employment was consistent only with his having elected to affirm the contract: cf Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 656; Khoury v Government Insurance Office of New South Wales (1984) 165 CLR 622 at 633; and Galafassi v Kelly (2014) 87 NSWLR 119 at [88].[99]

[98][2016] FCA 1473.

[99]Ibid [82]–[83].

1. Consistent with the authorities referred to above, the fact that Mr Loone continued to receive a salary during the period from 1 July until 12 July 2016 does not necessitate a conclusion that he thereby affirmed the Contract.  Mr Loone made very clear during his discussion with Mr Roberts on 1 July that he considered the position which CHA was taking in relation to the calculation of the Launceston bonus pool to be very unfair.  Further, the previous day, he had told both Michael Wilkins and Bruce Roberts that he would be reassessing his position.[100]  His evidence was that he was ‘basically threatening to resign’.[101] 

   [100]Exhibit D1: Defendant’s Court Book, 767.

   [101]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T292 LL15–16.

1. In each case it is a question of fact as to whether the conduct of an employee constitutes an affirmation of his or her contract.  In the present case, the conduct of Mr Loone between 1 July and 12 July 2016 did not constitute an affirmation of the Contract.  He was entitled to rely upon CHA’s stated intention to exclude the DFG acquisition from the Launceston bonus pool as grounds for terminating the Contract on 12 July 2016.

CHA’s proposed new incentive model

1. On 9 June 2016, Mr Loone attended a presentation in CHA’s Melbourne office along with other Managing Principals from the southern region (South Australia, Victoria and Tasmania).  The presentation was conducted by senior management of CHA.  During the course of the presentation, Mr Loone was informed that CHA intended to introduce a new incentive model under which bonus payments would be divided into two components:  a cash payment and a deferred incentive.  The deferred incentive would be 20 per cent of the employees’ annual bonus payment and would be deferred for a three year period.[102]

   [102]Exhibit D1: Defendant’s Court Book, 748, 757.

1. Mr Bourke submitted that the deferral of 20 per cent of the bonus payment was a repudiation of cl 7.5 of the Contract.[103]  He submitted that cl 7.5 required a discretion regarding the bonus to be exercised, the amount determined and then paid.[104] 

   [103]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T433 LL10–16, T434 L27 – T435 L1.

   [104]Ibid.

1. The question of construction of cl 7.5 which flows from Mr Bourke’s submission is as follows: does the absolute discretion as to the quantum of bonus confer upon CHA the right to defer 20 per cent of the bonus for a period of three years?  Mr Bourke does not challenge the 20 per cent deferral on the grounds that such deferral constitutes a capricious exercise of the discretion conferred upon CHA by cl 7.5.  Rather, he contends that, properly construed, cl 7.5 confers no right upon CHA to withhold any proportion of the bonus once a determination has been made as to what the quantum of that bonus should be.

1. In Silverbrook Research Pty Ltd v Lindley,[105] the respondent was employed pursuant to a contract which entitled her to an annual performance bonus of $40,000.  This was to be assessed against set objectives at the end of each quarter.  However, the employer did not set such objectives and therefore did not review the employee’s performance in order to determine whether she was entitled to a bonus.  No bonus was paid throughout the period of the employment agreement.  The employee terminated her employment and commenced proceedings, arguing that, inter alia, the employer breached the service agreement by failing to formulate the performance objectives and pay her a bonus when those objectives were met.  In dismissing an appeal from a primary judge’s award of damages of $74,000 for the failure to pay a bonus, Allsop P stated (Beazley JA agreeing):

The task then is to value that loss of opportunity or chance.  This process begins with a proper understanding of the contractual content of the obligations and entitlements arising out of cl 4 and in particular cll 4.2 and 4.3.  That the decision as to whether the respondent should receive the bonus was ‘entirely within the discretion of’ the appellant should not be construed so as to permit the appellant to withhold the bonus capriciously or arbitrarily or unreasonably; it should not be construed so as to give the appellant a free choice as to whether to perform or not a contractual obligation.  The relevant discretion should be understood against the proper scope and content of the contract.  This was a bargained for bonus to be assessed against set objectives.  Such a clause should receive a reasonable construction and not permit the appellant to choose arbitrarily or capriciously or unreasonably that it need not pay money the set objectives having been satisfied:  Greaves v Wilson (1958) 25 Beav 290 at 293; 53 ER 647 at 650; Stadhard v Lee (1863) 3 B & S 364 at 371–372; 122 ER 138 at 141; Gardiner v Orchard [1910] HCA 18; 10 CLR 722; Carr v J A Berriman Pty Ltd [1953] HCA 31; 89 CLR 327; Selkirk v Romar Investments Ltd [1963] 1 WLR 1415 at 1422–1423; Godfrey Constructions Pty Ltd v Kanangra Park Pty Ltd [1972] HCA 36; 128 CLR 529 at 538; 543, 547 and 549–555; Pierce Bell Sales Pty Ltd v Frazer [1973] HCA 13; 130 CLR 575.

The discretion is to be exercised honestly and conformably with the purposes of the contract.  There may be many circumstances in which it would be legitimate, and conformable with the purposes of the contract, to not pay the bonus.  There may be financial stringency or misbehaviour by the respondent or some other consideration.  It is unnecessary to explore the possibilities in detail. What, however, would not be permitted is an unreasoned, unreasonable, arbitrary refusal to pay anything, come what may.  This would be a denial of the very clause that had been agreed.  If these parties wished to make payment under the clause entirely gratuitous and voluntary such that payment could be withheld capriciously, notwithstanding the compliance with solemnly set objectives they needed to say so clearly.[106]

[105][2010] NSWCA 357.

[106]Ibid [5]–[6].

1. Allsop P’s statement set out above has been cited with approval by Le Miere J in Heugh v Central Petroleum Ltd [No 5],[107] and by Griffiths J in Murphy v Westpac Banking Corporation.[108]  The discretion conferred upon CHA by cl 7.5 is to be understood against the proper scope and content of the Contract.  Clause 7.5 is to receive a reasonable construction which does not permit CHA to arbitrarily choose that it need not pay a bonus in circumstances where the set objectives have been satisfied. 

   [107][2014] WASC 311, [116].

   [108][2014] FCA 1104, [1047].

1. Clause 7.5 provides:

You will be eligible to receive a bonus in any year if, and only if, you are in the employ of the Company at the time that the bonus is to be paid and you have not, prior to that time, given or been given notice of termination of your employment.[109]

The reference to Mr Loone being ‘eligible to receive a bonus in any year’ supports a construction of cl 7.5 whereby the eligibility operates by reference to a 12 month period. 

[109]Exhibit P1: Plaintiff’s Court Book, 148.

1. Clause 7.5 provides that the bonus ‘forms a discretionary component of your Remuneration’.[110]  ‘Remuneration’ is a defined term.  It is defined in cl 31.19 as meaning ‘your Base Salary, superannuation contributions and, if you are a Principal, any discretionary bonus’.[111]  Item 8 of sch 1 of the contract is headed ‘Annual Remuneration Package’.[112]  Set out thereunder is Mr Loone’s base salary entitlement of $280,000 per annum inclusive of superannuation.  When cl 7.5 is read in conjunction with the definition of Remuneration and Item 8 of sch 1, it is plain that the discretionary and non-discretionary components of Mr Loone’s remuneration are payable within a 12 month period. 

   [110]Ibid.

   [111]Ibid 157.

   [112]Ibid 159.

1. Under cl 7.5 Mr Loone was eligible for a bonus, being the full amount determined by CHA in the exercise of its discretion, by reference to the prescribed mandatory criteria.  Mr Loone was eligible to receive the bonus ‘in any year’.  CHA’s proposal to defer 20 per cent of the bonus for a period of three years was a breach of cl 7.5.  The discretion conferred upon CHA to determine the quantum of the amount of any bonus did not confer upon CHA the right to withhold any portion of that bonus.

1. The presentation on 9 June 2016 in respect of the new incentive model was such as to convey to a reasonable person in Mr Loone’s position, renunciation of a fundamental obligation under the Contract.  That fundamental obligation was CHA’s requirement to:

(a)   pay the full amount determined to be Mr Loone’s bonus entitlement assessed in accordance with the prescribed mandatory criteria; and

(b)   pay that amount.

1. Mr Loone was entitled to rely upon the proposed new incentive model as constituting a repudiation of the Contract.  The advice he provided to Mr Roberts on 12 July 2016, both by way of email and verbally, made specific reference to changes to his remuneration package.  This advice covered both the refusal to include the DFG acquisition in the Launceston bonus pool and the proposed changes to the incentive model. 

1. There was a delay of just over one month between the presentation on 9 June 2016 and the termination of the Contract on 12 July 2016.  Notwithstanding the fact that Mr Loone continued in employment during this period and continued to receive a salary, he did not affirm the Contract by reason of this delay.  There is evidence that throughout the period from mid-June to the end of June, Mr Loone was in ongoing discussions with Mr Roberts and Mr Wilkins during which he was expressing ongoing concerns regarding proposed changes which had been outlined during the presentation on 9 June 2016.  Mr Loone had discussions with Mr Roberts on 16 and 23 June 2016.[113]  He had a meeting with Mr Roberts and Mr Wilkins on 30 June 2016.[114]  During the course of the meeting on 30 June, he expressly stated that he was reserving his position in relation to his employment.[115]

   [113]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T281 L22 – T283 L8; Exhibit D1: Defendant’s Court Book, 764A, 765.

   [114]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T288 LL17–19.

   [115]Ibid T289 L27; Exhibit D1: Defendant’s Court Book, 767.

1. Viewed in isolation, either the exclusion of the DFG acquisition from the assessment of the Launceston bonus pool or the proposed changes to the incentive model constituted repudiatory conduct which Mr Loone was entitled to accept thereby bringing his contract to an end.  However, the conclusion that Mr Loone was entitled to accept CHA’s repudiatory conduct as terminating the Contract is reinforced when both matters are viewed cumulatively. 

The loss of position breach

1. My conclusion that Mr Loone was entitled to terminate the Contract on 12 July 2016 by accepting CHA’s repudiatory conduct constituted by:

(a)the failure to assess his bonus entitlement by reference to the prescribed mandatory criteria in cl 7.5; and

(b)a breach of cl 7.5 by reason of the proposal to defer 20 per cent of the bonus payment for a period of 3 years

renders it unnecessary for me to express any concluded view regarding the other grounds upon which Mr Loone contends that CHA repudiated the Contract.  Nevertheless, for the sake of completeness, I shall do so.

1. In addition to the two grounds of repudiatory conduct referred to above, Mr Loone contends that CHA also engaged in repudiatory conduct by reason of what he describes as:

(a)‘the loss of position breach’; and

(b)‘the family operating model repudiatory conduct’.[116]

[116]See ‘Anthony Loone’s Closing Submissions’ dated 20 February 2017, [39]–[41], [92]–[108].

1. Mr Loone signed the Contract for the position of Managing Principal on 1 November 2012.  Prior to Mr Loone signing the Contract, Mr Roberts provided Mr Loone with a position description, entitled ‘Managing Principal – Role Profile’.  It was an agreed matter before me that this document accurately describes the duties which were in fact performed by Mr Loone in the position of Managing Principal under the Contract.[117]

   [117]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T227 L30 – T228 L5.

1. The position description was tendered in evidence.[118]  Under the sub-heading ‘1. Position Purpose’, it confirms that the purpose of the position includes:

   [118]Exhibit D1: Defendant’s Court Book, 193-6.

(i)       a critical senior leadership role within the business;

(ii)      shaping and delivering the strategic direction of the business;

(iii)     identifying and driving key growth, performance and efficiency outcomes;

(iv)     providing clear leadership;

(v)      responsible for generating growth in revenue and client base and building strong client relationships.[119]

[119]Ibid 193.

Under sub-heading ‘2. Key Role Dimensions’, it confirms that the dimensions of the position include:

(i)       responsibility for the financial and non-financial performance of the business;

(ii)      responsibility for the staff management;  and

(iii)     participates in the STI Program.[120]

[120]Ibid.

Under sub-heading ‘Key Result Areas’ and further sub-heading ‘Business Leadership’ it confirms that the position responsibilities include to:

(i)       develop, communicate and implement strategies and plans to achieve key business objectives;

(ii)      drive key growth, performance and efficiency outcomes;

(iii)     lead and drive major change through the business to improve performance and position the business for growth;

(iv)     provide clear leadership and proactively attract and develop talent aligned to achieving the business strategy;

(v)      build the organisation’s bench strength through coaching, providing feedback and succession planning which supports career development and performance expectations;

(vi)     ensure the business is appropriately resourced to implement key strategies and plans.[121]

[121]Ibid 194.

Under sub-heading ‘Business Development and Growth’, it confirms that the position responsibilities include to ‘develop and execute plans to secure new business opportunities through internal and external client opportunities’.[122]

[122]Ibid.

Under sub-heading ‘Financials’, it confirms that the position includes:

(i)       to prepare and present annual budgets and financial plans;

(ii)      accountability for financial performance of the business;

(iii)     WIP [Work in Progress] and debtor management.[123]

[123]Ibid 195.

Consistent with the broad strategic and leadership role of the position, the position description under the sub-heading ‘3. Competencies’ confirms that the position requires:

(a)       vision and direction to:

(i)       shaping the future;

(ii)      translating vision into action;

(b)      managing the business;

(c)       leading people:

(i)       building teams;

(ii)      building support;

(iii)     developing people.[124]

[124]Ibid.

1. Throughout the period from November 2012 until January 2015, Mr Loone exercised full autonomy in the running of the Launceston office.  In January 2015 the ownership of CHA was acquired by Findex Group Ltd.  Mr Loone continued to report to Mr Roberts.  However, the CEO and COO of CHA were replaced by Mr Spiro Paule and Mr Tony Roussos.  Mr Michael Wilkins was appointed as manager with overall responsibility for all of CHA’s 112 offices throughout Australia and New Zealand.

1. In April 2015, a meeting of Australian and New Zealand Principals was convened in Queenstown, New Zealand.  Mr Paule gave a presentation in which he stated that he wanted ‘one best way to build the business’.

1. On 3 and 4 September 2015 Mr Loone met with Mr Roussos and Mr Roberts in Melbourne.  He asked what Findex’s position was on retaining the autonomy and decision-making capabilities that the Launceston office had at that time.[125]  Mr Loone specifically raised the application of Findex’s ‘one best way’ approach in Tasmania.  Mr Roussos replied that one best way was ‘very important’ and ‘it was too difficult to manage businesses if they weren’t doing it all the same way’.[126]

   [125]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T242 LL28–31; Exhibit D1: Defendant’s Court Book, 262.

   [126]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 15 February 2017) T243 LL 13–15.

[203][1997] 1 All ER 1 (‘Rock Refrigeration’).

[204]Ibid 20.

[205][2015] SASCFC 147 (‘Richmond’).

[206]Ibid [210].

1. CHA submitted:

In light of both the reasoning of the Full Court of the Supreme Court of South Australia in Richmond, and Phillips LJ’s judgment in Rock Refrigeration, it is not tenable for the Defendant to suggest General Billposting requires the court to deviate from conventional principles of contractual interpretation… Accordingly, the Plaintiff’s submission is that the court can be satisfied that by clause 1.2(e) it was the parties’ intention that the restraint obligations should survive termination, even if that arises from repudiation on the part of the Plaintiff.[207]

[207]‘Plaintiff’s Closing Submissions’ dated 20 February 2017, [3.43]–[3.44].

1. The reasoning of Phillips LJ relied upon by CHA differed from the approach adopted by Simon-Brown and Morritt LJJ, both of whom endorsed and applied the reasoning of the House of Lords in General Billposting.  Simon-Brown LJ stated:

The whole point about the General Billposting principle is that, in cases of repudiatory breach by the employer, the employee is on that account released from his obligations under the contract and restrictive covenants, otherwise valid against him, accordingly cannot be enforced.[208]

[208]Rock Refrigeration [1997] 1 All ER 1, 8.

1. Morritt LJ stated:

If the employment has been terminated by the wrongful act of the employer then, by definition, the employee must have accepted the repudiation and is no longer bound by its other terms.[209]

[209]Ibid 12.

1. Further, in Bond, Tate JA footnoted the judgment of Phillips LJ in Rock Refrigeration[210] in reference to ‘the development of the law since General Billposting and Kaufman with respect to the consequence of the acceptance of a repudiation upon continuing obligations’.[211] 

   [210]Bond [2013] VSCA 13, [47] n 44.

   [211]Ibid [47].

1. The head note in the judgment in Richmond,[212] records the facts of the proceeding as follows:

The appellant’s company entered into related agreements with the respondent for the sale of its accountancy practice and the provision of accounting services in the ongoing practice.  Each agreement contained a restraint clause.

The sale price of the business was dependent on the level of achieved fees over the first three years.  If average annual achieved fees fell below $1.4 million, the sale price was to be $1.4 million less the deficit or twice the deficit depending on the year.  If average annual achieved fees exceeded $1.4 million, the purchase price was to be $1.4 million and the appellant’s company was entitled to a bonus equal to the excess.  The agreement prescribed a mechanism for the parties to nominate and negotiate to agree the level of achieved fees at the end of the second and third years.

After the end of the second year in October 2013, disputes arose concerning the quantum of achieved fees and whether they had been fixed under the fee fixing mechanism prescribed in the agreement.  The respondent contended that the achieved fees had been fixed by default and this justified its ceasing to pay interest on the balance of the purchase price.

The appellant contended that the respondent defaulted in the payment of interest resulting in an acceleration of payment of the balance of the purchase price, and the respondent’s breaches or repudiation justified termination of the agreements in which event the restraint clauses ceased to be operative.  The appellant contended that in any event the restraint clauses were void for uncertainty or as being in restraint of trade.

The trial Judge upheld the respondent’s contention and granted an injunction retraining the appellant from soliciting or performing work for various named clients or soliciting employees of the respondent.

[212][2015] SASCFC 147.

1. The Full Court held that Richmond and his company had not been entitled to terminate the business sale agreement or the service agreement on the grounds of repudiation.  Clause 14(j) of the restraint clause in the business sale agreement provided:

The provisions of this Clause 14 survive the termination or expiry or satisfaction of this Agreement.[213]

[213]Ibid [211].

1. Clause 26.5 of the service agreement provided:

Clauses 4(b), 4(e), 5, 6, 9(f), 10(b), 11, 12, 13, 14, 15, 16, 18, 19.2, 22, 23, 24, 25 and 26 survive the termination or expiry of this Agreement.[214]

[214]Ibid [216].

1. Blue J concluded that the restraint clause in the business sale agreement did not survive termination by the seller (Richmond’s company WKYA Consulting Pty Ltd) for breach or repudiation before the expiry of three years from the completion date:

However, under the Business Sale Agreement the amount of the purchase price was not to be fixed until three years after completion. Until that time, the Seller was subject to a potential reduction in the purchase price depending on the Achieved Fees generated by the acquired business over the first three years. Early termination might result in the Seller receiving a lower consideration for the sale of the business than if the agreement proceeded to its full term. The Business Sale Agreement and the Service Agreement are inextricably intertwined in the manner summarised at [220] below and it is unlikely that the restraint clause in one agreement was intended to survive termination for breach or repudiation but not in the other.

On the proper construction of the Business Sale Agreement, clause 14 does not survive termination by the Seller for breach or repudiation before the expiration of 3 years.[215]

[215]Ibid [214]–[215].

1. Blue J also concluded that the restraint covenant in cl 23 of the service agreement did not survive termination by the Principal (Moore Stephens) of WKYA Consulting as independent contractor before the expiry of three years:

On the other hand, the prospect of WKYA earning a bonus under the Service Agreement was dependent in a practical sense upon the continuing engagement of WKYA to provide services thereunder for the first three years.  In a commercial sense, the substantive consideration for the restraint clause in the Service Agreement was the continuing engagement of WKYA to provide services thereunder for the first three years.[216]

[216]Ibid [219].

1. It is clear from the matters set out above that the observations of Blue J regarding the enforceability of the restraints post-termination were obiter.  Blue J concluded that that there had been no repudiatory conduct entitling Richmond and his company to terminate the business sale agreement and/or the service agreement.

1. Neither Mr Moses nor Mr Bourke referred me to any Australian authority where a court has made orders enforcing a restraint of trade covenant in circumstances where an employee has terminated a contract by accepting the employer’s repudiatory conduct. 

1. CHA’s written submissions contend:

In the Victorian Court of Appeal in Bond v Rees Corporate Advisory Pty Ltd Tate JA in obiter stated (without further support) that General Billposting and Kaufman have been interpreted as standing for a broad proposition that restraint obligations will not survive termination arising from the employer’s repudiation of the contract, but considered that it was ‘not clear’ why the general rules relating to the survival of terms post-termination would not apply.[217]

[217]‘Plaintiff’s Closing Submissions’ dated 20 February 2017, [3.28] (emphasis altered).

1. The contention that Tate JA’s reasoning at [47] was ‘without further support’ must be rejected.  Her Honour cited a considerable body of authority for the proposition that General Billposting and Kaufman have been interpreted as standing for the proposition that an employee’s post-employment restraint of trade obligations do not survive the termination of the employment contract where the termination is effected by the employee accepting the employer’s repudiation:

See, eg, Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435, 450 (Latham CJ); Geraghty v Minter (1979) 142 CLR 177, 187 (Gibbs J); Rock Refrigeration Ltd v Jones & Anor [1997] 1 All ER 1, 5–9 (Simon Brown LJ), 10–12 (Morritt LJ); BearingPoint Australia Pty Ltd v Hillard [2008] VSC 115, [142] (Habersberger J (obiter));  Tullett Prebon (Australia) Pty Ltd v Simon Purcell (2008) 175 IR 414, 430 [54] (Brereton J). In Geraghty v Minter, Gibbs J described the principle as one relating to the circumstances in which equitable relief will be granted and stated (at 187) (citing Measures Brothers):

He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’.

In general, however, the cases considering General Billposting and Kaufman have treated an employee’s acceptance of his or her employer’s repudiation of the employment contract as bringing to an end any post-employment restraint of trade obligations of the employee and not merely as limiting the ability of the employer to seek equitable relief to enforce these obligations.[218]

[218]Bond [2013] VSCA 13, [47] n 42.

1. Tate JA’s reasoning at [47] in Bond is supported by a considerable body of authority including three judgments of the High Court: Kaufman;[219] Geraghty v Minter[220] and Automatic Fire Sprinklers Pty Ltd v Watson.[221]  In the absence of any High Court authority overturning these judgments, the judgment of the Court of Appeal in Bond is authority for the proposition that an employee’s post-employment restraint of trade obligations do not survive the termination of the employment contract effected by the employee accepting the employer’s repudiation of the contract.

   [219](1914) 19 CLR 1.

   [220](1979) 142 CLR 177 (‘Geraghty’).

   [221](1946) 72 CLR 435.

1. In Richmond,[222] Blue J stated:

…the question whether the restraint clause survives [repudiation] must depend on the proper construction of the contract.[223]

Applying this approach, the question of construction in the present case is: do the restraints in sch 2 of the Contract survive the termination of the Contract in circumstances where Mr Loone accepted CHA’s repudiation of the Contract? 

[222][2015] SASCFC 147.

[223]Ibid [210].

1. In Geraghty,[224] Gibbs J stated:

The answer to the appellants’ arguments that the respondents may be in default under the deed and yet enforce the restraint lies in the principles of equity.  He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’: Measures Brothers Ltd v Measures, cited in Kaufman v McGillicuddy.[225]

[224](1979) 142 CLR 177.

[225]Ibid 187.

1. Applying Gibbs J’s reasoning to the present case, the restrictive covenants do not survive termination of the Contract brought about by Mr Loone’s acceptance of CHA’s repudiatory conduct.  First, CHA did not comply with the mandatory criteria prescribed by cl 7.5.  Second, the proposal to defer 20 per cent of the bonus payments for three years breached the requirement under cl 7.5 to pay in full the amount of any bonus determined by CHA.  Putting to one side my findings regarding CHA’s repudiation by reason of the diminution in Mr Loone’s responsibilities as Managing Principal, CHA did not perform its part of the bargain under the Contract.

1. An alternative approach to the question of the enforceability of the restrictive covenants post-termination, underpinned by public policy considerations, was considered by Stephen J in Geraghty:

…The restraint clause is not only unilateral in the sense which I have indicated above: it is also so worded as to apply upon termination of the partnership for any reason, including termination (whether by the Minters or by the Geraghtys) under cl 17. 

So say, the Geraghtys, the restraint clause might come into operation even although the partnership came to an end not merely through no fault of theirs but due to some positive fault of the Minters, perhaps even involving fraud.  A restraint clause which, in conjunction with the rest of the deed, is capable of such an operation cannot be supported as a no more than reasonable restraint of trade.  On the contrary, it is unconscionable and opposed to public policy.[226]

[226]Ibid 189.

1. If the effect of cl 1.2(e) of sch 2 is that the restrictive covenants survive termination effected by Mr Loone’s acceptance of CHA’s repudiatory conduct, the clause could not be construed as doing no more than is reasonably necessary to protect the legitimate interests of CHA, either as to the duration of the clause or its extent.[227]

   [227]Cf Wallis Nominees (2013) 45 VR 657, [18].

1. The question of reasonableness is not assessed by reference to the circumstances of the alleged breach, but rather by what the covenants require or permit the parties to the contract to do.[228]  If, as contended by CHA, the effect of cl 1.2(e) is that post-employment restraints operate notwithstanding repudiation of the Contract by CHA, this would be so irrespective of the nature of CHA’s repudiatory conduct.  Thus, the reasonableness of the restraints is determined by reference to the potential operation of the covenants irrespective of the nature of CHA’s repudiatory conduct.  For example, if CHA falsely accused Mr Loone of misconduct and suspended him without pay, Mr Loone would be entitled to accept this repudiatory conduct as bringing the Contract to an end.  Notwithstanding the nature of this repudiatory conduct, if CHA’s contention is accepted, the post-employment restraints would continue to operate.  If cl 1.2(e) in conjunction with the restraints has this effect, the clauses are unenforceable as an unreasonable restraint of trade.

   [228]Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242, 285; Geraghty (1979) 142 CLR 177, 180.

1. A further way of approaching the question of the enforceability of the restrictive covenants post-termination is to adopt the approach endorsed by Blue J in Richmond.[229]  In considering whether the restraints in the service agreement would survive termination effected by acceptance of the Principal’s repudiation, Blue J considered whether continued operation would be inconsistent with the ‘substantive consideration’ for the restraint clause.[230]  The substantive consideration for the restraint clauses in Mr Loone’s contract of employment was the agreement to pay remuneration in accordance with cl 7.  Mr Loone’s entitlement to have his bonus assessed in accordance with the prescribed criteria in cl 7.5 and to have the full amount so determined paid to him formed part of the substantive consideration for the post-employment restraints.  Properly construed, the parties’ intention as manifested in the contract is that the post-employment restraints would not operate where the termination arose out of Mr Loone’s acceptance of CHA’s repudiatory conduct where such conduct constituted a failure by CHA to comply with the prescribed criteria which underpinned the assessment and payment of Mr Loone’s bonus. 

   [229][2015] SASCFC 147.

   [230]Ibid [219].

1. If, contrary to the conclusion set out above, the post-employment restraints survive Mr Loone’s acceptance of CHA’s repudiatory conduct, I would in any event refuse on discretionary grounds to grant an injunction to enforce the restraints.

1. No authority has been drawn to my attention, and my own research has not disclosed any case, where a court, having found that an employer has engaged in repudiatory conduct, has declined to grant injunctive relief on discretionary grounds.  It would appear the issue has simply not arisen because there has not been a case in which a court has concluded that a post-employment restraint has survived termination of the contract by an employee’s acceptance of the employer’s repudiation.

1. In the absence of any authority directly on point, the reasoning of Gibbs J in Geraghty,[231] referred to above, is apposite:

He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’.[232]

[231](1979) 142 CLR 177.

[232]Ibid 187 (citations omitted).

1. CHA failed to assess Mr Loone’s bonus entitlement in accordance with the mandatory criteria prescribed by cl 7.5.  The new incentive plan which was to be introduced for the 2017 financial year breached cl 7.5 insofar as it provided for the deferral of 20 per cent of Mr Loone’s bonus entitlement for a period of three years.  Notwithstanding its discretionary character, Mr Loone’s right to have a bonus entitlement determined in accordance with the prescribed performance criteria and to have the bonus paid in full constituted an important element of the consideration which underpins the restraints of the Contract.  It would be unfair if CHA was to receive the benefit of the restraints notwithstanding its failure to comply with significant contractual obligations.

1. Mr Moses submitted that there was no scope for the application of the doctrine of clean hands ‘because the contract expressly provides for those restraints to continue to have force, despite repudiation or termination of the contract’.[233]  Mr Moses submitted that there would have to be ‘some other disentitling conduct’ separate from a breach of the terms of the Contract to disentitle CHA from obtaining equitable relief.[234]

   [233]Transcript of Proceedings, Crowe Horwath (Australia) Pty Ltd v Loone (Supreme Court of Victoria, S CI 2016 02982, McDonald J, 21 February 2017) T524 LL17–19.

   [234]Ibid T525 LL2–7.

1. I reject this submission.  Clause 1.2(e) of sch 2 does not preclude the Court, when considering whether equitable relief should be granted, from taking account of the nature of any breach of CHA’s contractual obligations.  However, for the reasons set out above, it is unnecessary to have recourse to equitable principles to deny CHA the relief which it seeks.  The restraint covenants are unenforceable by reason of the Contract having been terminated by Mr Loone’s acceptance of CHA’s repudiatory conduct. 

Conclusion

1. The restrictive covenants in cl 3.1 of sch 2 of the Contract do not survive the termination of the Contract effected by Mr Loone’s acceptance of CHA’s repudiatory conduct.  Mr Loone’s is entitled to an order discharging the injunction granted on 26 September 2016.[235]  When the injunction was granted, CHA gave an undertaking to abide by any order the Court may make as to damages if the Court concludes that Mr Loone has sustained damage by reason of the injunction, which CHA ought to pay.

   [235]See Crowe Horwath Pty Ltd v Loone [2016] VSC 582.

1. By an amended counterclaim dated 23 December 2016, Mr Loone has claimed damages.  His particulars of damage include the following:

Mr Loone has lost the right to receive the remuneration he would have received had he remained employed with CHA into the foreseeable future and received his full remuneration and STI, properly calculated to include the increase in the net profit growth derived from acquisition of the Davey Financial Group and the integration of that firm into Crowe Horwath Launceston.[236]

[236]Further Amended Defence and Counterclaim dated 23 December 2016, [49].

1. Pursuant to cl 16.2 of the Contract, both he and CHA had the right to lawfully terminate the Contract upon the provision of six months’ notice.[237]  To the extent that Mr Loone seeks damages flowing from the Court’s finding that CHA repudiated the Contract, a question arises as to whether any entitlement to damages is limited by the right of either party to terminate the Contract upon six months’ notice.[238]   

   [237]Exhibit P1: Plaintiff’s Court Book, 151, 159.

   [238]See Bostik (Australia) Pty Ltd v Gorgevski [No 1] (1992) 36 FCR 20, 32–33.

1. The injunction granted by the Court on 26 September 2016 restricted Mr Loone from providing accounting services to 89 clients of CHA.[239]  If any entitlement to damages is asserted on the basis of Mr Loone having continued in employment, a further question arises as to what damages flow from the injunction granted on 26 September 2016.  If Mr Loone claims damages based upon his entitlement to have continued in employment with CHA, it is not readily apparent how he can simultaneously claim damages flowing from the injunction.  The restraints arising from the injunction only had work to do because Mr Loone was no longer an employee of CHA.

   [239]See Crowe Horwath Pty Ltd v Loone [2016] VSC 582.

1. I shall provide the parties with an opportunity to make submissions on:

(viii)    the costs of the interlocutory proceedings;

(ix)       the costs of the trial;

(x)        directions in respect of further proceedings in respect of Mr Loone’s claim for damages.

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