Foggo v O'Sullivan Partners (Advisory) Pty Ltd
[2011] NSWSC 501
•01 June 2011
Supreme Court
New South Wales
Medium Neutral Citation: Foggo v O'Sullivan Partners (Advisory) Pty Limited [2011] NSWSC 501 Hearing dates: 27 April 2011, 28 April 2011 Decision date: 01 June 2011 Jurisdiction: Common Law Before: Schmidt J Decision: The parties should bring in short minutes of order to reflect the conclusions which I have reached. The usual order as to costs would be that costs follow the event, as agreed or assessed. In the event that the parties wish to be heard on costs, they should approach.
Catchwords: EMPLOYMENT LAW - contract of employment - repudiation - implied terms - bonuses - how bonus was determined - whether disputed bonus was not paid due to plaintiff's refusal to sign proposed new contract - termination of employment relationship - whether the defendant was contractually entitled to impose conditions on the payment of the bonus - whether conditions imposed breached any fetter on the defendant's discretion - failure to pay the bonus - breach of contract - implied terms - grievance policy - whether grievance policy had contractual force, so far as the defendant was concerned - whether defendant breached its obligations under the policy - implied terms - whether refusal to adhere to the grievance policy amount to repudiation - damages Cases Cited: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558
Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410
Byrne v Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68
DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423
Goldman Sachs JBWere Services Pty Ltd v Nikolich [2007] FCAFC 120; (2007) 163 FCR 62
Heptonstall v Gaskin (No 2) [2005] NSWSC 30
Koompahtoo Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115
Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21;(1976) 136 CLR 44
Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889; (2000) 177 ALR 193
Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198
Russell v the Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWSC 217; (2008) 72 NSWLR 559
Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357
Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) 116 IR 186
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) NSWLR 618
Yousif v Commonwealth Bank of Australia [2010] FCAFC 8; (2010) 193 IR 212Category: Principal judgment Parties: Daniel Foggo (Plaintiff)
O'Sullivan Partners (Advisory) Pty Limited (Defendant)Representation: Counsel:
Mr JJ Fernon SC with Mr D Chin (Plaintiff)
Mr SG Finch SC with Mr AB Gotting (Defendant)
Solicitors:
Baker & McKenzie (Plaintiff)
Watson Mangioni Lawyers Pty Limited (Defendant)
File Number(s): 2010/226636
Judgment
By amended statement of claim filed in July 2010 the plaintiff, Mr Foggo, seeks declarations and damages in relation to the termination of his employment with the defendant in June 2010 and his entltlement to payment of a bonus. In April 2009, Mr Foggo was employed as a senior vice president in the defendant's corporate advisory business. In 2010 a dispute arose about the parties' contractual rights and obligations in relation to a $300,000 bonus which the defendant had determined Mr Foggo should be paid in respect of the year ending 30 June 2010, on specified conditions.
There is no question that the employment came to an end over that dispute in June 2010, but who brought it to an end was in issue. The parties each accuse the other of having repudiated the employment contract by their conduct. There are also disputes over two other matters. Firstly, whether or not the defendant had the right to impose conditions on the bonus it had determined to pay Mr Foggo. Secondly, whether the defendant was contractually bound to observe a grievance policy which the defendant had implemented in June 2010.
What is in issue hinges on the terms of a written offer of employment which Mr Foggo accepted in March 2009, as well as terms which Mr Foggo claimed were implied in the contract. The offer which Mr Foggo accepted relevantly provided:
"...
Performance Incentive
You will be eligible to receive a performance incentive payment (ie cash bonus), in addition to the total remuneration package, the amount of which will be subject to both the Firm's performance and also to your successful achievement of agreed objectives and performance targets.
Specific objectives and performance targets and the mechanisms by which these will be measured will be agreed with you in writing within 60 days from the date of commencement of employment. The timing of payment for successful achievement will also be agreed in writing at this time.
The Firm operates a more traditional bonus regime, whereby all staff are eligible to participate in the bonus pool which is determined annually for the year ending 30 June. The bonus pool is generally limited to 50% of the Firm's EBIT (before bonus allocations) and may involve vesting for up to 3 years for cash allocations over $250,000. An individual's performance during the period will be assessed against their peers and a discretionary amount allocated by the Remuneration Committee. Payment of any performance incentive will be at the sole discretion of the Firm's Remuneration Committee.
...
Performance Reviews
An annual review of your performance will be conducted by the Firm's Remuneration Committee. The review will take into account both qualitative and quantitative performance during the preceding period. The first such review will be in July 2009 for the period ended 30 June 2009.
These performance reviews will provide the basis for future remuneration adjustments and any discretionary annual bonus. A review of your total remuneration package and incentive arrangements will take place each year, having regard to your overall performance and external market movements in the compensation payable to similar positions in comparable organisations. There are no automatic remuneration increases and any increase is at the absolute discretion of the Firm's Remuneration Committee. The Firm reserves the right to the change the timing and structure of these annual reviews at its absolute discretion.
...
Firm Policies and Procedures
The Firm has a range of policies and procedures as issued and varied from time to time and you are obliged to comply with them. These documents are available from the Firm's Head of Finance and Operations.
...
Separation and Termination
If you resign from you employment with the Firm you will be required to give the Firm three (3) months written notice of termination. If the Firm terminates your employment the Firm will give you three (3) months notice of termination, or the Firm will pay you three month's remuneration in lieu of notice or part thereof. If you are involved in serious misconduct or do anything which, in the sole discretion of the Firm, brings the Firm or you into disrepute or breach any other material policies of the Firm then your employment may be terminated by the Firm at any time would notice, and in such cases salary will be paid up until the time of dismissal only.
Your final payment will consist of payment for actual time worked, any outstanding annual leave or long service leave entitlements plus, if applicable, any payment or part payment in lieu of notice. Should you owe any amounts of money to the Firm, the Firm has the right to deduct the amount from your final payment.
Upon termination of your employment, you must deliver to the Firm all property belonging to the Firm. (Including mobile phones and computers) and all documents including all records, papers, keys, cards, disks and other material (including any copies) in your possession or control which relate in any way to the business or activities of the Firm or its clients or customers. Your obligations relating to intellectual property and duties of confidentiality shall continue even after your employment ends, as outlined in the relevant sections of this letter.
Severability
Part or all of any clause of this agreement that is illegal or unenforceable will be severed from this agreement and the remaining provisions of this agreement continue in force.
..."
On 28 May 2010, the defendant wrote to Mr Foggo informing him that it had determined to pay him a bonus of $300,000, subject to certain conditions, in the following terms:
"Having regards to the performance of the Firm and your achievements for the year ending 30 June 2010, we have pleasure in advising that you will be paid a cash bonus of $300,000 ( the Bonus ).
You will receive half of the Bonus in the June 2010 payroll and the balance in the June 2011 payroll, conditional upon you remaining in employment with O'Sullivan Partners ( OP ) at the time the Bonus is due to be paid (and having not given notice of resignation).
Should you resign from employment with OP and seek employment with a competitor before June 2011, you will be required to repay the gross upfront amount of any bonuses paid to you.
Furthermore, your new Total Remuneration Package (inclusive of superannuation) will increase to $270,000 from 1 July 2010 and your new title will be Director.
Pursuant to the terms of your employment, we would ask that you keep this information strictly confidential."
Mr Foggo disputed the defendant's contractual right to impose such terms. His view was that it was contractually obliged to pay him $300,000 as a bonus.
At the same time as these events, the defendant was in the throws of implementing new employment agreements for its staff, as well as introducing a number of new policies. One of them was a grievance policy. There had been a significant upheaval in its business during the course of the preceding year, which had resulted in a restructure, after a disagreement with a 'partner' in the business; the closure of the Melbourne office; and the loss of a number of staff members to competitors. The new standard form employment agreement sought to introduce new terms to reflect the introduction of the federal Fair Work legislation, as well as introducing changes in bonus and other conditions. The defendant's other staff members were content to accept the new employment contracts, but Mr Foggo was not.
In the discussions which followed, Mr Foggo disputed the defendant's contractual right to impose the conditions it had determined for payment of the $300,000 bonus. In particular, he was concerned about the 'clawback' provision, which required that in the event that he left the defendant's employ to work for a competitor before June 2011, he was obliged to repay the first tranche of the bonus, which was to be paid in June 2010. A similar clawback provision was provided in the new contract.
Mr Foggo notified the defendant of a grievance about these matters, but it came to the view, after meeting with him and then taking legal advice, that the grievance policy was not an appropriate mechanism for dealing with Mr Foggo's concerns. It did not require him to enter the new employment contract, but insisted on its right to pay him a bonus on the conditions it had determined. Given Mr Foggo's continued stance, the defendant finally determined that it would not pay him any bonus. Mr Foggo viewed these decisions as involving fundamental breaches of his employment contract, whereby the contract had been repudiated. He purported to accept that repudiation. The defendant denied any repudiation, but viewed Mr Foggo as having repudiated the contract. Thereby the employment came to an end.
The agreed facts
The partes were agreed that:
"1. On or about 5 March 2009 the plaintiff entered into a contract of employment with the defendant under which the plaintiff agreed to work for the defendant in full time employment as a Senior Vice President (the Contract).
2. It was a term of the Contract that the defendant would perform obligations and exercise rights under the Contract for the purpose of achieving the objects of the Contract.
3. It was a term of the Contract that the plaintiff was eligible to receive a performance incentive payment (cash bonus), in addition to the plaintiff's total remuneration package.
4. It was a term of the Contract that the payment of any cash bonus was to be at the sole discretion of the remuneration committee of the defendant.
5. It was a term of the Contract that the plaintiff was obliged to comply with policies and procedures issued and varied from time to time by the defendant.
6. It was a term of the Contract that the defendant was required to provide the plaintiff with three months' notice of termination of employment or a payment of three months' remuneration in lieu of notice of termination.
7. On or about 11 June 2010 the defendant issued a Grievance Policy which came into effect from 14 June 2010. The defendant informed the plaintiff that the Grievance Policy formed an "explicit part of [their] employment agreement".
8. On 16 June 2010 the plaintiff remained employed with the defendant and had not given notice of resignation.
9. By 24 June 2010 the Contract provided for a total remuneration of $240,000 per annum.
10. Since 25 June 2010 the plaintiff has not worked for the defendant.
11. On 11 October 2010 the plaintiff commenced full time employment with Barclays Capital in the position of Director, Investment Banking Division.
12. At current date the plaintiff remains in full time employment with Barclays Capital in the position of Director, Investment Banking Division."
Issues
The issues which the parties identified as requiring the Court's determination were:
"13. Whether the Contract included an implied term or terms that in the exercise of its discretion to pay a cash bonus the defendant would:
(a) act in good faith;
(b) act reasonably; and
(c) not act in a manner likely to destroy, seriously damage or damage the relationship of trust and confidence between it and the plaintiff.
14. Whether the amount of the cash bonus that the plaintiff was eligible to receive was subject to both the defendant's performance and also to the plaintiff's successful achievement of agreed objectives and performance targets.
15. Whether on or prior to 28 May 2010 the defendant determined to pay the plaintiff a cash bonus for the year ending 30 June 2010 in the amount of $300,000.
16. Whether on or prior to 28 May 2010 the defendant advised the plaintiff that the plaintiff would be paid a cash bonus having regard to the performance of the defendant and the plaintiff's achievements for the year ending 30 June 2010.
17. Whether the defendant was required by the performance incentive clause of the Contract to pay the cash bonus once the defendant determined to pay the cash bonus.
18. Whether the defendant was entitled to impose as conditions of payment of the cash bonus that:
(a) the plaintiff remain in employment with the defendant at the time the bonus was due for payment on 16 June 2010 and 16 June 2011 (and not having given notice of resignation); and
(b) the plaintiff repay the gross upfront amount of any bonus paid to him if he should resign from his employment with the defendant and seek employment with a competitor prior to June 2011.
19. Whether the defendant made payment of the cash bonus conditional on the plaintiff:
(a) remaining in employment with the defendant at the time the bonus was due for payment on 16 June 2010 and 16 June 2011 (and not having given notice of resignation); and
(b) repaying the gross upfront amount of any bonus paid to him if he should resign from his employment with the defendant and seek employment with a competitor prior to June 2011.
20. Whether the defendant made payment of the cash bonus conditional on the plaintiff accepting the condition in 19(b) above.
21. Whether the plaintiff's conduct amounted to a refusal to accept the cash bonus upon its terms.
22. Whether the defendant refused to pay the cash bonus because the defendant considered that the plaintiff did not accept:
(a) that he was required to be employed by the defendant and not having given notice of resignation when the instalment was due;
(b) that he was required to repay the gross upfront amount of any bonus paid to him if he should resign from his employment with the defendant and seek employment with a competitor prior to June 2011; and/or
(c) that he did not agree to sign the contract of employment enclosed in the letter to the plaintiff of 28 May 2010.
23. Assuming that the defendant was entitled to impose the condition in 18(a), whether the plaintiff became entitled to payment of $150,000 on 16 June 2010 by fulfilling the condition in 18(a) (that is to the extent that the plaintiff remained in employment with the defendant on 16 June 2010 and had not given notice of resignation).
24. Whether it was an implied term of the contract of employment that the defendant would respond to any grievance raised by the plaintiff:
(a) in good faith;
(b) reasonably;
(c) for the purposes of achieving the objects of the Grievance Policy; and
(d) in a manner that was not likely to destroy, seriously damage or damage the relationship of trust and confidence between it and the plaintiff.
25. Whether the defendant was contractually bound by the Grievance Policy.
26. Whether the plaintiff's grievance that:
(a) the defendant did not pay the plaintiff $150,000 on 16 June 2010;
(b) the defendant claimed to have imposed conditions on the payment of the cash bonus; and
(c) the purpose of the defendant's refusal to pay the $150,000 was to cause the plaintiff to accept those conditions,
was a grievance under the Grievance Policy.
27. Whether the defendant repudiated the contract of employment by:
(a) refusing to pay the cash bonus of $150,000 on 16 June 2010;
(b) refusing to pay the cash bonus; and/or
(c) refusing to apply the Grievance Policy and respond to the plaintiff's grievance.
28. Whether the plaintiff elected to accept the defendant's repudiation and terminate the contract of employment.
29. Whether the plaintiff would, but for the termination of the contract in June 2010, have remained employed by the defendant and for how long the plaintiff would have remained employed by the defendant.
30. Whether the defendant's repudiation caused loss to the plaintiff including, or the opportunity to earn:
(a) salary of $270,000 pa (payable monthly) together with subsequent increases of salary;
(b) bonus of $150,000 on 16 June 2011; and
(c) further bonus."
How Mr Foggo's bonus came to be determined
The contract envisaged that Mr Foggo could be awarded two types of bonus; an individual bonus and a share of a pool bonus. It was common ground that whether or not Mr Foggo was paid any bonus at all was, however, a matter of the defendant's sole discretion.
In both 2009 and 2010 the defendant had concerns about Mr Foggo's performance. In 2009, he had only recently come to Australia to take up a senior position with the defendant, at a time of difficult market conditions and internal problems within the defendant's business. There was no issue raised in these proceedings about the defendant's ongoing concerns with Mr Foggo's performance. Mr Foggo was paid no bonus in 2009, a matter then of concern to him, but about which no complaint was made in these proceedings.
Despite the ongoing concerns about his performance, in 2010 the defendant was anxious to retain Mr Foggo's services. It had expended a considerable sum on his recruitment and had lost other staff to competitors. It wanted to avoid the further expense and disruption of replacing Mr Foggo, who it was aware was also being headhunted by competitors. The defendant sought to use the bonus system as an incentive to retain Mr Foggo in its employment.
Under the contract, individual bonuses depended on achievement of specific objectives and performance targets, which in Mr Foggo's case, were never agreed. No complaint is made about that, or about the performance review conducted by the defendant in April 2010. Mr Foggo's allegations of breach of contract resulted from the defendant's decisions in 2010, that he would be paid a bonus out of the bonus pool in which all staff were eligible to participate that year.
The size of the pool was determined by the defendant each year. The pool was 'generally limited to 50% of EBIT (before bonus allocations)'. In 2010, the defendant determined that the pool would be larger. That decision was made by Mr O'Sullivan and Mr Cronin, the two effective shareholders operating the business together as partners, who also comprised the defendant's remuneration committee. Mr O'Sullivan also fulfilled the role of managing partner, as he explained it, the CEO function.
Individual participation in the pool was determined each year by the remuneration committee having regard to individual performance, by comparison to the performance of other staff.
After the 2010 performance review was conducted in April 2010, Mr O'Sullivan and Mr Cronin discussed the review with Mr Foggo, as well as the payment of a bonus that year, on a conditional basis. They also asked him about his intentions in relation to remaining with the firm.
Mr Foggo told them that he had been interviewing with Deutsche Bank, in light of the uncertainties which existed at the defendant, but said that he had stopped pursuing such a position. This was not frank. In these proceedings Mr Foggo revealed that he had become increasingly concerned about his job security; that he had also met with Goldman Sachs; and had engaged a recruitment firm to send his CV to other employers. In April he was also approached by Merryl Lynch.
At this discussion, Mr Foggo disputed the defendant's understanding of its contractual rights in relation to bonuses. After further consideration, Mr O'Sullivan and Mr Cronin concluded that despite their ongoing reservations about his performance, Mr Foggo would be paid a bonus in order to retain his services, but that conditions would be imposed on that payment. They did not accept his views of the contract.
On 3 May 2010, Mr Cronin and Mr O'Sullivan met with Mr Foggo to discuss that year's bonus. While there are differences in the detail of the recollections of Mr Foggo, Mr Cronin and Mr O'Sullivan as to what was said at this and other meetings, there was limited disagreement of substance. The performance of the firm, as well as Mr Foggo's performance were discussed. Mr Foggo was told that Mr Cronin and Mr O'Sullivan understood that the market level for his bonus was between $500,000 to $750,000, but that he would not be paid at that level.
Whether Mr Foggo intended to remain with the defendant was again discussed. Mr Foggo advised that his bonus would need to be at a level that 'it remained economically rational for me to stay at the firm'. He did not then reveal that he had still been actively pursuing employment opportunities with others in the industry. While deferred bonuses and the reasons for such an approach being adopted were discussed at the meeting, Mr Foggo asked that the defendant make him an upfront cash payment of his bonus.
Mr Foggo's evidence was that he also told to Mr O'Sullivan and Mr Cronin that he had been making contingency plans for a redundancy, but that it then remained his preference to stay with the defendant.
While the contract expressly envisaged the deferral of any bonus payments, which were entirely within the discretion of the remuneration committee, it did not deal with the imposition of any other conditions on the payment of bonuses. Both Mr Cronin and Mr O'Sullivan understood, however, that the contract gave the defendant the discretion to impose such conditions. In the circumstances, neither considered it responsible to make an upfront cash bonus payment to Mr Foggo, as he had sought. They regarded him to be a 'flight risk' and wanted to structure a bonus payment which would help the defendant to retain his services.
Mr Cronin and Mr O'Sullivan met again with Mr Foggo on 24 May and advised him of the conditions which they had determined to impose on his bonus payment, given their views that he was a flight risk. They were a deferral of two thirds of the bonus for one year and a clawback, if he left within a year. The deferral condition had also been imposed on other employees that year, but not the clawback provision. No one other than Mr Foggo was then perceived to be a flight risk.
Mr Foggo objected to both the deferral structure, which he did not consider reflected market practice, and the clawback condition. He claimed that his contract required 'the first $150,000 of the bonus to be paid in cash in the year that it is awarded'; that he had made his decision to join the firm 'upon the cash bonus threshold'; and that it was not fair for the defendant to 'shift the posts', after he had worked for over a year. As was accepted for Mr Foggo at the hearing, those views and complaints had no foundation in his contract, given its express terms.
During this discussion on 24 May, Mr Foggo asked that consideration be given to a 50/50 split of his bonus, given that he had his first child on the way and had just purchased a new Audi Q7. He also complained that it was unreasonable to impose the proposed clawback provision. Mr Foggo said that it was not his current intention to leave the firm, but he could not foresee the future. He also raised the possibility that he might leave, but not to join a competitor, in which case he proposed that the clawback should not operate.
After further consideration, Mr Cronin and Mr O'Sullivan accepted some, but not all of Mr Foggo's views. Mr Foggo's views about his contractual entitlements were not accepted; the clawback was regarded as non-negotiable, given what was known of his pursuit of other employment with a competitor; but it was determined that a 50/50 split could be accepted and that there would be no clawback if Mr Foggo left, but not to join a competitor.
Mr Foggo was advised of the conclusions reached by the letter of 28 May, when he was also advised of his new title and salary. Mr Foggo's remuneration package was to increase from $240,000 per annum to $270,000, with a new title of Director, from 1 July 2010.
The proposed new employment contract was attached to this letter, together with a statutory 'Fair Work Information Statement'. The letter advised that the new employment contract was 'designed to homogenise the Firm's employment agreements and address the latest Fair Work Act requirements'. Mr Foggo was asked to sign the contract, but he did not respond.
On 4 June, Mr Buchanan, the defendant's office manager, sent an email to Mr Foggo and a number of other employees, requesting that they sign the new contracts 'to facilitate payment of bonuses in the June payroll' and that if there were any issues, to raise them as soon as possible. There was no reply and Mr Buchanan sent Mr Foggo a follow up email on 8 June. A further meeting between Mr Foggo, Mr Cronin and Mr O'Sullivan then took place on Friday 11 June.
Mr Foggo then advised that he was concerned that the new contract was inferior to his existing terms in a number of respects: termination; the clawback condition; and, that bonuses were not guaranteed, but were at the sole and absolute discretion of the defendant and according to rules from time to time of the bonus scheme.
Mr Foggo told Mr Cronin and Mr O'Sullivan that he was not prepared to sign the new contract, which he believed would prejudice his current entitlements and that he needed to review what was proposed about bonuses over the weekend. His view was that only bonus moneys above $250,000 could be deferred under his current contract and that accordingly, he should immediately be paid that amount. Mr Cronin and Mr O'Sullivan did not accept Mr Foggo's views as to the defendant's contractual obligations in relation to their existing contractual rights. They told him that given the basis on which the bonus payments were to be made, he was being treated more generously than other employees, who were having two thirds of their bonus payment deferred.
Mr Foggo's concern about the proposed new termination provision of the employment contract was, however, accepted as being an oversight, given that his existing employment contract differed from that of other employees. Mr Foggo's concerns about 'good leaver versus bad leaver' provisions, as well as his views about the clawback provision, as being inconsistent with his existing employment contract, were discussed. Mr Cronin and Mr O'Sullivan agreed to consider some amendments to the defendant's decisions, while insisting that the clawback condition was not fundamentally negotiable.
Mr Cronin and Mr O'Sullivan decided to accommodate some of Mr Foggo's concerns about the contract. A marked up version of the contract with the changes which they were prepared to accept 'to address the matters discussed', was provided to Mr Foggo later on 11 June. He was asked to confirm his acceptance of the proposed changes, so that the document could be finalised. Mr Foggo did not respond to this email. He took an extended long weekend, not returning to work until Wednesday 16 June.
On 15 June, Mr Cronin and Mr O'Sullivan came to the view that it would be reckless to pay Mr Foggo the first tranche of the bonus, without agreement first being reached with him as to the defendant's right to impose the conditions it had determined. They concluded that written confirmation of his acceptance of those conditions would be required.
At 2.42pm on 16 June, Mr Foggo sent Mr O'Sullivan and Mr Cronin an email, asking why he had not been paid his bonus that day. Their email exchange was:
"Tony, Garren
I was advised in writing on 28 May 2010 that I would be paid a cash bonus of $300,000 and that I would receive half of this payment in the June 2010 payroll. This did not occur. Please advise me by close of business today as to why this payment has been withheld.
With regards
Daniel"
"Daniel, I believe that it's because we are waiting for your return of the signed contract (which includes the provision regarding a claw-back if you were to move to a competitor).
Tony"
In his evidence, Mr O'Sullivan explained that he viewed Mr Foggo's email to be somewhat disingenuous, given their ongoing discussions and Mr Foggo's understanding from what he and Mr Cronin had told him on 11 June, that the clawback condition to which he objected was fundamental to the defendant's decision to pay him a bonus, at a time when it was known that he had been actively seeking other employment. This advice led to Mr Foggo initiating the grievance policy processes.
The grievance policy
On 11 June, Mr Foggo and other employees had been advised that the defendant had implemented a number of new policies, including a grievance policy. About an hour after receiving Mr O'Sullivan's reply to his email on 16 June, Mr Foggo hand delivered Mr O'Sullivan a document entitled 'notification of complaint and grievance'. There Mr Foggo raised three grievances: Firstly, that he had not been paid in accordance with the letter of 28 May and that accordingly he had been denied a bonus payment, inconsistent with his existing contractual entitlements. Secondly, that he had been subjected to 'inappropriate duress and intimidation' in relation to his refusal to execute the new employment contract'. Thirdly, that there had been a unilateral attempt to vary his bonus arrangements and to withhold payments due and payable to him on 16 June.
Mr Foggo claimed that the new grievance policy applied to his complaints, given that he had been advised by the defendant that it was an explicit part of his employment contract. He advised that accordingly, any breach of the policy could leave the defendant liable for damages. He reserved his rights in relation to his contract of employment and advised that he would write separately in relation to the potential repudiation of his employment contract.
Mr Cronin and Mr O'Sullivan met immediately with Mr Foggo to discuss his grievance. He advised them that he would not sign the new contract. He was informed that he was not required to sign it. The conditions of the bonus were also discussed. Mr Foggo's recollection was that the discussion continued:
"Well do you want to continue with the firm?"
Before I could respond to this question from Mr Cronin, he then said to me:
"Well in my view you can't be expecting to stay"
Mr Cronin also said to me:
" Daniel I have zero tolerence for dealing with you on this matter."
I said:
"Whether I want to stay or whether I want to go depends upon how my grievance is handled."
Mr O'Sullivan said shortly thereafter:
"Let us know tomorrow whether you want to continue to work for the firm."
Mr Cronin recollected that what was said was:
"Cronin: "This is all very strange behaviour for someone supposedly committed to the firm. Have you now decided to leave the firm?"
Foggo: "That all depends on how this bonus issue is now handled."
"I told you before that I considered the proposed new employment agreement inferior to my existing contract. You cannot make me sign it and I won't sign it."
Cronin: "Frankly, we don't care if you don't sign the new employment agreement; the central issue at play is you have continued to express your unwillingness to accept the key conditions attaching to your bonus, namely the operation of the clawback. As you know, we consider you a 'flight risk' and hence when setting our bonus specified several key conditions one of the which was the clawback condition with remains paramount, particularly now you've clearly demonstrated an aggressive unwillingness to accept this concept.'
Foggo: "I've never heard of a clawback applying in corporate finance. As far as I am concerned you cannot place any conditions on the bonus as my existing employment agreement makes no reference to clawback conditions."
Cronin: "Well Daniel, Tony and I have gone out of our way to try and accommodate you and I now have zero tolerance for your constant complaining. I hope you are getting good legal advice, because you do not seem to appreciate that we have absolute discretion in setting your bonus and applying conditions thereto. There is nothing new to this concept in the investment banking world. I suggest you once again read your existing employment agreement."
Mr O'Sullivan recollected:
"Cronin: "Do you think that this sort of behaviour is normal? What(sic) are you acting in this way? Perhaps you have now decided to leave the firm"
Foggo: "That all depends on how this bonus issue is handled"
Cronin: "Let's be very clear about something. Daniel, this is not about you signing up the firm's new employment contract, which by the way has been agreed to by ever other member of staff. This is about you refusing to understand that your bonus payment is strictly conditional upon you agreeing to the one year clawback, not you signing the new contract employment. You are interviewing outside with our competitors - how reckless would we be to pay you without protecting the firm?"
Foggo: "Again, I reiterate, my legal advice is that you cannot introduce a clawback provision into my employment contract."
O'Sullivan: "Daniel, let's be clear, this is not about your employment contract. This is about you understanding that the clawback condition is inseparable from the bonus payment. Without the clawback, there is no bonus. We have absolute discretion as to whether or not to award you a bonus, as is investment banking industry practice."
Cronin: "Tony and I have gone out of our way to accommodate you and I now have zero tolerance for your constant complaining. I hope you are getting good legal advice."
Mr O'Sullivan advised Mr Foggo by email on 16 June 2010 that:
"Dear Daniel
We acknowledge receipt of your hand-delivered notification of grievance dated 16 June 2010.
We have initiated a review of your grievances, to be undertaken by a law firm. We have spoken to the Firm's lawyer. Formal advice will follow upon the lawyer's return to the office next week.
We refer to our employment agreement dated 5 March 2009, which states that " payment of any performance incentive will be at the sole discretion of the Firm's Remuneration Committee ".
You have now advised us that you refuse to accept the conditions of payment specified in our letter to you dated 28 May 2010, particularly in relation to the claw back and deferral provisions, which are clearly inextricably linked to our proposed payment to you . Please confirm in writing that this is your position.
Regards
Tony"
On 17 June, Mr Foggo responded, advising of his view that the defendant had breached its obligations under the grievance policy; reiterating his view that the defendant had no contractual right to impose a clawback condition on payment of the $300,000 bonus it had determined to pay him; that he understood that the failure to pay him $150,000 on 16 June was the result of his continuing refusal to sign the new employment contract; and that by its conduct, he regarded the defendant to have repudiated his contract of employment. He sought a review of his grievance by an independent law firm and gave the defendant 14 days to rectify its repudiation.
The involvement of an independent law firm in the resolution of a grievance was not provided for in the grievance policy, but was an understandable request, given the terms of the policy and the fact that it was a dispute between a senior employee of the firm and Mr Cronin and Mr O'Sullivan, which had been raised as a grievance under the policy. Variation of the policy was a matter of the defendant's discretion. Given what Mr Foggo's grievance involved, there were obvious difficulties with the further implementation of the policy to deal with his grievance. In the circumstances, the suggestion made was an understandable one.
On 18 June the defendant replied, disputing Mr Foggo's account of what had occurred to that point; and advising him that it did not propose to apply the grievance policy to the matters he had raised. He was told of the defendant's view that:
"The Policy applies to discrimination and harassment regarding an employee's work or their work environment.
Your complaint relates to your terms and conditions of employment, in particular the issue of your bonus. It would be an abuse of the grievance process to apply to it the matters you have raised.
In any event, the Policy provides that it may be applied, varied or withdrawn at the firm's discretion. The firm rejects that it may be liable for damages if it does not comply with the Policy. The firm has no contractual or other obligation to comply with the Policy. The statement in the covering email when the Policy was issued that it "forms part of your employment agreement" is entirely consistent with you existing contract of employment dated 5 March 2009. As you would be aware, the contract requires that you comply with the firm's policies.
Accordingly, the firm has decided that your grievance will not be externally reviewed."
The request that an external law firm be appointed to deal with the grievance was thereby rejected.
The defendant also denied that Mr Foggo had been subjected to any threats or duress in relation to the new contract; advised that it had understood that changes to the new contract it had provided to him on 11 June reflected understandings which had been reached at the meeting that day; and that on 16 June, it had been confirmed to him that the key issue was his refusal to accept the conditions on which the bonus was to be paid, not the signing of the new contract. The defendant accepted that signing the new contract was a matter for Mr Foggo, as was his acceptance of the conditions on which it proposed to pay him the bonus. It also advised him that given his rejection of those conditions, the 'offer' to pay the bonus had lapsed; in its view, in the circumstances it had no obligation to pay him the bonus; and that his claim that it had repudiated the existing contract was baseless.
The termination of the employment relationship
To that point Mr Foggo can have been under no misapprehension that the defendant wished to retain his services. That was a matter of repeated discussion with him; the bonus condition had been structured to entice him to stay in its employment; and when he objected to the terms of the proposed new contract, the defendant accepted his right to remain on his current terms. Mr Foggo was still dissatisfied with the defendant's approach to the bonus and disputed the defendant's right so to act.
The defendant's 18 June letter conveyed its decision that it was no longer prepared to pay him a bonus, even on the conditions it had specified in the May letter. The first $150,000 due in June had not been paid. It was clearly the ongoing dispute over the defendant's insistence that it had a contractual right to impose the conditions it had devised, which had delayed that payment. Mr Foggo's stance finally led the defendant to the decision that without his acceptance of the conditions of the bonus, he would be paid no bonus at all.
Given the nature of the discussions to that point, it must have been apparent to the defendant that this decision was likely to have the result that Mr Foggo would leave its employment. No further discussions about the dispute were invited in the 18 June letter. On Mr O'Sullivan's evidence as to his approach to employees, it may have been that if Mr Foggo had even then accepted the defendant's stance, the bonus would still have been paid. The defendant was not, however, prepared to pay Mr Foggo a $300,000 bonus, on the terms he desired. It preferred to risk his departure from its employment.
On 24 June, Mr Foggo replied, claiming that his employment contract had been breached by the defendant's failure to pay him a bonus on 16 June; by its failure to apply the grievance policy; and by the decision of 18 June to pay him no bonus at all. Mr Foggo purported to accept that repudiation, thereby bringing the employment to an end.
On 25 June, the defendant wrote to Mr Foggo advising that he was mistaken in the allegations he had made as to various matters; that it had not repudiated his contract; that his letter amounted to an immediate resignation from his employment contract, which amounted to a repudiation of that contract. That repudiation was not accepted and he was required to comply with his contractual obligations, but he was obliged to return all of the defendant's property.
Mr Foggo never returned to work. On 30 June the defendant sought repayment of his salary paid in advance to 30 June.
Was Mr Foggo not paid the disputed bonus, because of his refusal to sign the proposed new contract?
Both Mr Cronin and Mr O'Sullivan were cross-examined on the basis that the real reason that Mr Foggo was not paid the bonus was because of his refusal to sign the new contract. They each denied this. That is a denial which in my view must be accepted.
On Mr Foggo's own account the imposition of conditions on the payment of the bonus was first discussed with him in April and again in May, before the letter of 28 May was sent, advising of the conditions which had been determined for payment of the bonus, as well as providing him with the proposed new contract. That was a contract provided to all of the defendant's employees. There is no question that the defendant was obliged to comply with the new provisions of the Fair Work legislation. That it then took the opportunity to review its employment agreements in the face of that legislative change, as well as the upheavals in its business over the preceding year, seems understandable. I can see no basis on which Mr Cronin and Mr O'Sullivan's evidence about these matters should be rejected.
Certainly the subsequent discussions about the conditions on which the defendant proposed to pay the bonus and the new contract, which also contained clawback provisions to which Mr Foggo objected, but other employees were prepared to accept, then became intertwined. Once his concerns about the revised contract provided to him on 11 June (after the discussions which took place earlier that day) were appreciated, the two issues were separated, as he was advised on 16 June when he met with Mr O'Sullivan and Mr Cronin. That occurred after Mr Foggo provided his grievance on 16 June, following receipt of Mr O'Sullivan's reply to his email, which had explained that he had not been paid the bonus that day, because he had not signed the new contract.
When Mr Cronin and Mr O'Sullivan met with Mr Foggo on 16 June to discuss his grievance, on their evidence they then informed him that signing the new contract was not a requirement for payment of the bonus. What was of concern to the defendant was that he be paid $150,000 in circumstances where it was known that he had been actively considering leaving its employment to take up employment with a competitor. That the defendant had concerns in the circumstances that he was a 'flight risk' may be accepted.
While Mr Foggo disputed aspects of Mr Cronin and Mr O'Sullivan's account of what they told him at the meeting on 16 June, particularly that he was advised that he was not obliged to sign the new contract, or that the conditions imposed in relation to the bonus remained their crucial concern, that advice was certainly consistent with that given in writing on 18 June. On his own account, this followed Mr Foggo advising Mr Cronin and Mr O'Sullivan on 16 June, that whether he stayed or went depended on how his grievance was handled.
In the circumstances, I accept Mr Cronin and Mr O'Sullivan's account of what they told Mr Foggo on 16 June. At that point the driving consideration in relation to the payment of the first tranche of the bonus due that day was not acceptance of the new contract. Rather, the defendant was only prepared to pay Mr Foggo the bonus on the conditions it had determined. Given his continuing attitude, the defendant reached the point where it required his acceptance of those conditions, before it was prepared to pay the first $150,000.
Was the defendant contractually entitled to impose conditions on the payment of the bonus?
Contrary to the view which he took at the time, in these proceedings it was accepted by Mr Foggo that in 2010 the defendant had the contractual right to defer payment of any bonus in excess of $250,000 which it determined to pay him, for up to three years. At the time he claimed variously that there was no such right; that he had been guaranteed a minimum cash bonus of $150,000; and that the defendant was only entitled to defer amounts above $250,000.
Otherwise at the hearing, Mr Foggo maintained the view that properly construed, the defendant had a discretion under the contract as to whether or not it would pay him any bonus at all; and if a bonus was to be paid, its amount. It had no discretion, however, to impose the proposed clawback condition, or the condition which required that he be in employment, at the time that any deferred payment was due to be made. Furthermore, the discretion was not at large, but was controlled by the terms of the contract, which did not permit the bonus to be withheld capriciously, arbitrarily or unreasonably. Support for this approach to the contractual discretion was submitted to be found in Allsop P's observations in Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357, where his Honour said:
"5 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 (1858) 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.
6 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, not to 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.
7 Reliance was placed on what Lord Reid said in Malloch v Aberdeen Corporation [1971] 1 WLR 1578 at 1581 (and like cases) that an employer was not bound to hear his employee before dismissing him, and even if he acts unreasonably or capriciously the dismissal is valid. That is not the foundation for any general principle that an employer is always entitled to exercise contractual powers in an employment contract capriciously or arbitrarily. To the contrary: while the dismissal may be effective, depending on the contract, the employee's remedy is for breach of contract."
The defendant's case was that in respect of the pool bonus, its discretion to make a bonus payment was unfettered, other than by the express requirements that any bonus of less than $250,000 could not be deferred and that payment of bonuses in excess of $250,000 could only be deferred for up to three years; and by the implied contractual obligation to exercise its discretion in relation to bonuses for the purpose of achieving the objects of the contract. Otherwise, it was a matter of its discretion, as to whether or not a bonus was paid and if it was, the conditions on which it would be paid. In any event, it had not exercised its discretion in relation to payment of the pool bonus capriciously, arbitrarily or unreasonably.
The parties' contest over their contractual rights must be determined in the light of the purpose of the contract, particularly the contractual bonus provision, having in mind considerations of the kind discussed in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165. There it was it was observed at [40]:
"... It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual
relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other
party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a
reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the
terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That,
normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction."
True it is, as was argued for Mr Foggo, that the payment of the pool bonus here in issue would have had the practical result that he would have received a further reward for the past performance of his work. That was the result of the defendant's obligation to consider his past performance, in determining both whether or not to exercise the discretion in his favour in relation to sharing in the pool bonus and if it was exercised, his share of the bonus. That was not the only consideration, however. Also to be considered was the performance of other employees, as well as the defendants' performance overall; a consideration in the determination of the bonus pool.
That consideration is to be contrasted with that required to be undertaken by the defendant in relation to an individual bonus, which under this contract was to be reflective only of Mr Foggo's individual performance and the defendant's performance. That exercise was to be undertaken by reference to successful achievement of agreed objectives and performance targets.
As the defendant argued, that the contractual provision in relation to bonus, particularly pool bonus, was not reflective only of individual performance, makes apparent that further reward for past performance was not the only purpose of the contractual bonus system,
That this is what a reasonable person would have appreciated, from the language used in this contract, was revealed by Mr Foggo's own evidence. He said that the opportunity to earn bonuses was one of the things which attracted him to employment with the defendant. He also repeatedly told the defendant that how it operated the bonus system was an important consideration in his decision in 2010, as to whether or not he would remain in its employment. This evidence reflects the operation of the intended attraction and retention elements of the bonus system.
The bonus pool was to be determined each year by the defendant, having regard to its performance. Thereby the bonus system encouraged work performance which generated funds for employees to participate in. The contract also expressly envisaged the deferral of pool bonus payments of over $250,000. That reveals that the bonus system was not only designed to further reward past performance, but also to provide an incentive for the ongoing good performance of work in the future, while the employee remained in the defendant's employment and also to encourage employees to remain in employment. Thereby employees could earn further bonuses and help ensure that they obtained the benefit of the exercise of the defendant's past discretion, when it came time to make any deferred bonus payments, when they fell due.
In my view it would require an unrealistic view of the terms of this contract and the evidence of the parties' respective conduct, to conclude that a reasonable person in either of their positions, would have had the view when the contract was made, that the only purpose of this aspect of the bonus system was to further reward Mr Foggo for his past performance. Mr Foggo's own evidence belies such an understanding on his part. Mr Foggo's case may not, in that respect, be accepted. The purposes of this scheme clearly also comprehended attracting Mr Foggo to accept employment and encouraging him to remain in the defendant's employment.
Even so, it may be accepted that the defendant was not free to exercise its discretion to pay Mr Foggo a pool bonus capriciously, arbitrarily or unreasonably. As the defendant argued, exercise of the bonus discretion in order to require Mr Foggo to join a club, support a football team, or adhere to a religion, would all offend the defendant's contractual obligations. Nor could the defendant act in order to give itself a free choice as to whether or not to perform the annual contractual consideration of the exercise of its discretion in relation to bonus, at all.
Otherwise, however, the contract expressly fettered the defendant's discretion to award a pool bonus in only three ways. That is, by requiring the defendant to conduct its assessment process by reference to Mr Foggo's performance, by comparison to that of his peers and of its own performance; by precluding any deferral of the vesting of a bonus of less than $250,000; and by permitting deferral for only three years of the vesting of bonuses in excess of $250,000.
Unquestionably the defendant was free to be more generous to Mr Foggo, than the bonus provisions of the contract required of it. That the defendant was entitled to impose conditions on any bonus it proposed to pay him, beyond any contractual entitlement which he may have had in respect of bonus, must also follow.
The contractual provision required that the defendant's discretion in relation to pool bonus to be paid to Mr Foggo be exercised in respect of the specified bonus pool, which had to be determined by the defendant each year. That was to be reflective of its financial performance.
In 2010, however, the defendant decided to increase the bonus pool beyond what was contractually envisaged. It also determined to pay Mr Foggo a bonus out of that increased pool, notwithstanding its ongoing reservations about his performance and its concern that he was a flight risk. It made the decision that Mr Foggo would be paid a bonus on the basis that the payment would be subject to conditions which it had earlier discussed with him, in the letter of 28 May. That decision reflected the defendant's desire to encourage Mr Foggo to remain in its employment, notwithstanding its reservations about his performance, given its other business interests and its understanding that he was actively considering taking up employment with a competitor.
In my view of the proper construction of this contract, even if Mr Foggo's performance, by comparison to that of other employees and of the defendant itself, had warranted the defendant's exercise of the discretion under the contract in his favour, out of a contractually specified pool, that it was not entitled to specify the conditions under which it was prepared to exercise that discretion, in order to encourage him to remain in its employment, does not follow. So long as any condition imposed did not breach the express contractual fetters, it seems to me that it could be imposed.
In my view, it also follows from the contractual purpose underpinning the bonus provision, that a condition designed to encourage Mr Foggo to remain in its employment, could not readily involve the defendant acting capriciously, arbitrarily or unreasonably.
By its decision the defendant proposed to pay Mr Foggo $300,000 bonus. That was considerably more than his annual remuneration for the year which had passed, notwithstanding its reservations about his performance. It made that decision, because it wished to induce him to remain in its employ. It thus imposed conditions requiring him to remain in its employment for the period specified, if he wished to retain the bonus.
Thereby the defendant sought to provide Mr Foggo with a considerable inducement to remain in its employ. The effect of the conditions imposed in May 2010 was that:
- If he remained in the defendant's employment in June 2011, he would be paid $150,000 bonus.
- That bonus vested in June 2011, if he was then in the defendant's employment, even if he thereafter left to go to a competitor.
- It was only if he resigned before June 2011, to seek employment with a competitor, that he would have had to repay the $150,000 which he was paid in June 2010. It would then not vest in him in June 2011.
- If his employment terminated for any other reason before June 2011, he would not have been obliged to repay the $150,000.
- In the event that he was not employed by the defendant in June 2011, he would not be entitled to be paid the further $150,000 bonus in June 2011.
- If he was in the defendant's employment in June 2011, he would be paid a further $150,000, which would vest in him immediately, even if he then left its employment.
So understood, it is not open to conclude that the defendant's purpose in exercising its discretion in relation to pool bonus was for a purpose extraneous to the contract. To the contrary, it seems to have been one designed to help ensure that the contract remained on foot.
Nor does the approach adopted seem to have been unreasonable in the circumstances. Mr Foggo had repeatedly discussed his concerns about the defendant's position in relation to imposing conditions on the payment of any bonus; he had revealed that he had been pursuing employment with competitors, although he was not frank as to the extent of that pursuit; he had advised the defendant that he had no present intention to leave, but that his attitude to remaining in the defendant's employment depended on its approach to the bonus payment. Mr Foggo was entitled to leave his employment on the giving of three months' notice. In the circumstances it seems to me that it was not unreasonable for the defendant to have exercised its discretion in relation to the payment of a very substantial bonus, in order to induce Mr Foggo not to exercise that right.
It was Mr Cronin's evidence in cross examination, as well as that of Mr O'Sullivan, that had the defendant not had the right to impose the conditions it had devised on the payment it proposed to make, that the decision to pay a bonus of $300,000 would not have been made. They also denied that he would have been paid a greater bonus, in order to retain his services.
In my view, that evidence must be accepted. Given the decision finally made in June 2010 that Mr Foggo would not be paid any bonus, it is apparent that the defendant was not as anxious to retain his services, as was suggested for Mr Foggo. The price it was prepared to pay had a limit. There had been ongoing negotiations about the terms on which it was prepared to pay him a $300,000 bonus. Mr Foggo's views had been accommodated to some extent, but the defendant was simply not prepared to pay him an upfront cash bonus of $300,000, or even $250,000 as he had sought. It was not prepared to take the risk that he would leave its employment to go to a competitor, despite having received a bonus intended to induce him to stay.
Did the conditions imposed breach any fetter on the defendant's discretion?
The express term of the contractual letter was that:
"The bonus pool ... may involve vesting of up to 3 years for cost allocations over $250,000."
It did not deal at all with the question of payment, which could clearly be made at a different time, or at the same time as the bonus vested. The contract expressly envisaged that the 'vesting' of an allocation of over $250,000 from the contractual bonus pool, could be deferred for up to three years, implicitly, while the employment remained on foot. Thereby an inducement was provided to Mr Foggo to remain in employment. There would be no other point to deferral of vesting of a bonus already paid. That was the purpose of the contractual right to defer vesting, namely to bind Mr Foggo to the employment, until the bonus fell due to vest.
In this case the remuneration committee determined to pay Mr Foggo $300,000 on the basis it had determined, after their discussions. The bonus of $300,000 was to be paid in two tranches: $150,000 in June 2010 and the second $150,000 in June 2011. Vesting of the first $150,000 due to be paid in June 2010, was made dependent on Mr Foggo not having left employment to join a competitor before June 2011. Vesting and payment of the second $150,000 depended on Mr Foggo still being in employment in June 2011. In my view, the discretion to pay Mr Foggo a pool bonus, so exercised, did not involve any breach of the express term of his contract.
The implied terms - the bonus
Mr Foggo claimed that his contract contained a number of implied terms: that the defendant would perform its obligations and exercise its rights under the contract in good faith, reasonably and for the purpose of achieving the objects of the contract, and that it would not conduct itself in a manner likely to seriously destroy or damage the relationship of trust and confidence between it and Mr Foggo.
The defendant accepted that there was an implied term that it would perform its obligations and exercise its rights under the contract for the purpose of achieving the objects of the contract, but otherwise disputed the existence of the other implied terms. In any event, it argued, even if the other claimed terms were implied in the contract, it had not breached them. Its exercise of its discretion in relation to the pool bonus had been for the purpose of achieving the objects of the contract, one of which was the retention of Mr Foggo in its employment. For reasons which I have already explained, I accept that view of the objects of this contract and that the conditions which the defendant imposed on the bonus payment it decided to make, were intended to advance that contractual purpose.
As to the implied obligation of good faith and reasonableness, it certainly has some acceptance in Australia, at least in the case of certain commercial contracts. In United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) NSWLR 618 Allsop P recently observed at [61]:
"Whilst this necessarily incomplete review of authorities reveals that the law in Australia is not settled as to the place of good faith in the law of contracts, this Court should work from the position that it has said on at least three occasions (not including Renard) that good faith, in some degree or to some extent, is part of the law of performance of contracts. It is unnecessary to go beyond this proposition to gain assistance in the construction of this particular clause of this contract. Many issues arise in respect of any implication (whether as a matter of fact or by law) of any term requiring performance of a contract, or the exercise of contractual rights, in good faith. Those issues need not be explored here in a case dealing with an express clause as part of a dispute resolution clause."
Earlier in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558, a case concerning wrongful termination of a franchise contract, the view taken was that in a commercial contract, there would ordinarily be implied as a matter of law, terms of good faith and reasonableness, in order to ensure that a party acting to promote its legitimate interests under the contract, does not do so in such a way as to render nugatory or worthless, the other parties' rights under the contract. This meant that a party was entitled to have regard to its own legitimate interests in exercising its discretion's but 'it must not do so for a purpose extraneous to the contract' (at 185]).
The parties referred to a raft of authorities where the existence of the implied terms have been accepted, or assumed. In the case of employment contracts, it is convenient to refer to Russell v the Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198, where Rothman J reviewed various authorities which had dealt with the question of the existence of two implied duties, that of good faith and that of mutual trust and confidence; that is, a duty not without reasonable cause to act in a manner calculated to destroy or damage the relationship of confidence and trust which must exist between an employer and an employee. His Honour referred to Hoeben J's observation in Heptonstall v Gaskin (No 2) [2005] NSWSC 30:
"[17] It is submitted on behalf of the plaintiff that decisions in the United Kingdom make it clear that as a matter of law there is now to be implied into a contract of employment a term of mutual trust and confidence. Such an approach is the law of Australia, or alternatively is arguably the law of Australia.
[18] It seems beyond argument that the implication of such a term is now part of the law of the United Kingdom: Malik and Mahmud v BCCI (1998) AC 21, Johnson v Unisys Ltd (2001) 1 AC 518, Gogay v Hertfordshire County Council (2000) IRLR 703 and Eastwood & Anor v Magnox Electric plc, McCabe v Cornwall County Council & Anor (2004) 3 WLR 322.
[19] Because of the provisions of the Employment Rights Act 1996 (UK) with its remedies for unfair dismissal, a distinction has been drawn by the House of Lords between psychiatric injury brought about by an employer's actions during the actual course of employment and psychiatric injury brought about by dismissal from employment or by circumstances directly related to that dismissal. That is the essential distinction between Malik and Mahmud, Gogay and McCabe on the one hand and Johnson v Unisys on the other. As was explained by Lord Nicholls in McCabe (paras 4-6; 27-32) the particular statutory context which exists in the United Kingdom brought about the development of the 'trust and confidence' implied term in a contract of employment. Without such a term, deserving plaintiffs would have no legal right to claim against employers in respect of conduct which occurred before they were dismissed and which was not directly related to that dismissal.
[20] The background to the implication of such a term in the United Kingdom is important. It contrasts with the situation in Australia. In Australia the same result has been brought about by the tort of negligence. Such cases as State of NSW v Seedsman [2000] NSWCA 119, State of NSW v Jeffery & Anor [2000] NSWCA 171 and Mannall v State of NSW [2001] NSWCA 327 make that clear. A similar reliance upon the tort of negligence was not possible in the United Kingdom as a result of the decision of the House of Lords in White v Chief Constable of South Yorkshire Police (1999) 2 AC 455. There the House of Lords held that an employer's duty of care for the safety of employees and to take reasonable steps to protect them from physical harm did not extend to protecting them from psychiatric injury when there was no breach of the duty to protect from physical injury; and that the general rules restricting the recovery of damages for pure psychiatric harm applied to claims by employees.
[21] Accordingly there has been no need in Australia to rely upon a 'trust and confidence' implied term in the contract of employment to enable employees to succeed in claims against employers for purely psychiatric injury suffered in the course of employment. This difference in approach to that in the United Kingdom is apparent in Tame v NSW (2002) 211 CLR 317 and Gifford v Strang Patrick Stevedoring Pty Limited (2003) 214 CLR 269.
[22] What is not at all clear is whether a 'trust and confidence' implied term in the contract of employment forms part of the law of Australia. In Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 the full Federal Court left open the question of the existence of such an implied term (p 154). Similarly, Spigelman CJ in Paige (para 135) left that same question open. In a somewhat different context the full bench of the Industrial Relations Commission of NSW in Court Session implicitly approved the implication of such a term ( Hollingsworth v Commissioner of Police (1999) 47 NSWLR 151 at 190) as did Allsop J in Thomson v Orika Australia Pty Ltd [2002] FCA 939 para 141. The implication of such a term in employment contracts in Australia remains controversial and awaits clarification by an appellate court.
[23] Given the way in which the 'trust and confidence' implied term has evolved in the United Kingdom against a legislative background and an approach to tort law different to that in Australia I doubt whether such an implied term in a contract of employment does form part of the law of Australia. I cannot, however, say that such is not the case and I certainly cannot say that the existence of such an implied term is not arguable."
Rothman J also referred to the observations of Allsop J (as he then was) in Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) 116 IR 186, where his Honour said:
"[141] However, if one is to approach the matter in straightforward contractual terms there is ample authority for the implication of a term in a contract of employment that the employer will not, without reasonable cause, conduct itself in a manner likely to damage or destroy the relationship of confidence and trust between the parties as employer and employee: Burazin v Blacktown City Guardian (1996) 142 ALR 144, 151 and the English cases there cited and Daw v Flinton Pty Ltd (1998) 85 IR 1, 3. Breach of that implied term will entitle the employee to treat himself or herself as wrongfully dismissed. Olson J (sitting at first instance) in Blaikie v South Australian Superannuation Board (1995) 65 SASR 85, 102-106 and (sitting on the Full Court, though in dissent) in Easling v Mahoney Insurance Brokers Pty Ltd [2001] SASC 22 at [99], if I may say so, expressed the principle with clarity. The principle expressed by Olson J in Easling at [99] was not the subject of any criticism from the majority (Doyle CJ and Bleby J). His Honour said:
'...Suffice to reiterate that the notion of constructive dismissal implies the existence of conduct on the part of an employer which is plainly inimical to a continuance of a contract of employment according to its express or implied terms. The authorities establish the concept that there is implied in a contract of employment a term that the employer will not, without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. An intention to repudiate need not be proved. Rather, it is a matter of objectively looking at the employer's conduct as a whole and determining whether its effect, judged reasonably and sensibly, is such that the employee cannot be expected to put up with it.'"
On appeal, the conclusions which Rothman J reached on these questions were considered in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217; (2008) 72 NSWLR 559. Basten JA there observed:
"29 The contract in the present case was oral and bereft of detail. The parties understood that the appellant was to take on the position of Director of Music at the Cathedral, which, as the trial judge found, meant that he was "responsible for the general management of the St Mary's Cathedral Choir; he taught and trained members of the Choir, conducted for the Choir at church services and other events, directed concerts and performances and conducted rehearsals" (at 202 [8]). He arranged and led the choir on three international tours in 1982, 1985 and 1991 (at 202 [9]). His Honour described the position as "permanent part-time" and noted that it was accompanied by a salary, which, by January 2003 was, in round terms, $25,000 per annum (at 202 [10] and 213 [66]).
30 Rothman J considered separately whether there were implied terms of good faith and of not acting, without reasonable and proper cause, in a manner calculated to destroy or seriously damage the relationship of confidence and trust between employer and employee. In relation to the former, he noted that the express terms of the contract were basic in their extent and that the parties envisaged a continuing, indefinite period of employment, where the precise extent of the obligations of the employee were not fully known at the time the contract was entered into (at 227 [118]). His Honour continued (at 227 [118]):
"[118] ... And in those circumstances, the rights and/or duties reposed in either the employer or the employee would need to be exercised honestly and reasonably; with prudence, caution and diligence, and with 'due care to avoid or minimise adverse consequences' to the other party that are inconsistent with the agreed common purpose and expectations of the parties to the contract. But all the while, the parties have the capacity to exercise their rights in their own interests."
31 In relation to the second implied term, his Honour noted that the characterisation of an employer/employee relationship as one importing duties of loyalty, honesty, confidentiality and mutual trust, was the subject of high authority, citing (at 230 [129]) Concut Pty Ltd v Worrell (2000) 103 IR 160 at 164 [17] and 167 [26] (Gleeson CJ, Gaudron J and Gummow J) and 172 [51.3] (Kirby J) and (at 222 [99], 231 [132]-[133]) Mahmud v Bank of Credit and Commerce International SA (In Liq) [1998] AC 20; Russell (at [99], [109] and [110]).
32 Although there were said to be two implied terms, it is probably sufficient to identify them as a single obligation. Thus, in Eastwood v Magnox Electric plc [2005] 1 AC 503 at 523 [11], Lord Nicholls of Birkenhead stated:
"[11] ... The trust and confidence implied term means, in short, that an employer must treat his employees fairly. In his conduct of his business, and in his treatment of his employees, an employer must act responsibly and in good faith. In principle, this obligation should apply as much when an employer exercises his right to dismiss as it does to his exercise of other powers of his which affect a subsisting employment relationship. It makes little sense, for instance, that the implied obligation to act fairly should apply when an employer is considering whether to suspend an employee but not when the employer is proposing to take the more drastic step of dismissing him."
33 Recognising that an employer may act with reasonable and proper cause to pursue its own interests, whether or not they are adverse to those of the employee, and may terminate the employment at any time without cause on giving notice, casts some uncertainty on the scope and extent of the implied duties. In Australia, they have enjoyed more limited recognition than in the UK and have usually been called in aid to identify the kind of conduct of an employer sufficient to constitute "constructive dismissal", which the employee can treat as a repudiation of the contract of employment: see Easling v Mahoney Insurance Brokers (2001) 78 SASR 489 at 514 [99], per Olsson J; Thomson v Orica Australia Pty Ltd (2002) 116 IR 186 at 224 [141], per Allsop J; Martech International Pty Ltd (ACN 009 022 799) v Energy World Corporation Ltd (2007) 248 ALR 353 (Moore J, Tamberlin J and Gyles J); Hem v Cant (2007) 159 IR 113 at 118 [20]-[23], per Finkelstein J; Delooze v Healey [2007] WASCA 157 at [32], per Wheeler JA, Steytler P agreeing. In Hem , on facts not so distant from the present case, the employee was accused by his superior of being a thief, without justification. The Court accepted that such conduct could constitute constructive dismissal because it constituted conduct inconsistent with the mutual trust required for the employment relationship.
34 As explained by the Full Court of the former Industrial Relations Court of Australia in Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 at 151-154, per Wilcox CJ, von Doussa J and Marshall J, it is unclear to what extent the breach of such a term may permit relief by way of damages, consistently with the principle in Addis v Gramophone Co Ltd [1909] AC 488, precluding damages for the manner of a wrongful dismissal and the distress thereby occasioned to the employee, except in the limited circumstances identified in Baltic Shipping Company v Dillon (1993) 176 CLR 344 discussed below."
Gyles JA agreed with Basten JA's conclusions, assuming the existence of the implied terms and Hodgson JA observed:
"73 It is clear that there can be an implied term in a contract of employment requiring an employee to exercise good faith in certain circumstances (eg Del Casale & Ors v Artedomus (Aust) Pty Limited [2007] NSWCA 172; (2007) 73 IPR 326 at [32]-[34], [76]-[100] and cases there cited). Further, some Australian cases have accepted that there is (or, sometimes, that it is at least arguable that there is) an implied term in a contract of employment binding the employer to exercise good faith concerning the employment relationship: Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 607-8 (Waddell CJ in Eq); Hollingsworth v Commissioner of Police (1999) 47 NSWLR 151 at 190 (Wright and Hungerford JJ); Heptonstall v Gaskin (No 2) [2005] NSWSC 30; (2005) 138 IR 103 (Hoeben J); Irving & Ors v Kleinman [2005] NSWCA 116 (Hodgson, Ipp and Tobias JJA). I am content to decide the present case on the basis of assuming, without deciding, that the employer owed implied contractual obligations of the type that the appellant alleges."
More recently the Full Court of the Federal Court in Yousif v Commonwealth Bank of Australia [2010] FCAFA 8; (2010) 193 IR 212 also found it unnecessary to resolve the question of the existence of such implied terms, given the conclusions reached on the facts in that case. It did observe, however, that the precise contours of the claimed duties appeared to be uncertain, suggesting that it was more useful to think of them as a single term, than as two distinct terms (see at [110]).
In this case the defendant also submitted that it was unnecessary to determine the question of the existence of the claimed implied terms. It agreed that even if it were concluded that the implied terms existed, given the parties' common acceptance as to the operation of another implied term, namely that the defendant was obliged to exercise its rights and obligations under the contract for the purpose of achieving the objects of the contract, no different result would flow on the facts.
I accept that submission, although it does seem to me that some further support for a conclusion as to the existence of an implied term of good faith is provided by the conclusions reached in Silverbrook Research Pty Ltd . While this point did not there arise for consideration, it is relevant to observe that Allsop P (with whom Beazley JA agreed) there took the view that the loss of a chance to earn a bonus under an employment contract involved the loss of a valuable commercial opportunity, compensable in damages for breach of contract. Further, in Byrne v Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68, settled legal principles applying to the interpretation of business contracts, were applied to determine the proper construction of the provisions of a share retention policy applying to an employment contract.
Employment contracts are, of course, particular kinds of contracts, but nevertheless contracts which may bring with them considerable commercial advantages, for both the employer and employees involved. That being so, it is difficult to see why a term of good faith and reasonableness would not be implied in such contracts, as it is in other contracts which bring parties commercial advantages. Such a conclusion may have to be tempered by considerations of the kind discussed in Russell , depending on the question which arises for determination in a particular case. Nevertheless, the approach adopted in the cases provides, in my view, a further basis for accepting the existence of the implied terms on which Mr Foggo seeks to rely in this case.
In this case it is sufficient to assume the existence of the implied terms. In my view that does not advance Mr Foggo's case any further. Compliance with the implied terms does not require an employer to act contrary to its own interests. Rather, what is required is an approach which has regard to matters such as the honest and reasonable exercise of the employer's rights; with prudence, caution and diligence, and with care taken to avoid or minimise adverse consequences to the employee, that are inconsistent with the agreed common purpose and expectations of the parties to the contract. Essentially, employers must treat employees fairly in the conduct of their business, and must act responsibly and in good faith in the treatment of their employees.
So understood, I cannot see that the defendant breached the obligations relied on in relation to the question of whether Mr Foggo should receive any pool bonus. It had a duty under the contract to conduct a performance assessment. There is no complaint as to what it undertook, or the conclusions which it reached about Mr Foggo's performance, or the basis of the pool bonus to be paid that year. The defendant then considered and discussed with Mr Foggo paying him a bonus on terms designed to induce him to remain in its employment, at a time when he was looking elsewhere for work with competitors. It later advised him of the conditions being considered and accepted some of his views, while not accepting that it should exercise a discretion in his favour, by the upfront payment of a very substantial cash bonus, without any conditions. It then proposed to pay him a bonus, on conditions designed to encourage him to remain in is employment.
There is no complaint made about the decision to fix the bonus payment at $300,000 or to make that payment out of the pool determined. Even after it advised him of the conditions on which it had determined to pay him a bonus out of that pool greater than the contractual terms envisaged, it negotiated further with Mr Foggo. It did not accept his view of his contractual entitlements, or what he sought; an unconditional payment of the bonus proposed. In these proceedings it was accepted that much of what he understood had no foundation in the contract.
The defendant was not prepared to do what Mr Foggo variously insisted on being entitled to, namely payment of $300,000 in cash up front, or at least $250,000 up front, without any requirement that he continue in the defendant's employment and repay any part of the bonus, if he left to work for a competitor.
Mr Foggo had no contractual right to such a payment, nor could he have reasonably expected the defendant to exercise its discretion on that basis, given the conclusions reached as to his performance. The implied term did not require that he be given the generous treatment which he sought, nor did it require that the defendant ignore its own interests, in seeking to retain his services.
In the context of this contract, I cannot see that the defendant's approach involved any breach of the implied terms relied on. It seems to me that in determining that it would pay him a bonus, the defendant was entitled to have regard to its assessment that Mr Foggo was a flight risk and to impose terms on the payment of the bonus, which sought to induce him to remain in its employment. What occurred in relation to the development and negotiation of the proposed new contract, can lead to no other conclusion, particularly given my conclusion that the defendant did not finally make entry into the new contract a condition of the payment of the bonus.
The failure to pay the bonus - breach of contract
It was not in issue that by its decision conveyed to Mr Foggo by the letter of 28 May, the defendant exercised its contractual rights in relation to payment of a bonus. Thereby it determined that Mr Foggo would be paid $300,000, on the conditions it had specified. That decision bound both it and Mr Foggo. What was in issue was its right to impose the conditions it had specified.
While Mr Foggo disagreed with the defendant's view of its contractual rights and obligations in relation to bonuses, that disagreement was not such as to relieve the defendant of the consequences of the decision it had made and implemented by its 28 May letter. Thereby it was contractually bound to pay him $150,000, if he was in its employment in June 2010.
The bonus was due to be paid on the usual monthly pay day, 16 June. The payment was not made that day, Mr Foggo was advised, because the new contract had not been executed. After discussion, the defendant accepted that this was not a condition of the payment of the bonus and told Mr Foggo so. Still the payment was not made. On 18 June the defendant confirmed that it was not a requirement that he enter the new contract it wanted him to sign, but advised him that it had decided not to make any bonus payment to him at all, in view of his ongoing disagreement over the conditions it had imposed.
The defendant had neither an express or implied right to reconsider the decision it had made as to the payment of a bonus, notwithstanding its characterisation of what it did as withdrawal of an 'offer' to pay Mr Foggo a bonus, an offer which he had not accepted. The defendant had made no such offer, nor had it sought his acceptance of any such offer.
The defendant argued that it was entitled to take that course because Mr Foggo's approach involved an anticipatory breach of his contract, or of a separate contract in relation to the bonus. In my view that submission may not be accepted, particularly having in mind Mr Foggo's adherence to the requirements of the grievance policy. Thereby he sought to resolve the disagreement which had arisen under the policy as he was contractually obligated to do, but he never advised the defendant that if he were paid the bonus on the conditions specified, that he would not adhere to them.
If this view is incorrect and it were accepted that an anticipatory breach of a fundamental term of the contract had arisen, that would have given the defendant the right to rescind the contract. Otherwise, it could insist on specific performance and could seek damages, in the event that any damage arose, if the anticipatory breach materialised (as discussed in Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21; (1976) 136 CLR 44 at 450). As discussed in DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at [24] to [26]:
"[24] ...A party in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper interpretation. Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach, and indeed could profit from his misinterpretation of the contract, as the appellant seeks to do in this case when it claims forfeiture of the deposit and damages. By insisting on its incorrect interpretation of the contract to the point of claiming to rescind because the respondents were relying on the different but correction interpretation, the appellant by that stage showed that "definitive resolve or decision against doing in the future what the contract" (required) which is referred to by Dixon C.J. in Rawson v. Hobbs [1961] HCA 72; (1961) 107 CLR 466, at p 481 . Whether or not the respondents could by then have rescinded certainly the appellant could not do so. (at p433)
25. The appellant never accepted that the contract be performed according to its correct interpretation and thus the facts are different from those in Lennon v. Scarlett & Co. [ 1921] HCA 42; (1921) 29 CLR 499 . There a plaintiff had, after the making of the contract, sought to insist on additional terms. The defendant then called off negotiations, in effect purporting to rescind. It was held that the attempt by the plaintiff to add new terms did not amount to a repudiation. It was further held that the defendant had repudiated. But the difference between that case and the present case is that there the plaintiff, after the defendant's purported rescission, offered to complete the contract on its true terms. The defendant declined to do so. By that time the plaintiff was willing to complete the contract according to its true terms and he could therefore treat the defendant's act as a repudiation and could rescind accordingly. (at p434)
26. Thus the contract in the present case was still on foot on and after 25th July 1974. Neither party had effectively rescinded. But there can be no doubt that by 5th December 1974, when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as being still on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract. The position is similar to that with which Isaacs J. dealt in Summers v. The Commonwealth [1918] HCA 33; (1918) 25 CLR 144 . The plaintiff did not succeed in his action for damages for breach of contract, but on the other hand the defendant had not rescinded. Time passed during which neither party took any steps to perform the contract. It was held that the parties had so conducted themselves as mutually to abandon or abrogate the contract. (at p434)"
Certainly what an anticipatory breach did not do, was give the defendant the right to elect to keep the contract on foot, but on altered terms which it devised. The letter of 18 June established that the defendant did not rescind the contract. What it purported to do was to relieve itself of the obligation to pay the bonus it had determined, thereby avoiding the possibility that Mr Foggo might be paid the $150,000 bonus, that he might thereafter leave its employ to work for a competitor before June 2011 and yet refuse to repay the bonus. That was not a course open to it. Nor was the breach which it feared inevitable. Payment of the bonus after all, would have provided Mr Foggo with a considerable inducement to remain it its employment until June 2011, by which time the entire $300,000 would vest.
The course taken by the defendant involved a clear breach of its obligations under the contract. Even if this was a breach of a non-essential term of the contract, it was a sufficiently serious breach so as to justify Mr Foggo's termination of the contract (see Koompahtoo Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115 at [49] - [51]). I am satisfied that Mr Foggo was entitled to treat the breach as involving a repudiation of the contract. He accepted that repudiation on 24 June and thereupon the contract came to an end.
Did the grievance policy have contractual force, so far as the defendant was concerned?
There is no question that in accordance with the terms of the written employment contract, Mr Foggo was bound to comply with the policies of which the defendant advised him on 11 June. That included the new grievance policy. The defendant itself asserted that he was so bound when the policy was promulgated to its employees. Mr Foggo accepted that this was so and then acted in accordance with the policy on 16 June, in relation to his concerns about the bonus and the new contract. For its part, the defendant also initially acted in accordance with the policy. Mr Cronin and Mr O'Sullivan immediately met with Mr Foggo, resolving at least one of the matters he had raised in their discussion, namely that entering into the new contract was not a condition of payment of the bonus.
It was only later, on 18 June that the defendant advised Mr Foggo that the policy would not be further applied; the defendant relying on its right to withdraw or vary the policy.
Despite this, in these proceedings the defendant denied that it was contractually bound to observe the policy it had devised and implemented. That seemingly curious stance must be resolved by application of the principles discussed in Toll .
That a reasonable person, in the circumstances, would have understood that the defendant, as well as Mr Foggo, was contractually bound to observe the grievance policy which it had implemented, unless varied or withdrawn, must be accepted. The policy envisaged that in the event that an employee had a grievance, he or she would advise the defendant, which would then take the steps specified in the policy to seek to resolve that grievance. That a reasonable person would understand that the employee was obliged to adhere to what the policy required of him or her, but that the defendant was not obliged to take the steps which the policy envisaged it would take, may not be accepted. That would defy both logic and common sense.
That conclusion is reinforced, when clause 9 of the policy is considered. It gave the defendant unfettered rights to alter or bring the policy to an end, providing in clause 9:
"9. Duration of this Policy
9.1 This policy was brought into effect from 14 June 2010.
9.2 It will be reviewed on a regular basis (and updated as deemed necessary) to ensure that it remains relevant and appropriate to OP.
9.3 For the avoidance of doubt, this policy may be applied, varied or withdrawn at any time at OP's discretion."
In my view, unless and until the defendant exercised such rights, it was contractually obliged to adhere to the policy it had brought into effect. That conclusion is supported by views expressed in Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889; (2000) 177 ALR 193 and Goldman Sachs JBWere Services Pty Ltd v Nikolich [2007] FCAFC 120; (2007) 163 FCR 62, where similar questions arose for consideration. In both Riverwood and Goldman Sachs the question of whether the employer, as well as the employee, was contractually bound by the policy in question as an implied term of the contract, arose to be considered. The test is that discussed in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-3 and Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 442.
That a term which requires an employer, as well as the employee, to adhere to a policy which the employer has devised and implemented and which the employee is contractually obliged to observe, by express provision, would be implied in order to give business efficacy to the contracted contract, is immediately understandable. In the case of the policy here in question, it is evident that the contract could not operate reasonably and effectively without such an implied obligation. It would make nonsense of the employee's ongoing obligation to act in accordance with what the policy required of him or her from time to time, if the employer had no obligation to act in accordance with what the policy required of it.
In Riverwood the view taken was that a purported agreement which leaves the content of the agreement entirely at the discretion of one party, is not contractual; and that any alteration could only achieve binding force, if there was a new agreement to that effect (see at [152]). The evidence in this case established that such an agreement was here reached and implemented. The defendant promulgated the policy, advising that it had contractual force. Mr Foggo accepted that view of his contractual obligations and acted accordingly, adhering to the policy, as did the defendant, at least initially, thereby resolving one of the grievances he had raised, in the initial discussion which the policy envisaged would take place.
For his part, Mr Foggo appreciated that in its terms, the policy could not sensibly operate further, given that Mr Cronin and Mr O'Sullivan, the only two partners in the firm who might in other cases be appointed by the defendant to conduct any appeal, if either party were not satisfied with how the remaining parts of the grievance he had raised was resolved, had already both been involved in the intial discussions and would have to be involved on the defendant's behalf, in what was further required at the next stage. Accordingly, he suggested the appointment of an external law firm to deal with the grievance. That would have required a variation to the policy under clause 9.3.
Such a variation was not one which the defendant was prepared to accept. It then purported to exercise its right to withdraw the policy, a right which Mr Foggo did not accept, asserting that also amounted to repudiation of the contract. Nevertheless, that by their respective conduct, both the defendant and Mr Foggo had accepted that the policy had contractual force, must be accepted. That accorded with the view which I have reached, that it was an implied term of Mr Foggo's contract, that the defendant, as well as he, was contractually bound by the policy.
Did the defendant breach its obligations under the policy?
'Grievance' was defined in the policy in clause 1.2 as:
"A grievance is any type of problem, dispute, concern or complaint related to an employee's work, or their work environment. A grievance may be about any act, omission, situation or decision that an employee perceives as unfair, discriminatory or unjust. Grievances can range in severity from matters which can be immediately resolved by timely appropriate action, to complex matters involving prolonged investigation, negotiation or disciplinary action."
The purpose of the policy was outlined in clause 2.2 as:
"This policy is designed to ensure that:
a) If an employee has a grievance it will be dealt with confidentially, effectively and with the appropriate degree of urgency (wherever possible);
b) An employee's grievance will be thoroughly investigated on an impartial basis. All parties will be given the opportunity to give their perspective. All relevant information will be collected and considered;
c) Only the people directly involved in a grievance or in resolving it have access to information about the complaint;
d) Appropriate action will be taken to resolve an employee's grievance and where proven, to ensure it does not reoccur;
e) OP will take all reasonable steps to ensure that an employee is not disadvantaged because they have put forward a complaint or are witnesses to an incident; and
f) Victimisation is prohibited as it potentially undermines the integrity of OP's complaint process by making people fearful of bringing complaints forward. It may also be against the law."
When first notified on 16 June of Mr Foggo's grievance about its decisions in relation to his 2010 bonus and the new contract it wished him to sign, Mr O'Sullivan and Mr Cronin met immediately with him. That accorded with what clause 3.1 of the policy envisaged, namely that grievances should be sorted out informally, in the first instance; the employee having provided a written note of the grievance, containing all relevant details. Mr O'Sullivan and Mr Cronin advised Mr Foggo that the defendant did not require him to enter the new contract. There can be no complaint about that, it was advice which must have addressed Mr Foggo's concern that he could not be forced to agree to new contractual terms, which he was not satisfied with.
They also confirmed that the defendant's view as to its contractual rights to impose conditions on the bonus which it proposed to pay him, had not altered and that it was seeking advice about how the grievance was to be further dealt with. The policy envisaged a thorough, impartial investigation of the problem, by another employee appointed to conduct the investigation, with the employee and others involved being given an opportunity to give their perspectives. Both parties were to be advised of the decision, irrespective of the outcome and clause 7.2 provided:
"Appropriate action will be taken, depending on the outcome of the investigation."
An appeal process was also provided, with an appeal being made to the employee's supervising partner and being conducted by a different member of staff from the person who made the original decision. These aspects of the policy no doubt explain the view to which the defendant came, that this dispute was not one appropriate to be dealt with under the policy.
The problem which had arisen did not concern relationships between two employees, but the question of the construction and operation of Mr Foggo's employment contract in the circumstances which had arisen. There were only two partners of the firm, Mr Cronin and Mr O'Sullivan. They both comprised the remuneration committee, which had decided not only Mr Foggo's bonus, but the conditions on which it would be paid. It was they who had decided what funds would be made available for payment of pool bonus that year and that the defendant wished to retain Mr Foggo's services. It was their view of the defendant's rights under the contract with which Mr Foggo took issue. That there was anyone other than Mr Cronin or Mr O'Sullivan who could deal with the issues which had arisen under the grievance policy, was not apparent, especially if an appeal was required to be dealt with.
Having taken advice, the defendant came to the view that the dispute about Mr Foggo's contract was not an appropriate matter to be dealt with under the grievance policy and that it would not be applied. It did not accept his views of his entitlements under the contract and given his ongoing refusal to accept the terms on which it proposed to pay him a bonus, advised him that he would be paid no bonus at all.
The defendant's case was that in adopting that approach, it exercised its rights under clause 9 to vary or withdraw the policy. Mr Foggo's case was that it did not take either step, despite what was said in the letter of 18 June. Reference was made in the letter of 18 June to the defendant's rights under clause 9, but it was not expressly said, it must be accepted, that those rights were being exercised. That this was what was intended, must be accepted. There was no other purpose for referring to those rights. By its actions the defendant clearly withdrew the policy, at least in so far as Mr Foggo was concerned, having refused his request to vary its terms.
In the circumstances, it does not seem to me that there was any breach of an express term of the policy.
The implied terms - the grievance policy
The implied terms were also relied on by Mr Foggo in relation to this policy. There was no disagreement between the parties that if the policy had contractual force, the defendant was obliged to exercise its discretion in relation to withdrawal or variation of the policy for the purpose of achieving the objects of the contract.
Withdrawing the policy in the circumstances which had arisen as at 18 June, seems to me not to have been consistent with that obligation. Mr O'Sullivan's evidence as to his usual approach to matters raised with him by employees, supports the view that it was not consistent with the purpose of the contract to withdraw the policy on 18 June, refusing the request to exercise the discretion to vary its terms, to accommodate the circumstances which had arisen.
Permitting a review of the kind which the policy envisaged, would have been consistent with the objects of the contract, particularly given Mr Cronin and Mr O'Sullivan's evidence that by the conditions it had devised for the bonus, the defendant was seeking to ensure the continuation of Mr Foggo's employment. On 18 June, continuing the operation of the grievance policy, by an appropriate variation of the dispute resolution mechanism, to accommodate the circumstances which had arisen, would clearly have been consistent with the contractual objects. Withdrawal of the policy, without even any warning being given of the course proposed to be taken, at the same time as determining to refuse to pay any bonus at all, was in my view to exercise the discretion inconsistently with the objects of the contract.
Given the evidence of the parties' respective stances, it seems to me that had the investigation which the policy envisaged been pursued, some common ground might have been found, particularly given that at that time the parties were each being assisted by their legal advisers. At the least the defendant's contractual right to defer vesting of the bonus for up to three years, would have been agreed. Complete agreement on all that was disagreed might not have been forthcoming, but that withdrawing the grievance policy at that point, in my assessment, was clearly inconsistent with the objects of the contract.
In so far as the other implied terms operated, as I have assumed that they do, the same conclusion must follow. Given what was in issue, withdrawing the policy was not consistent with an honest and reasonable exercise of the defendant's rights under the policy, approached with prudence, caution and diligence, and with care taken to avoid or minimise adverse consequences to Mr Foggo, consistent with the agreed common purpose and expectations of the parties under the contract, and treating him fairly in the conduct of the defendant's business, while acting responsibly and in good faith. Had the policy not been withdrawn, the question of the defendant's right, in the circumstances which had arisen, to refuse to pay any bonus at all, could certainly have been discussed, with the result that the defendant's breach of its obligations under the contract in relation to bonuses, may not have resulted.
Did the refusal to adhere to the grievance policy amount to repudiation?
While there was a breach of contract involved in the approach adopted in relation to Mr Foggo's grievance, that does not necessarily lead to the conclusion that thereby the contract was repudiated, thus entitling him to accept the repudiation, so as to bring the employment to an end.
In my view this was a breach of a non-essential term of the contract, not sufficiently serious to justify its termination by Mr Foggo, so as to bring the employment to an end.
Damages
The conclusions which I have reached must lead to the result that Mr Foggo must have an award in his favour in respect of the $150,000 bonus which he ought to have been paid on 16 June 2010. There was no obligation to repay that amount under the conditions which the defendant had imposed on the bonus, when Mr Foggo accepted the defendant's repudiation of his contract on 24 June. He was in employment as at June 2010 and did not resign in order to take up employment for a competitor.
Under the contract, Mr Foggo had no contractual entitlement to payment of the second $150,000 bonus. He will clearly not be in the defendant's employment in June 2011. No award of damages can flow in respect of the second $150,000.
Mr Foggo also claimed damages for the lost opportunity to continue in the defendant's employment, in order to earn salary and bonus. Had he continued in employment until June 2011, he would have been entitled to payment of the second $150,000, even if he later resigned, as well as salary. Accordingly, he seeks an award of damages in respect of that aspect of the bonus, as well as salary for that period.
On the evidence, I am unable to come to the view that Mr Foggo would have remained in the defendant's employ until June 2011, had it not come to an end as the result of the defendant's repudiation. Mr Foggo's evidence was that at the time his contract was repudiated in June 2010, he intended to remain in the defendant's employ. His evidence was not challenged and must be accepted. Account must also be taken, however, of his acceptance of the repudiation, as well as his pursuit beforehand of other employment, a more intense and ongoing pursuit than he had been prepared to reveal to the defendant. As at June 2010, he had not received any offer of employment which he could have accepted. Despite his then intention to remain with the defendant, in his negotiations with Mr O'Sullivan and Mr Cronin he persisted in his efforts to put himself in a position in which he would have been contractually entitled to retain any bonus he was paid, even if he did resign to take up employment elsewhere. Clearly he was seeking to position himself to his advantage, if he accepted such an offer. He was plainly prepared to entertain such offers if he did receive them. As he said in his evidence, his attitude to remaining in employment with the defendant, was influenced by how it treated him in relation to the bonus. That he took a very negative view of that treatment may not be overlooked.
That Mr Foggo would have remained in the defendant's employ, if the defendant had paid him the $150,000 due in June 2010, seems unlikely. Its failure to accept his view of his contractual entitlements, can only have influenced him to continue his pursuit of other employment and to accept an offer, if received. While he discussed with the defendant taking up non-competitive employment in a business operated by his father-in-law, he took up employment with a competitor in October 2010. That was employment where he earned a higher base salary than the defendant was obliged to pay him from July 2010 and where he earned his first commission payment in December 2010.
Given the negative views which Mr Foggo had clearly formed of the defendant's treatment of him, views which in part rested on an erroneous view of his contractual rights, that Mr Foggo would have given up his pursuit of other employment, had he remained in employment with the defendant in June 2010, may not sensibly be accepted. On the evidence, not only had he sought such employment, he had been approached by headhunters. To that point he had not received an offer which he could accept. That he would have refused an offer of more lucrative employment had it come to be made to him as the result of his ongoing efforts, so that he would have remained in the defendant's employ until June 2011, seems to me most unlikely.
That is reinforced by a consideration of evidence of the existence of a practice in this industry, whereby employees who are headhunted and as the result of accepting an offer from a competitor, lose a right to payment of a deferred bonus, receive a payment of that lost benefit from the new employer. Even this possibility was not enough to encourage Mr Foggo to accept the defendant's view of its contractual rights and to remain in the defendant's employ in June 2010. That in reality he finally became intent on leaving, irrespective of what that meant for his bonus payment, is apparent.
It follows that no basis for damages in respect of the loss of the second $150,000 bonus was established. I do accept, however, that but for the repudiation of his contract, it is likely that Mr Foggo would have remained in the defendant's employment until he succeeded in obtaining employment elsewhere. On that basis his damages should comprehend the period up to 11 October 2010, when he took up his new employment.
There is another basis for ordering damages in respect of most of that period. Mr Foggo is entitled to damages which reflect what the defendant should have paid him, had it given him the three months' notice which the contract required it should have given, in order to bring the employment to an end. There is no basis for concluding that he lost any opportunity to earn further bonus in respect of such a period of further employment. Assessment of further bonus depended on a further performance assessment, not due to be conducted by the defendant until 2011.
In accordance with the contract, these damages must be calculated at a total remuneration package of $270,000, as from 1 July 2010, that being what he was advised on 25 May he would be paid from that date, in his new position of director.
Orders
The parties should bring in short minutes of order to reflect the conclusions which I have reached. The usual order as to costs would be that costs follow the event, as agreed or assessed. In the event that the parties wish to be heard on costs, they should approach.
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Decision last updated: 01 June 2011
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