Earney v Australian Property Investment Strategic Pty Ltd
[2010] VSC 621
•22 December 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 10748 of 2009
| GRANT ARTHUR EARNEY | Plaintiff |
| v | |
| AUSTRALIAN PROPERTY INVESTMENT STRATEGIC PTY LTD (ACN 009 110 463) | Defendant |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 and 26 November, 8 December 2010 | |
DATE OF JUDGMENT: | 22 December 2010 | |
CASE MAY BE CITED AS: | Earney v Australian Property Investment Strategic Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 621 | |
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EMPLOYMENT CONTRACT – Plaintiff employed by defendant as Chief Financial Officer – Change of control clause in contract of employment – Plaintiff entitled to 12 months’ salary if terminated following change of control – Plaintiff removed from position as Chief Financial Officer and offered alternative positions – Whether alternative positions of equivalent status and responsibility – Whether defendant’s conduct amounted to a repudiation of the employment contract – Whether, in addition, plaintiff entitled to payment in lieu of notice – Whether plaintiff entitled to other entitlements arising under employment contract – Whittaker v Unisys Australia Pty Ltd [2010] VSC 9 applied; Easling v Mahoney Insurance Brokers (2001) SASR 489 distinguished.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W L Friend SC | A J Macken & Co |
| For the Defendant | Mr M G Rinaldi | Gadens |
TABLE OF CONTENTS
Parties and introduction................................................................................................................... 2
Did the defendant repudiate the employment contract?........................................................... 3
Is Mr Earney entitled to payment in lieu of notice?.................................................................. 29
Must Mr Earney bring his later earnings into account?........................................................... 33
Does Mr Earney have other entitlements under the employment contract?........................ 34
Conclusion and orders.................................................................................................................... 36
HIS HONOUR:
Parties and introduction
The plaintiff, Grant Arthur Earney, was employed by the defendant, then called MacarthurCook Ltd, as its Chief Financial Officer (‘CFO’) in January 2009. The defendant is often referred to in contemporaneous documents as ‘MCK’. The defendant is based in Melbourne.
Clause 8.4 of Mr Earney’s employment contract provides:
8.4 Change of Control
If a third party acquires control of at least 50% of the issued shares in [the defendant] in the period up to 30 June 2010 and [Mr Earney’s] employment is terminated during this period other than for cause, then [Mr Earney] shall be entitled to a termination payment equal to 12 months base salary.
In July 2009, AIMS Financial Group Ltd, a Sydney based company, acquired control of 92 per cent of the issued shares in the defendant. The takeover triggered the possible operation of clause 8.4 of the employment contract.
Mr Earney contends that his employment was terminated during the relevant period other than for cause, because he was removed from his position as CFO and was not offered, or appointed to, another position of equivalent status and responsibility. Mr Earney contends that the defendant’s conduct amounted to a repudiation of the employment contract, which he accepted within the relevant period. He claims 12 months’ salary as a liquidated sum, six months’ salary in lieu of notice and other accrued entitlements under the employment contract.
The defendant denies repudiation. It contends that Mr Earney acquiesced in his removal as CFO and that the details of an alternative position, or positions of equivalent status and responsibility, were being discussed between the parties in good faith when Mr Earney purported to accept the alleged repudiation. Accordingly, the defendant contends that Mr Earney breached his employment contract by ceasing to attend for work, and that it has validly dismissed him for cause.
The defendant contends in the alternative that, if Mr Earney is entitled to 12 months’ salary under clause 8.4 of the employment contract, he has no further right to payment in lieu of notice, and he must bring to account any earnings by him in the 12 months after he ceased working for the defendant. Further, the defendant denies that Mr Earney has any other entitlements under the employment contract.
The principal issues for determination may be summarised as follows:
(1) Did the defendant repudiate the employment contract?
(2) Is Mr Earney entitled to payment in lieu of notice?
(3) Must Mr Earney bring his later earnings into account?
(4) Does Mr Earney have other entitlements under the employment contract?
Did the defendant repudiate the employment contract?
In order to determine whether the defendant’s conduct constituted a repudiation of the employment contract, it is necessary to consider the facts in some detail.
By letter dated 24 November 2008, the defendant offered to employ Mr Earney in the role of CFO. The letter attached two copies of the employment contract and invited Mr Earney to accept the offer of employment by signing one copy and returning it to the defendant. The letter contains the following statement concerning Mr Earney’s remuneration:
The Employment Agreement provides for an initial annual remuneration package exceeding $351,244 comprising:-
· Base salary $250,000.00
· Superannuation $13,744.80
· Options*, 10% of base $25,000.00
· Bonus**, 25% of base salary $62,500.00
__________
Total salary $351,244.80
*Each year you will be issued 10% of your base salary in Options on specified performance targets being achieved. The actual number of options issued is based on an independent valuation.
**On achievement of KPIs [key performance indicators].
The defendant signed a copy and the employment contract then came into existence.
In considering the repudiation issue, the following provisions of the employment contract are relevant:
(1) The defendant agreed to employ Mr Earney as its CFO on a full-time basis, reporting to the defendant’s Chief Executive Officer (‘CEO’) - clause 1.1.
(2) Mr Earney agreed to hold the responsibilities and perform the duties and tasks conferred, delegated or specified by the CEO from time to time – clause 1.5(a).
(3) It was agreed that Mr Earney’s initial responsibilities would be those detailed in a position description. That position description was handed to Mr Earney on commencement of his employment in January 2009. The position description described the key functions to be performed by Mr Earney as CFO of the defendant and related group companies, in the following terms:
1.Effectively manage the MacarthurCook (MCK) group Finance function and the finance team.
2.Develop and prepare timely, accurate and commercially relevant financial and accounting information to management and the Board.
3.Prepare all schedules for financial reporting in accordance with statutory requirements and the needs of management.
4.Interpret the statistical and accounting information to appraise operating results in terms of costs, budgets, trends and increased profit possibilities.
5.Offer substantive opinion on the financial implications of company wide growth initiatives.
6.Provide corporate and fund tax strategic planning and operational tax management.
7.Manage corporate debt and treasury function.
8.Maintain day to day operational responsibilities associated with fund debt and hedging positions.
9.Manage internal relationships and internal control procedures.
10.Work with the Head of Legal and Compliance and Compliance Manager, jointly leading the risk management strategies, practices and stakeholders across the business.
11.Drive the business planning process with the Head of Operations & Commercial Development.
12.Implement appropriate risk mitigation and cost control strategies.
13.Provide research and platform performance information.
14.Present the MacarthurCook business to analysts on a half-yearly basis or as required.
These responsibilities will involve:
·Management of external service providers to the Finance function including auditors, fund accountants, tax advisers, brokers etc.
·Management of day to day banking matters for the company and the funds; and
·Compliance with the rules, regulations and legislation as it affects the financial activities of listed and disclosing entities.
Mr Earney commenced working for the defendant on 12 January 2009.
Mr Earney’s position as CFO of the defendant and related group companies was one of significant status and responsibility. The defendant was the manager of 11 listed and unlisted funds in Australia, Asia and the United States of America. Each of the funds invested in real estate or related securities. The total amount invested exceeded $1 billion.
The AIMS Financial Group conducts a diversified business including the making of home loans, managing property funds and ownership of a stock exchange.
At the time of the takeover, the CEO of the defendant was Simon Grant. As CFO, Mr Earney reported directly to him. Directors of the defendant included Mark Thorpe-Apps and Greg Bundy. The company secretary was Sarah Christensen.
At the time of the takeover:
(1) George Wang was the Executive Chairman and Chief Executive Officer of AIMS. Following the takeover, he also assumed that position for the defendant.
(2) Dustine Pang was the Chief Financial Officer of AIMS. In the circumstances described below, he replaced Mr Earney in that position with the defendant.
(3) James Tong was Chairman of the AIMS ‘advisory board’. He reported directly to Mr Wang and was described as his ‘right hand person’.
Before proceeding further with the factual narrative, it is convenient to state my views as to the demeanour and general credibility of the witnesses. Mr Earney gave evidence in a direct and forthright manner. He made concessions where appropriate, in particular as to the commercial good sense of the AIMS group CFO, Mr Pang, becoming CFO for the expanded group, including the defendant. There were occasions on which Mr Earney was argumentative, but those occasions appeared to me appropriate given the form of the questions put.
Mr Wang had great difficulty in giving evidence. He appears to understand the English language well enough, but his spoken English is very poor. There were some initial difficulties with an interpreter, but these resolved after a second interpreter was engaged. There were occasions when Mr Wang was a non-responsive witness, who seemed intent on conveying his subjective thoughts when the questions called for his recollection of communications between him and Mr Earney. However, on many occasions I am satisfied that this was due to his failure to comprehend the question asked.
Mr Pang was a straightforward witness, and there was nothing about his demeanour which calls for comment.
Mr Tong falls into a different category. He was argumentative and at times evasive. Some of his evidence was inconsistent. He gave evidence of communications with Mr Earney, which were not put to Mr Earney in cross-examination. Counsel for the defendant frankly acknowledged that he was unaware that Mr Tong was going to give much of that evidence. Mr Tong also gave evidence which was inconsistent with other witnesses, including Mr Wang. Taking his evidence as a whole, I formed the impression that he had developed a narrative in support of a case to be advanced on behalf of the defendant, rather than giving evidence of his best recollection of material events.
The takeover became effective on about 14 July 2009. Soon afterwards, in early August 2009, there was a board meeting of the defendant in Sydney. There were also a series of meetings between senior executives of AIMS and the defendant during that day. One of the meetings was between Mr Earney, Mr Wang, Mr Bundy, Mr Pang and Mr Tong. They discussed opportunities for the defendant in the future. Mr Earney said that, at this meeting, Mr Bundy spoke of a concept of a ‘shared services company’. The concept was based upon Mr Bundy’s experience while he worked at Merrill Lynch. The concept was described as a service company offering ‘back office’ services to the defendant and third parties. The concept was subsequently referred to as ‘ServiceCo’, and I will adopt that description. Back office services included fund accounting, legal, compliance, settlements and other administrative services for managed funds. There was discussion about developing the concept and providing a role for Mr Earney.
The defendant’s witnesses did not agree with all of Mr Earney’s evidence about this meeting. There were differing recollections as to who was present. Further, Mr Tong said he, and not Mr Bundy, suggested the ServiceCo concept. Mr Wang acknowledged that Mr Bundy was involved in putting the concept forward. It is unnecessary to resolve the conflict between Mr Earney and Mr Tong on this issue. It is enough to record that the concept was discussed, and it was not Mr Earney who suggested it as a possible future role for him.
Following the meeting, Mr Earney was asked to prepare a document outlining the ServiceCo concept and how it might work in practice. As a result, Mr Earney prepared a document and forwarded it to Mr Pang and Mr Grant. In his covering email, he described the document as ‘some initial, high-level thoughts on the concept’. The document described the short term objective of the concept as the establishment of ServiceCo ‘with an internal focus’, to provide services for the AIMS Group, including the defendant. Longer term, the document proposed that these services be offered to external parties, and referred to Babcock & Brown Residential Land Partners (‘BLP’) as a possible external client. Mr Earney suggested that ServiceCo would report to the CFO of the AIMS Group. He continued:
Perhaps, this should be the first step before we embark on the external model, but the problem is there are two CFO candidates.
It is suggested that a decision be made to choose of the two CFO’s [sic] to be the single group CFO and use the other one for special projects or other roles (eg member of MCK executive committee?)
AIMS executive committee has kindly suggested that [Mr Earney] becomes the CEO of ServiceCo but this only has viability if/when there is critical mass in relation to external clients.
In the longer term, external model, a CEO would have oversight over the functions being performed by ServiceCo and would be a “quasi CFO” for the “client(s)”. Over time, as critical mass is achieved, there would be room for a ServiceCo CEO and CFO’s at the “client(s)”.
The document then gave some detail as to the various functions which would be brought within the ServiceCo concept, recorded some issues for consideration and concluded with the suggested steps to progress the concept, as follows:
7. Steps in the process
(i) Finalise issues/structure
(ii) Prepare costings and then service level agreements…
(iii) Establish ServiceCo
(iv) Transfer AIMS and MCK employees into ServiceCo
Mr Earney said that he received no response to the document. He said ‘the idea just seemed to die, and it didn’t really go anywhere’. He acknowledged that this was probably due to more pressing matters within the AIMS Group at the time.
By email dated 18 August 2009, sent to Mr Earney and others without prior notice, Mr Earney’s authority for expenditure was curtailed substantially. Previously, as CFO, Mr Earney had been accustomed and authorised to incur expenditure of significant sums, amounting to tens of thousands of dollars. By this email, his authority was reduced to $2,000.
At this time, Mr Earney and Mr Pang were speaking on an almost daily basis about various accounting and financial issues. In this context, Mr Earney prepared another document. He sent it to Mr Pang, with a copy to Mr Tong, on 3 September 2009. In that document, Mr Earney proposed the integration of the defendant’s finance and operations process within the AIMS Group, thus eliminating the separate accounting functions of AIMS and the defendant. He referred to this integration as providing a ‘platform from which the possible ServiceCo concept can be developed’, but he stated that the ServiceCo concept was ‘currently on hold per GW’, a reference to Mr Wang. This statement was not challenged by Mr Wang or Mr Pang at any time. However, Mr Tong said in cross-examination that he told Mr Earney that Mr Wang may not be fully aware of the ServiceCo concept, and that he instructed Mr Earney to continue and develop ‘a proper proposal’. I do not accept Mr Tong’s evidence. There is no documentary evidence to support it, and the evidence was not put to Mr Earney in cross-examination.
On the question of leadership of the integrated finance operations, Mr Earney stated:
3. Leadership
Operationally, all the relevant service functions should report to the same person which is logically the CFO.
Alternative 1:
Given that Dustine Pang is AIMS Group CFO, it makes sense that he take on responsibility for all MCK support functions. The implications of this are discussed below in this paper.Under this alternative, a new role would have to be created for Grant Earney – this is considered in a separate paper.
Alternative 2:
The alternative to this is that Grant Earney takes on the AIMS Group CFO role and Dustine Pang is moved to a new AIMS Group role.This alternative is not considered further in this paper.[1]
[1]Emphasis added.
On the following day, 4 September 2009, Mr Earney sent an email to Mr Wang attaching the separate paper prepared by him as to the possibilities for creating a new role for him in the AIMS Group. A copy of the paper was also sent to Mr Tong. In his email to Mr Tong, Mr Earney stated:
Attached to this email are my thoughts on what this would mean for me. My intention with this is to have an open mind and put all the issues “on the table” so please read it in this context. Dustine and I have been working very well together and I have very much appreciated him giving me space rather than trying to takeover my role. However, as I have said to you and George it doesn’t make sense to have two CFO’s in the AIMS Group so I’m trying to find a way forward. [2]
[2]Emphasis added.
In the attached paper, Mr Earney outlined his concerns about his then current role:
Concerns with my current role:
· Still CFO for MCK but not involved in key issues (eg some meetings involving MCK financial issues being conducted without me present, no involvement in Singapore transaction, new independent director liaising directly with AIMS CFO, “out of the loop” re development of AIMS thoughts re MCK recapitalisation and going concern issue resolution)
· Certain aspects of my role now involve “double up” with AIMS CFO such as insurance and bank relationship issues.
Mr Earney also raised some concerns about his bonus for the financial year ended 30 June 2009. Mr Tong gave evidence that Mr Earney was initially enthusiastic about the new roles being considered for him in the event that he was replaced as CEO of the defendant. However, he said that Mr Earney’s attitude changed when the defendant did not pay him his full bonus for the year ended 30 June 2009. From that time, according to Mr Tong, Mr Earney became less receptive to the suggested roles that he may undertake, and became ineffective in progressing matters within his responsibility. I reject that evidence. As appears below, the dispute which Mr Earney has concerning his bonus for the year ended 30 June 2009 is extremely minor, concerning approximately $2,600. Further, this evidence from Mr Tong was not put to Mr Earney in cross-examination.
On the assumption that the finance operations of the defendant would be integrated within the finance operations of the AIMS Group, with Mr Pang remaining as the CFO for the group, Mr Earney raised the impact of that situation upon him. In the course of doing so, Mr Earney made the following statements in the paper:
(1) He referred to the suggestion that he become the CEO of ServiceCo, but reiterated that such a role ‘only has viability if/when there is critical mass in relation to external clients.’ Further, he again stated that Mr Wang had placed the ServiceCo concept ‘on hold due to higher priorities’. This was the second statement by Mr Earney to this effect in documents forwarded to the senior management of AIMS. Again, it was not challenged at any time.
(2) Given that the ServiceCo concept had been placed on hold, Mr Earney proposed two alternative roles which may be viable for him – Chief Operating Officer of the defendant or AIMS Group. The paper then discusses the issues surrounding the two alternative roles. Mr Earney noted that he had concerns about the structure of any such role, particularly regarding the lack of direct reports if he was appointed Chief Operating Officer of the defendant, and emphasised that such a role was at risk of being a ‘nothing’ role and needed input from the AIMS executive committee before it would be acceptable to him. This statement demonstrates that Mr Earney was concerned that any continuing role assigned to him would carry equivalent status and responsibility to his position as CFO of the defendant.
Mr Earney discussed this paper with Mr Tong, who suggested that he take the matter up with Mr Wang. Mr Earney emphasised his concerns in an email sent to Mr Pang on 10 September 2009.
Next, on or about 17 September 2009, Mr Earney met with Mr Wang and discussed his future. Mr Earney gave the following evidence about this meeting:
In the meeting Mr Wang made it clear that he wanted me to stay around and that he was very keen to try and find a role for me to play within the organisation. I expressed to him concerns about what was being proposed, concerns about what it meant for the staff that had reported through to me, and so I said there were things that we needed to resolve before we could pull the trigger, so to speak.
Yes. And did Mr Wang make any response in relation to that? --- Not really. I think it's fair to say that on matters like that George was quite happy to let people like Dustine [Pang] or James [Tong] carry out the detail.
At about this time, BLP prepared a proposal to outsource components of its management (‘BLP outsourcing proposal’). A copy of this proposal was sent to Mr Thorpe-Apps by David Wightman, the CEO of BLP, on 23 September 2009. In this context, there was some discussion between Mr Earney and other management about the possibility of the defendant making a proposal to BLP. Given the existence of this opportunity, Mr Earney persuaded Mr Wang to put further redundancies in the defendant’s Melbourne office on hold, in case the staff were required to service BLP if its business was obtained.
Mr Earney then took a two week holiday from Friday 25 September 2009. On his return, he prepared a draft proposal by the defendant to BLP in response to the BLP outsourcing proposal. Mr Earney described the draft as a ‘very high level initial proposal’ which he distributed to Mr Wang and others for comment. He said it took about one day to prepare.
The draft proposal included suggested fees to be charged by the defendant to BLP for the various services which BLP was seeking to outsource. In a conversation between Mr Earney, Mr Wang and Mr Thorpe-Apps, Mr Wang said that he was unhappy with the proposed fees, and asked that they be deleted from the draft. In an email sent 21 October 2009, Mr Earney canvassed some alternative fees with Mr Pang.
In his examination in chief, Mr Pang said that the BLP outsourcing proposal was linked to the ServiceCo concept; if the concept was implemented, there were potential cost savings for the defendant in relation to fund accounting; and it was intended to make a profit from servicing BLP. However, he offered no opinion as to whether the BLP business, if obtained, would be profitable. In cross-examination, Mr Pang acknowledged that the fees referred to in Mr Earney’s 21 October email were greater than the estimated direct costs to BLP, making it potentially unattractive to BLP. He described the proposed fees as ‘still very much in draft form’, and said they were ‘too draft to be able to tell’ if the BLP business was likely to be obtained or, if it was, if the business would be profitable for the defendant.
Further, Mr Pang said in evidence in chief that, if the ServiceCo concept was implemented and the BLP business was sufficiently profitable to justify it being undertaken, the combined role of managing those businesses would have been ‘a substantial role, and would have been no less than the role [Mr Earney] had prior to the takeover’.
In cross-examination, Mr Pang was asked whether the BLP outsourcing proposal resulted in any business for the defendant. He said that he was not involved in continuing with the project, because he had other work to do. However, he acknowledged that Mr Thorpe-Apps, who remained in the defendant’s employ until August or September 2010, had the capacity to continue seeking the BLP business, and that others could also have done so. Notwithstanding this, no further work was done on the BLP outsourcing proposal after Mr Earney left.
On 1 October 2009, Mr Earney and Mr Pang were each appointed as a co-company secretary of the defendant, in place of Ms Christensen. The reason for appointing co-company secretaries appears to have been to ensure that there was a company secretary in both Sydney and Melbourne, as Mr Pang was based in Sydney and Mr Earney was based in Melbourne. Ms Christensen resigned as company secretary in late September 2009, but remained in the employ of the company. Mr Earney said that she continued to perform the day-to-day work of company secretary ‘albeit with me having the title’.
On 14 October 2009, Mr Earney met with Mr Wang and discussed his continuing role. Mr Earney described the conversation as Mr Wang stating to him: ‘Look, here’s what I want. Talk to James about the detail.’ Given Mr Wang’s difficulty in speaking comprehensible English, Mr Earney sent two emails that day, to record his understanding of the conversation.
In his first email following this conversation, Mr Earney raised a particular issue with Mr Pang concerning fund accounting. The defendant had two core areas of accounting: corporate accounting (handling the accounts of the defendant only) and fund accounting (accounting for each of the various funds managed by the defendant). The two areas were separate in their objectives. Mr Earney understood Mr Wang to have informed him that both corporate and fund accounting was to be transferred to Mr Pang, as Group CFO, and he was endeavouring to ascertain from Mr Pang whether this was also his understanding. According to Mr Earney, fund accounting represented approximately 30 per cent of his CFO responsibilities. Mr Pang estimated the fund accounting as representing approximately 50 per cent of Mr Earney’s CFO responsibility. It is unnecessary to resolve the conflict between the estimates.
The second email sent by Mr Earney following his conversation with Mr Wang was addressed to Mr Tong (the ’14 October email’). Again, Mr Earney was seeking confirmation that he had understood Mr Wang’s wishes. Relevantly, the email states:
Hi James
I spoke further to George about my role today and he asked me to follow up a few issues with you.
George has confirmed that my CFO responsibilities will move to Dustine, including fund accounting. He thinks compliance will report to me but he wants me to sort this out with Sarah/Ryan/Dustine. He wants me to work on due diligence work with respect to new business opportunities (eg BLP, Austock). I have concerns re losing direct responsibility for the accounting and finance function but and George mentioned that I would be getting a revised contract “soon”.
George wants me to take on an “overseeing” role in Melb and be part of the AIMS/MCK executive committee. George wants me to be involved in these meetings to discuss MCK issues. As I understand it, the group of you, George, Mark, Greg meets on an ad-hoc basis and so given I am in Melb this will mean calling me when you have a discussion.
…
Please consider the above and call me to discuss.[3]
[3]Emphasis added.
Mr Wang accepted that the 14 October email was an accurate reflection of his conversation with Mr Earney on that day.
Accepting that the 14 October email contains an accurate summary of the statements made by Mr Wang on that day, I find that Mr Wang told Mr Earney the following things:
(1) He was to be removed from his position as CFO, including fund accounting. All of his CFO responsibilities, with the possible exception of ‘compliance’, would be undertaken by Mr Pang from that time.
(2) Pending a revised contract being presented to Mr Earney for his consideration, Mr Wang wanted him to work on due diligence work with respect to new business opportunities such as BLP and another possible client for ServiceCo, Austock.
(3) Further, Mr Wang wanted Mr Earney to take on an ‘overseeing’ role in the Melbourne office of the defendant, and to become involved in executive committee meetings to discuss issues relating to the defendant.
The next day, 15 October 2009, Mr Wang telephoned Mr Earney. Mr Earney made a brief handwritten note of the conversation on his copy of the 14 October email, in the following terms:
15/10/09: GW called.
‘CFO responsibilities not yet moved’ – ‘work with Dustine’.
Mr Earney’s recollection of this conversation went beyond the terms of his brief handwritten note. He said in evidence in chief that Mr Wang telephoned him and said:
“No, look, no change. I’m sorry if I gave you that impression. CFO responsibilities are not moving at all. Keep talking to Dustine [Pang], but there’s no change.”
Mr Earney described this conversation as effectively cancelling out the conversation on the previous day, which he had endeavoured to confirm in the 14 October email. Later, he said that the effect of the conversation was that the 14 October email ‘all became null and void’.
Mr Wang’s evidence concerning this conversation was not consistent. In his evidence in chief, in response to leading questions, he said that it was only the removal of Mr Earney as CFO of the defendant that he put on hold, and that the remainder of the 14 October email was not discussed. In cross-examination, he said that ‘the only thing I made any reference to was the CFO position’. However, when asked to recall the conversation in his own words, he described in the following terms:
I made a phone call to Grant. I will not pass on the CFO role to Dustine for the moment.
…”You continue with whatever you have been working on.”
Later in his cross-examination, Mr Wang agreed that the effect of the conversation was that he told Mr Earney that ‘CFO is not changing now, keep working with Dustine [Pang] the way you have been’ and ‘the CFO is not changing, keep going as you are’.
Mr Wang’s version of the conversation is capable of being consistent with Mr Earney’s understanding. This is particularly so in circumstances where Mr Wang had difficulty in speaking English in a comprehensible way. For reasons given below, it is unnecessary to reach a firm conclusion as to what was said during this conversation. This is because Mr Earney and Mr Wang agree that Mr Wang informed Mr Earney that he was to continue as the CFO of the defendant for the time being. Of course, the defendant appreciated that it was likely that his role as CFO would not continue indefinitely, as he had recognised the good sense in having only one CFO for the whole of the AIMS group, including the defendant. However, for the time being, he was to continue in his role as CFO of the defendant, and work with Mr Pang as he had been doing to that time.
The other roles for Mr Earney which are referred to in the 14 October email were general in nature and did not amount to the offer of a definite position. Reading the 14 October email as a whole gives the clear impression that the other roles were proposed as short term tasks to be undertaken by Mr Earney, while awaiting a revised contract for his consideration. I find that Mr Earney remained in a state of complete uncertainty as to what his continuing role was to be. He was simply given a list of things to do while his continuing role was worked out by Mr Wang, and a definite proposal was put to him.
On 21 October 2009, Mr Earney sent an email to Mr Wang’s executive assistant, asking her to organise flights for him to travel to Sydney for a meeting of the defendant’s board on the following Thursday. Notwithstanding that Mr Earney was a co-company secretary of the defendant, the assistant questioned whether it was necessary for him to attend the board meeting. She proposed that Mr Earney participate in the board meeting by telephone. Although he could not recall it, Mr Wang acknowledged that his assistant would not have questioned Mr Earney’s travel entitlements without receiving direction from ‘someone senior in Sydney’.
By email sent 29 October 2009, Mr Earney asked Mr Pang whether he had spoken with Mr Wang about the BLP outsourcing proposal. Mr Pang replied that he, Mr Tong and Mr Thorpe-Apps had spoken with Mr Wang the previous afternoon, and Mr Thorpe-Apps was going to speak with the CEO of BLP, Mr Wightman, to advance the proposal. Mr Earney responded tersely. He questioned why no attempt was made to include him in the discussions concerning BLP, as he thought Mr Tong had been ‘keen’ for him to be the project manager of the BLP proposal. Mr Pang said he believed Mr Earney attended the meeting with Mr Wightman. The evidence was clearly hearsay and I do not accept it. It was not put to Mr Earney and not supported by other witnesses.
Mr Thorpe-Apps met with Mr Wightman in late October or early November 2009 to discuss the BLP outsourcing proposal. Mr Thorpe-Apps was not called as a witness, and no evidence was given as to the matters arising from that discussion. Taking the evidence as a whole, I find that the BLP outsourcing proposal was a mere possibility in prospect, which was not pursued beyond a draft proposal prepared by Mr Earney in the course of one day. Costings were never finalised. Mr Pang said in re-examination that a formal quotation for the work was never put forward by the defendant.
On 29 October 2009, Mr Earney was copied into an email which indicated that certain accounting functions were to move from Melbourne to Sydney. Although he remained the CFO of the defendant, he was given no prior warning of this decision.
Prior to the takeover, a significant aspect of Mr Earney’s role as CFO was to manage the relationship with its principal banker, OCBC. By early November 2009, Mr Pang and Mr Wang had assumed principal responsibility for dealing with OCBC. Mr Earney was consulted from time to time, but ceased having direct involvement with OCBC.
On 6 November 2009, at Mr Wang’s direction, the human resources manager of the AIMS group, Moni An, sent a circular email to all of the defendant’s Melbourne staff, including Mr Earney (the ‘6 November email’). Mr Earney had no prior notice that this email was to be sent. The email is in the following terms:
To All Staff
Dear All,
Following the recent review of the finance and accounting functions of the group, the management has pleasure to announce that Mr. Dustine Pang as the Chief Finance Officer of the AIMS Group is to take over the role of Chief Finance Officer of MacarthurCook Limited with effect immediately.
All Melbourne Finance and Accounting Department staff is to report to Dustine directly.
As a result of the above, Mr. Grant Earney will now focus on special projects assigned by the Executive Chairman.[4]
[4]Emphasis added.
As previously noted, Mr Earney knew it was likely that Mr Pang would assume the role of CFO for the whole of the AIMS group, including the defendant. Indeed, he saw the sense in that happening, and said so in writing. However, the failure to give him notice of a final decision to that effect, other than by circular email to all staff in Melbourne, was a significant matter. By the email, Mr Earney was removed from the senior position of CFO, with its attendant status and responsibility, and assigned to ‘special projects’. The 6 November email contained no reference to what these special projects entailed, or as to their status and responsibility. The overall impression is that Mr Earney had been demoted, and that no definite role had yet been found for him. That was the fact. By the 6 November email, Mr Wang was restoring the position summarised by Mr Earney in the 14 October email. Mr Earney was to undertake a series of ad hoc tasks until a position was found for him and a revised contract was presented for his consideration.
Mr Pang appreciated the significance of the announcement that Mr Earney was being removed as CFO. He said that he knew the 6 November email was being drafted, and he gave specific instructions to Ms An, and Mr Tong, that he wanted an opportunity to speak with Mr Earney before the email was sent ‘out of courtesy’. When that did not happen, he apologised to Mr Earney afterwards. When Mr Pang was asked if Ms An had failed to comply with his instruction, he said it was more in the nature of a request, as he did not have authority to direct her what to do.
Following the 6 November email, Mr Earney telephoned Mr Wang, who was then in Singapore. Soon after this conversation, Mr Earney recorded the substance of it in an email to Ms An and to directors of the defendant, in the following terms:
I think you should know that I have just spoken to George and told him that I am very disappointed in the content of this e-mail and the fact that I had no warning that it was about to be sent. This is despite Dustine being in Melbourne over the past two days (albeit I was busy today and hard to catch) and despite me asking yesterday a direct question about reporting lines for Melbourne staff (to which he did not give a response).
Whilst it is true that George has flagged the possibility that this change might occur, he and James Tong have subsequently told me that there are issues which needed to be worked through before anything would change. It is also the case that I have made repeated attempts to clarify the nature of my role going forward and I have only received limited information.[5]
I accept that the emphasised sentence reflects the position at that time. At the time Mr Earney was removed as the CFO of the defendant, no definite proposal for his future employment by the defendant had been put forward. Rather, there were a series of possible roles in contemplation.
[5]Emphasis added.
On 8 November 2009, there was a meeting of the defendant’s board of directors in Sydney. Mr Earney was not invited to attend the meeting, even though he was a co‑company secretary. The explanation for him not being invited was that the meeting was to discuss issues concerning his conduct, and he would have a conflict of interest. That may be so. However, if his role as a co-company secretary was a real one, and not just a fill-in role for times when board meetings were held in Melbourne and Mr Pang was not able to attend, he should have been informed of the meeting, and an explanation given that the board considered he should not attend because of a possible conflict of interest.
On 9 November 2009, without prior notice, Mr Earney was removed as a signatory of the defendant’s bank accounts.
Also on 9 November 2009, Mr Earney learned of the board meeting held in Sydney the previous day. He sent an email asking for an explanation as to why he was not notified of the meeting. He received no response to that email.
By this time, Mr Earney’s patience had been exhausted. Since the takeover, the following objective conduct had taken place concerning his employment:
(1) Although he remained CFO, his authority to approve expenditure had been substantially reduced.
(2) Although he had been appointed a co-company secretary, his travel arrangements to attend a board meeting in Sydney were refused and he had been given no notice of another board meeting. Objectively considered, his role as co-company secretary appeared a token one.
(3) His draft alternative costings for the BLP outsourcing proposal, a project he understood may be managed by him, were not responded to. Instead, Mr Thorpe-Apps was to meet with Mr Wightman of BLP. Mr Earney was not involved in the discussions about this meeting. He only found out that it was to occur, because he asked Mr Pang what was happening with the BLP outsourcing proposal.
(4) Although he was still CFO on 29 October 2009, he was given no prior notice of significant accounting functions being moved from Melbourne to Sydney.
(5) Although he was still CFO in late October and early November, Mr Wang and Mr Pang assumed principal carriage of the negotiations with OCBC.
(6) He was given no prior notice of his removal as CFO by the 6 November email.
(7) He was not given the courtesy of any notice that he was removed as a signatory of the defendant’s bank accounts.
(8) The statement in the 6 November email that he was to focus on ‘special projects’ assigned by Mr Wang contained no definite offer of continuing employment on any particular terms. Instead, the position summarised in the 14 October email was reinstated. As stated above, Mr Earney’s continuing role as an employee of the defendant was completely uncertain. It amounted to no more than a list of tasks for him to attend to, pending the development of one or more possible roles which may be developed in the future.
Mr Earney took the view that this position involved such a downgrading of his status and responsibility as an employee of the defendant that the defendant had evinced an intention to no longer be bound by the terms of his employment contract. He elected to accept that repudiation and terminate the contract. He communicated that election by email to Mr Wang on 10 November 2009, in the following terms:
Subject: My role and contract
George
A series of events culminating in the appointment of Dustine Pang to my position as CFO (Moni’s e-mail of 6 November refers) and my removal as signatory of all fund and corporate bank accounts represents my constructive dismissal as an executive of MacarthurCook Limited.
I accept the repudiatory breach of my employment contract and reserve my rights in all respects.
I draw attention to my entitlements under my employment contract and request a statement of the Company’s intentions as to their payment.
I am prepared, if requested, to remain for some short reasonable time to assist the Company in the transition, without prejudice to my entitlements on separation.
The question for determination is whether, objectively considered, the defendant’s conduct to 10 November 2009 constituted a repudiation of Mr Earney’s employment contract.
This issue falls for determination at the time Mr Earney elected to treat the defendant’s conduct as a repudiation, on 10 November 2009. However, the parties accepted that the subsequent conduct of the parties may shed light on the determination of that issue.
At the time, Mr Wang was in Singapore attending to a contested takeover of one of the AIMS group property funds. He had left Australia in late October 2009 and did not return until 24 November 2009.
Mr Tong and Mr Earney spoke on 12 November 2009. Mr Tong said that the call was ‘not official’. Mr Tong told Mr Earney that he wanted him to stay on as an employee, as there were initiatives in prospect where his skills and experience could provide assistance to the AIMS group, including the defendant. These initiatives were not specified. Mr Earney confirmed this conversation in an email sent on the next day, 13 November 2009, to Mr Wang with a copy to Mr Tong. He offered to assist the defendant on a consultancy basis, without prejudice to his contractual entitlements. He said that his last day in the office would be Friday 20 November 2009 ‘in the absence of any formal response’. At this stage, Mr Earney said that he was receptive to a formal offer of a defined role, and was endeavouring to encourage such an offer. No offer was made. Indeed, Mr Earney’s email was not replied to.
On or shortly prior to 19 November 2009, Mr Earney spoke with Mr Bundy. He said that he was still open to a firm proposal being put so that he could continue to work for the defendant. On 19 November, Mr Earney sent an email to Mr Wang, with a copy to Mr Bundy. In that email, he noted that he had received no reply to his emails of 10 and 13 November, and stated that he was surprised there had been no response. He confirmed that his last day in the office would be the next day, 20 November 2009.
Mr Wang finally responded on 19 November 2009. In his email, he asked Mr Earney to reconsider his position until after he returned to Australia. He proposed a face to face meeting in the following week. Once again, no proposal was put to Mr Earney concerning a defined future role.
Also on 19 November 2009, Mr Tong sent an email from Japan, where he was on holiday, to the same general effect as Mr Wang’s email.
As no definite proposal was made, Mr Earney left the defendant’s offices on Friday 20 November 2009. Thereafter, his solicitors contended in correspondence to the defendant that Mr Earney had been dismissed as a result of the defendant’s repudiation of his employment contract, which Mr Earney had accepted. The defendant contested this proposition, and contended that Mr Earney was in breach of his employment contract by failing to attend for work. By letter dated 18 December 2009, the defendant terminated Mr Earney’s employment for cause under clause 8.3 of the employment contract.
I turn to consider the applicable legal principles, and to apply them to this case.
Like any other contract, an employment contract may be the subject of repudiation by a party. When an employee engages in repudiatory conduct, the employer can accept the repudiation and dismiss the employee. Where an employer engages in repudiatory conduct, the employee may accept the repudiation as a termination of the employment contract and sue for breach.
The applicable legal principles governing the repudiation of an employment contract were recently analysed by Ross J in Whittaker v Unisys Australia Pty Ltd.[6] I respectfully adopt that analysis, which may be summarised as follows:
[6](2010) 192 IR 311.
(1) The term repudiation is used in a number of senses. Relevantly, the High Court has recently stated that repudiation:
may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations. It be may termed renunciation. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.[7]
[7]Ibid, [32] (citations omitted), citing Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, [44].
(2) It is not necessary to prove a subjective intention to repudiate. The test is an objective one.[8]
[8]Ibid, [33].
(3) Whether there has been repudiation is a question of fact.[9]
[9]Ibid, [34].
(4) Repudiation is not to be inferred lightly. It is a serious matter.[10]
[10]Ibid, [35].
(5) Repudiation may be evidenced by a single act or by an accumulation of conduct in circumstances where no individual act on its own constitutes a repudiation.[11]
[11]Ibid.
(6) Repudiation does not bring an end to a contract. It is necessary for the innocent party to elect to accept the repudiation.[12]
[12]Ibid, [36].
(7) Repudiatory conduct may be ‘cured’ by the party in breach, but only prior to the acceptance of the repudiation.[13] Accordingly, once the innocent party has elected to terminate the contract for breach, it cannot thereafter be cured.[14]
[13]Ibid, [39].
[14]Ibid, [40].
(8) In the context of employment contracts, a significant diminution in remuneration, status or responsibility may constitute a repudiation. Whether or not this is so is a question of fact in each case.[15]
(9) There may be a significant diminution in status or responsibility, even where the employee retains the same remuneration and title.[16]
(10) However, there are circumstances where a considerable change in the nature of an employee’s duties may not amount to a repudiation. Although an employer cannot usually force changes of status and responsibility upon an employee, the circumstances of a particular case may permit a degree of flexibility in approach, with each party being required to provide ‘some reasonable give and take’.[17] In such cases, repudiation may not be inferred in the absence of serious non-consensual intrusions upon the status or responsibilities of the employee.[18]
[15]Ibid, [41].
[16]Ibid, [42]-[46], adopting the approach of Madgwick J in Westen v Union des Assurances de Paris (1996) 88 IR 259.
[17]Ibid, [45].
[18]Ibid.
In Whittaker, the plaintiff was employed by the defendant as a senior manager. Another employee was promoted to the plaintiff’s position, and the plaintiff was transferred to a newly created position. There was no change to the plaintiff’s remuneration. Ross J compared the status and responsibility of the plaintiff’s position as a senior manager with the status and responsibility of the newly created position. He found that the newly created position entailed a significant diminution in status and responsibility. On that basis, he found that the employer had evinced an intention to no longer be bound by the employment contract and had repudiated it.[19]
[19]Ibid, [68]-[86].
The defendant accepts that the relevant principles were correctly stated by Ross J in Whittaker. However, on the issue of flexibility of approach, it relies upon the decision of the Full Court of the Supreme Court of South Australia in Easling v Mahoney Insurance Brokers.[20] In that case, the employer proposed changes to the existing duties of the employee. The employee’s duties had expanded over time, beyond those specified in his employment contract. His salary had also increased. The changes were proposed by the employer as part of a restructure consequent upon a deteriorating commercial situation.[21] In that context, the employer proposed discussions with the employee to enable a clear understanding of the necessary changes and the consequent effect upon the employee’s duties and responsibilities. The employer was seeking the employee’s involvement in constructive discussions to resolve the deteriorating commercial situation, on the basis that the employee would continue to be employed at the same remuneration. The employee refused to participate in the discussions. He contended that the proposed changes to his duties and responsibilities constituted a significant departure from his position, thus entitling him to accept the employer’s conduct as a repudiation of the contract and sue for damages.
[20](2001) 78 SASR 489.
[21]There was background of alleged sexual harassment by the employee towards female employees. However, it is unnecessary to consider that aspect of the case.
The majority (Doyle CJ and Bleby J) decided the case on a narrow ground. In their view, the proposed changes to the current duties and responsibilities of the employee were within the terms of the original employment contract. The fact that the employee’s role had gradually developed into a more responsible role did not bring about any variation to the terms of the employment contract. Accordingly, the employee’s claim failed.[22] However, on the hypothesis that this result may be wrong, Doyle CJ and Bleby J rejected the employee’s contention that the proposed changes amounted to an imposition of a significant diminution in his status and responsibilities. This was because the employer was doing no more than seeking to negotiate the proposed changes with the employee, and things had not yet reached the stage that any changes were being imposed.[23] These statements were clearly obiter dicta.
[22]Ibid, [3]-[12] per Doyle CJ, [134]-[144] per Bleby J.
[23]Ibid, [13] per Doyle CJ, [149]-[150] per Bleby J.
Further, the facts of this case are distinguishable from the facts in Easling. In Easling, there was a definite continuing role for the employee. He was to continue to operate the defendant’s Adelaide office on his own. The proposed discussions were proposed to enable a clear understanding of both the manner in which the Adelaide office was to operate in the future and the employee’s responsibilities in relation to those operations.[24] As appears below, this is not such a case.
[24]Ibid, [86].
Nor is this a case like Whittaker, where a newly created position was imposed upon the employee. At the time Mr Earney purported to accept the defendant’s repudiation of the employment contract, his continuing status and responsibility was in doubt. Although a number of possibilities had been discussed, no agreement had been reached and the defendant had not created a definite position for Mr Earney.
It was submitted on behalf of the defendant that, viewed objectively, the defendant’s conduct did not amount to a repudiation of Mr Earney’s employment contract. It was submitted that the defendant, in a post-takeover context, was still in the process of acting reasonably to work through the future role of Mr Earney, in circumstances where it was keen to retain his knowledge, skills and experience. It was submitted that, in this context, the defendant allocated a number of ‘extremely meaningful roles’ to Mr Earney to perform while a final decision was made as to his future as an employee of the defendant. It was submitted that these roles included Mr Earney’s continuing management of the defendant’s fund accounting.
In these circumstances, it was submitted that Mr Earney ‘jumped and was not pushed’; that he acted precipitously in circumstances where he was obliged to adopt a flexible approach and provide a reasonable degree of give and take in considering his future role with the defendant. I do not accept those submissions. When viewed objectively and as a whole, the defendant’s conduct amounted to a repudiation of Mr Earney’s employment contract. In addition to the observations which I have made in the course of describing the relevant facts, my reasons follow.
First, I do not accept that the defendant allocated ‘extremely meaningful roles’ to Mr Earney. As I have said, Mr Earney was given a list of tasks to attend to, including developing possible business opportunities for him to play a role in, without any definite continuing role ever being offered to him. Indeed, insofar as possible alternative roles were proposed, the only written evidence of them is Mr Earney’s own correspondence and attached documents. There is not one written proposal or direction from the defendant as to his continuing role. The only written statements by the defendant as to Mr Earney’s continuing role were those which significantly reduced his status and responsibility as an employee.
I accept that Mr Earney continued to manage the defendant’s fund accounting in Melbourne until he ceased his employment. However, objectively considered, that role was to become Mr Pang’s responsibility as replacement CFO. The 6 November email makes no reference to Mr Earney continuing to manage or be responsible for fund accounting. To the contrary, the email makes it plain that all finance and accounting staff were to report directly to Mr Pang. Mr Earney’s continuing role is described by reference only to ‘special projects’.
Second, although I accept that the circumstances required Mr Earney to adopt a flexible approach, and provide some reasonable give and take in considering any offer from the defendant as to his continuing role, I find that he adopted that approach. With the exception of the ServiceCo concept, which originated with the defendant, it was Mr Earney who proposed a series of possible replacement roles for him to undertake when it was eventually decided that Mr Pang would take on his role as CFO of the defendant; a decision which he frankly acknowledged made commercial sense. However, notwithstanding repeated statements by Mr Earney that he was concerned about his future role as an employee of the defendant, the defendant did no more than acknowledge the existence of possible roles. At no stage was an offer made for Mr Earney’s continuing employment. Accordingly, Mr Earney was never placed in the position where he was required to adopt a flexible approach in that context.
The defendant’s conduct continued in this vein for a period of four months after the takeover. Over that period, Mr Earney’s status and responsibility was progressively downgraded, culminating in his removal as CFO by the 6 November email. Viewed as a whole, the defendant’s conduct was such as to convey to a reasonable person in Mr Earney’s position that the defendant did not intend to perform its obligation to employ him as either CFO or in an acceptable alternative position of equivalent status and responsibility.
For the above reasons, Mr Earney’s employment was terminated within the relevant period for the purposes of clause 8.4 of his employment contract. He is entitled to be paid the agreed termination payment – an amount equal to 12 months’ base salary. That amount is $250,000.
Is Mr Earney entitled to payment in lieu of notice?
I turn to consider whether, in addition to his entitlement to the agreed termination payment under clause 8.4 of the contract, Mr Earney is also entitled to paid an amount in lieu of reasonable notice. Putting clause 8.4 to one side, it was common ground that the contract contained an implied term that Mr Earney would be given reasonable notice of any termination, otherwise than for cause under clause 8.2 of the contract or in circumstances justifying summary termination under clause 8.3 of the contract.
Further, it was not seriously in dispute that a reasonable period of notice of termination of Mr Earney’s employment was six months. The issue for determination is whether, in circumstances such as the present where clause 8.4 is engaged and Mr Earney is entitled to the termination payment, he is also entitled to reasonable notice or payment in lieu if notice was not given. The issue is one of contractual interpretation.
The relevant provisions of the contract are contained in clauses 8.2, 8.3 and 8.4 of the contract:
8.2 Termination
The Company may terminate the Employment upon giving the Employee three month’s written notice for failure to perform the position to the satisfaction of the Company. Such notice will not be given without a prior warning to the Employee detailing the areas of underperformance and time period for rectification. Should the Company not desire the Employee to work out the notice period payment in lieu will apply. This clause does not apply to a termination during the probation period or to Summary termination detailed in clause 8.3
8.3 Summary Termination
The Board may terminate the Employment immediately by giving written notice to the Employee and without being required to provide any compensation or payment in lieu of notice if the Employee:
(a) engages in serious or gross misconduct;
(b)breaches any duty or responsibility referred to in sub-clause 1.5 or breaches Clause 7;
(c)commits an act of fraud or dishonesty;
(d)engages in conduct that puts any AFS Licence at risk;
(e)is absent from the Company’s premises (or does not or is not able to perform their duties and responsibilities) for a period of not less than 3 months for any reason.
8.4Change of Control
If a third party acquires control of at least 50% of the issued shares in MacarthurCook Limited in the period up to 30 June 2010 and the Employee’s employment is terminated during this period other than for cause, then the Employee shall be entitled to a termination payment equal to 12 months base salary.
Clause 8.2 imposes an obligation on the defendant to give Mr Earney three months’ notice of termination for failure to perform, and provides that the defendant may at its option make payment in lieu of notice. Clause 8.3 provides that Mr Earney has no entitlement to either prior notice or payment in lieu of notice in the event that he is summarily dismissed.
Clauses 8.2 and 8.3 each concern termination for cause. The contract makes no provision for termination otherwise than for cause, except in clause 8.4. For this reason, counsel for the defendant rightly acknowledged that the contract contained the usual implied term as to reasonable notice where Mr Earney’s employment was terminated otherwise than for cause, and clause 8.4 was not engaged.
In contrast to clauses 8.2 and 8.3, which speak in terms of notice entitlements or lack thereof, clause 8.4 does not contain any notice requirement and casts no obligation on the defendant to make a payment in lieu of notice. It provides simply that, if engaged, Mr Earney is entitled to ‘a termination payment equal to 12 months base salary’. That is an agreement to pay a liquidated sum.
It was submitted on behalf of Mr Earney that the implied term as to reasonable notice applies indiscriminately to any termination otherwise than for cause, whether or not clause 8.4 is engaged. I do not accept that submission. My reasons follow.
It is necessary to construe the relevant provisions of the contract in accordance with general principles of contractual interpretation. This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose of the transaction.[25] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[26] The Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious with one another’[27] and to ensure the ‘congruent operation of the various components as a whole.’[28]
[25]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40].
[26]Hillas & Co Ltd v Arcos Ltd [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437; Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732, 740; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 770-1.
[27]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[28]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, [16].
The first issue for consideration is identification of any admissible evidence of surrounding circumstances or purpose. It was submitted on behalf of Mr Earney that the surrounding circumstances included the fact that Mr Earney’s previous employment was of longstanding with a very substantial financial services organisation, that he left that employment to work for the defendant, that he was being appointed to a very senior position with the defendant, and that his position as CFO was likely to be terminated in the event of a takeover. In these circumstances it was submitted that the clear purpose of clause 8.4 was to provide a guarantee of employment until at least 30 June 2010, by acting as a deterrent against prior termination by a new owner of the defendant. In these circumstances, it was submitted that the parties, acting reasonably, would have understood the termination payment to be in addition to any entitlement that Mr Earney may have to reasonable notice under the implied term.
I do not accept the submissions made on behalf of Mr Earney. Clause 8.4 is clearly directed towards compensating Mr Earney for the early termination of his employment. In my view, clause 8.4 was intended to record all of Mr Earney’s rights to compensation for termination in circumstances when it was engaged. Reasonable persons in the position of the parties would have understood clause 8.4 to cover the field in those circumstances – to provide a certain and generous amount of compensation to Mr Earney. As I have said, the amount is a liquidated sum. It does not depend on an objective assessment of reasonableness. Further, as appears below, the amount is payable in full whether or not Mr Earney earns income during the relevant 12 month period.
The surrounding circumstances and objective purpose of deterrence against termination, which are relied upon by Mr Earney, do not justify a different result. To the contrary, a fixed payment of 12 months’ base salary, payable in full even if Mr Earney obtains employment within the 12 month period after termination, is consistent with the purpose of deterrence which is relied upon.
This construction of the contract is supported by commercial common sense. It is objectively unlikely that the defendant would agree to pay Mr Earney both 12 months’ base salary and payment in lieu of reasonable notice, which the parties accepted was six months’ base salary plus bonuses and other entitlements.
Must Mr Earney bring his later earnings into account?
Following the termination of the contract, Mr Earney sought alternative employment. The defendant acknowledges that he acted reasonably in that regard. He eventually found work and earned approximately $78,000 in the 12 month period following his termination. The defendant submits that Mr Earney is obliged to bring these earnings into account in reduction of the termination payment specified in clause 8.4 of the employment contract. This submission was based on the contention that Mr Earney’s claim for the termination payment under clause 8.4 was a claim for damages, thus requiring Mr Earney to act reasonably to mitigate his damage.
I do not accept the defendant’s submissions in this regard. The termination payment was an agreed liquidated sum, to be paid on the occurrence of the event specified in clause 8.4. In these circumstances, the termination payment is not subject to principles of mitigation of loss.[29]
[29]Reilly v Praxa Ltd [2004] ACTSC 41, [32].
Does Mr Earney have other entitlements under the employment contract?
Mr Earney contends that he has two entitlements under the employment contract which have not been paid.
First, Mr Earney claims the amount of $2,578 in respect of his performance bonus for the year ended 30 June 2009. Mr Earney’s entitlement to a performance bonus for that financial year is not in dispute. The dispute concerns the calculation of the bonus entitlement. In order to understand the dispute, it is necessary to note that the bonus is payable on achievement of ‘KPIs’, which are key performance indicators. For the year ended 30 June 2009, key performance indicators totalling 90 points were set. Mr Earney achieved a score of 78 out of 90 in respect of those indicators. He was accordingly entitled to 78/90ths, or 86.6 per cent of the bonus amount. The defendant, in error, paid him a bonus based on 78 per cent. The arithmetic put forward by Mr Earney has not been challenged. Accordingly, I find that he is entitled to recover $2,578 in respect of unpaid bonus for the year ended 30 June 2009.
Secondly, Mr Earney contends that he is entitled to receive a pro-rata bonus for the period 1 July 2009 to 10 November 2009, when his employment was terminated. He relies upon the letter of offer from the defendant dated 24 November 2008 and upon clause 2.4 of the employment contract, which relevantly provides:
2.4 Performance Bonus
…
(d)The Board shall, in each succeeding year, determine performance targets to be achieved by the Employee in the next financial year.
(e)The Board shall, as soon as possible after 30 June, but no later than 30 September in each succeeding year, determine, having regard to the performance of the Employee against the performance targets referred to in the previous paragraph, the amount of the Employee’s bonus which shall be up to a maximum of 25% of the base salary in the relevant year.
(f)As soon as possible after the Board has determined the amount of the performance bonus, the Company shall pay to the Employee the amount of the bonus in cash or by the allocation of additional share options as agreed (the issue of which the Employee acknowledges may require shareholder approval).
As the letter of offer makes plain, Mr Earney’s bonus entitlement was an integral and significant part of his remuneration package.
It was submitted on behalf of the defendant that Mr Earney is not entitled to a pro‑rata payment in respect of his performance bonus for the period to 10 November 2009. It was submitted that no bonus is payable unless Mr Earney was still employed on 30 June 2010. Reliance was placed on clause 2.4(e) of the employment contract, which provides for the assessment of Mr Earney’s performance against key performance indicators, and consequent determination of his bonus entitlement, after 30 June 2010. I reject that submission. As part of his remuneration package, Mr Earney was entitled to be paid such part of his performance bonus as he earned during any part-year of employment. There is nothing in the employment contract to indicate a contrary result, and it would make no commercial sense. If the defendant’s submission was to be accepted, Mr Earney would lose his bonus if his employment was terminated with effect from 29 June 2010. The parties cannot have intended such a result.
There is a superficial difficulty, because the defendant breached the employment contract by failing to fix any key performance indicators for Mr Earney in respect of the relevant financial year. That was probably because Mr Earney’s position was in doubt, and key performance indicators would have been difficult to specify in the absence of defined duties and responsibilities. However, that is no bar to the Court estimating the amount of Mr Earney’s loss.[30]
[30]Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 102.
It was submitted on behalf of Mr Earney that the Court should fix his pro-rata bonus by reference to the maximum bonus payable to him for the financial year ending 30 June 2010. The maximum bonus was 25 per cent of Mr Earney’s base salary, an amount of $62,500. The pro-rata calculation for the maximum bonus for the part-year to 10 November 2009 is $22,773. I do not accept that submission. The Court’s assessment of Mr Earney’s pro-rata bonus entitlement should make allowance for contingencies, in particular that Mr Earney may not have fully met some or all of the key performance indicators set for him. The only evidence as to this contingency is Mr Earney’s own assessment of his performance for the period to 30 June 2009. For that period, he achieved 86.6 per cent of his key performance indicators. I will apply that percentage to the $22,773 maximum pro-rata bonus claimed by Mr Earney, resulting in an amount of $19,720 under this head of his claim.
Conclusion and orders
For the above reasons, I find that Mr Earney is entitled to recover the termination payment specified in clause 8.4, a sum of $250,000, together with $2,578 in respect of his bonus for the year ended 30 June 2009 and $19,720 in respect of his pro-rata entitlement to a bonus for the period 1 July 2009 to 10 November 2009. This makes a total of $272,298. There will be judgment for that sum.
For the reasons given, Mr Earney is not entitled to recover any amount in respect of his claim for payment in lieu of reasonable notice.
I will hear the parties as to interest and costs.
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