Loly v Nwioa Ops Pty Ltd
[2016] WADC 94
•30 JUNE 2016
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: LOLY -v- NWIOA OPS PTY LTD [2016] WADC 94
CORAM: MCCANN DCJ
HEARD: 18-20 JANUARY 2016
DELIVERED : 30 JUNE 2016
FILE NO/S: CIV 3701 of 2014
BETWEEN: MICHAEL DAVID TANUI LOLY
Plaintiff
AND
NWIOA OPS PTY LTD
Defendant
Catchwords:
Contract of employment - Breach - Failure of employer to establish a performance bonus plan - Assessment of damages
Legislation:
Nil
Result:
Judgment for the plaintiff
Damages assessed in the sum of $106,149
Representation:
Counsel:
Plaintiff: Mr G J Carter
Defendant: Mr M M De Kerloy
Solicitors:
Plaintiff: Lynn & Brown Lawyers
Defendant: Mony De Kerloy
Case(s) referred to in judgment(s):
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Electricity Generation Corporation v Woodside Energy Ltd (2004) 251 CLR 640
Hancock Prospecting v Wright Prospecting Pty Ltd (2012) 45 WAR 29
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
MCCANN DCJ:
Introduction
In this matter the plaintiff claims that the defendant breached his contract of employment by failing to establish a Performance Bonus Plan (PBP) for him.
The plaintiff claims damages in the sum of $404,453, being the alleged value of the lost opportunity to earn bonuses if a PBP had been established for him.
The defendant does not dispute that it was contractually obliged to establish a PBP but contends, in effect, that ad hoc arrangements which were put in place were equally beneficial and were accepted by the plaintiff. As such, the defendant denies that it breached the contract of employment and, in the alternative, asserts that the plaintiff waived the breaches or has not suffered any loss or damage.
The evidence
A book of trial documents (exhibits 1.1 – 1.35) was received in evidence by consent.
The plaintiff adduced evidence from himself.
The defendant adduced evidence from directors and officers, namely Mr Derek Humphrey, Mr Ian Campbell and Mr Robert Wilson.
All of the witnesses testified in a helpful and professional manner consistent with their senior positions and without any overt signs of prevarication, hesitation, tendentiousness or gross memory loss. They all made concessions. I am confident that they all testified to the best of their recollection and belief, and that the minor differences between them are attributable to inadvertent mistakes or differences in emphasis or differences in their contemporaneous perspectives of events.
Factual background
Most of the facts are not in dispute or can be inferred from undisputed facts. I have made findings in relation to the disputed matters where appropriate.
At all material times the defendant's shareholders were Atlas Iron Ltd, Brockman Resources Pty Ltd (later called Brockman Mining Australia Ltd) and FerrAus Ltd (later called FerrAus Pty Ltd). They were all involved in the development of iron ore tenements in the Pilbara region. Although their mining and railway operations were intended to be separate, they had a mutual interest in the establishment of a shared port facility and adjacent infrastructure in Port Hedland.
The defendant was established by Atlas Iron, Brockman Resources and FerrAus as a joint venture vehicle to investigate the feasibility of a 50 Mt shared port facility at South West Creek in Port Hedland (the Project), to carry out necessary technical and design studies, to secure land and seabed tenures, to proceed to a final feasibility decision and, ultimately, construction of the Project.
A great deal of technical and feasibility work had been done as at November 2011. Negotiations with the Port Hedland Port Authority in relation to tenure and access were well advanced and in principle approvals had been obtained from that body.
The defendant (and the shareholders) had very sanguine expectations as to the fulfilment of the Project within the foreseeable future. In particular, they were optimistic that a master plan (the so‑called 'Plan') would be signed off soon and construction would be underway, if not complete, within a very few years. The draft business case contemplated a first shipment of iron ore in December 2014 (see exhibit 1.3).
The Plan needed to accommodate the requirements of the shareholders, which were not necessarily identical and might even be inimical to each other. It also needed to accommodate the possibility of other junior miners being offered the use of the port facility. As such, development of the Plan called for flexibility and it was a dynamic process.
Prior to 7 June 2011 the plaintiff had been employed for many years as an executive in the iron ore industry.
Between 7 June and 1 November 2011 he was employed by FerrAus as its area manager, ports. That role included some involvement with the Project. Accordingly, he had a working knowledge of the objectives and activities of the defendant.
On 1 November 2011 the plaintiff commenced employment with the defendant and became the new Project director. A written contract of employment was executed by the parties on 16 November 2011 (the contract).
I am not satisfied that the plaintiff had a detailed knowledge of the feasibility work, especially as regards the business case. As he said (ts 75), he embarked on a 'steep learning curve' when he started with the defendant.
Pursuant to the contract, the plaintiff's starting base salary was $350,000 per annum, with provision for annual reviews and participation in a PBP.
Pursuant to cl 6.5 the defendant was obliged to establish the 'scope of the PBP' by no later than 31 December 2011 in conjunction with the development of a revised business case. The PBP was to provide for short term incentive payments and long term incentive payments (STIP and LTIP respectively) of up to 25% of the plaintiff's annual remuneration in each case, that is to say, the PBP was to provide for target (potential) bonuses of up to 50% of the base salary per annum.
Pursuant to item 10 of the Plan as at 8 November 2011 (see [51]) the plaintiff embarked upon a review of the business case immediately upon commencing his employment. He soon came to the view that insufficient feasibility work had been done and that the business case was not as advanced as the defendant and its shareholders had believed. He reported this to the Board at a meeting on 19 December 2011. Amongst other things, at that meeting (exhibit 1.3):
(i)He spoke in terms of the business case producing net positive value (NPV) in its own right at a conceptual level.
(ii)He spoke of 'pre‑feasibility work' being done in order to reduce a range of technical solutions to one, having clarity on approvals, commercial viability and there being 'no show stoppers'.
(iii)In respect of feasibility, he spoke in terms of optimising the 'technical solution', gaining approvals and the process being certain.
(iv)He stated that the feasibility study that had been done was anything but definitive, that the goal of delivering the first ore shipment in December 2014 was 'not achievable' and the business case would not be complete without a rail agreement between all of the port users.
(v)He systematically addressed a range of commercial and technical goals and for the most part found that they did not align with the Plan at that time.
The management of the Port Authority changed in early 2012 and it soon transpired that the defendant's negotiations with that authority were a long way from finalisation.
The defendant's Board did not establish a PBP for the plaintiff by 31 December 2011.
With effect from 1 November 2012 the defendant increased the plaintiff's base salary to $380,000 per annum.
With effect from 1 January 2014 the defendant increased the plaintiff's base salary to $388,740 per annum.
The defendant paid the plaintiff an STIP of $60,000 for the period 1 November 2011 to 31 December 2012. The board decided against a STIP in 2013 because of liquidity and economic conditions.
It is common ground that the plaintiff carried out all of his duties to the satisfaction of the defendant.
On or about 30 September 2014 the defendant gave the plaintiff written notice of the termination of his employment (effective 1 October 2014) on the grounds of redundancy. This had been expected for some time and almost all of the defendant's employees were made redundant at the same time. So, there is no dispute as to the termination of the plaintiff's employment.
Based on the evidence it would seem that the defendant suspended the Project for three basic reasons. First, the lack of a holistic railway and port plan which the plaintiff considered was essential to the feasibility of the Project. Second, because of the technical challenges posed by the proposed location of the port facilities (see Mr Campbell's evidence at ts 222). Third, iron ore market forces reduced the economic feasibility of the Project (exhibits 1.17 and 1.31).
On 6 October 2014 the defendant paid the plaintiff $290,917.25 comprising $97,195 in lieu of three months' notice, a redundancy payment of $97,195, unused annual leave of $18,556.29 and performance bonuses of $77,990.96. The lattermost comprised $72,889.96 for STIP and $5,101 for LTIP (see exhibits 1.29, 1.31, 1.32 and 1.35).
Having received the termination payment the plaintiff commenced proceedings against the defendant claiming unpaid STIP and LTIP. After some false starts those proceedings evolved into the present claim for damages for breach of contract.
The contract in detail
The express terms
Express terms of the contract were as follows.
Pursuant to cl 3(a) and cl 9.1(a), the plaintiff's employment was terminable by either party on the giving of three months' notice in writing. Pursuant to cl 9.4, the defendant was entitled to immediately terminate the employment by written notice to the plaintiff in the event of his role becoming redundant.
Pursuant to cl 3(c) and (d), and cl 14.5(a), the contract constituted the entire agreement between the parties and could only be varied, supplemented or replaced by a document in writing executed by the parties.
Clause 14.9 provided as follows:
(a)The failure of either party at any time to require performance by the other party of any provision of this Agreement does not affect the party's right to require the performance at any time.
(b)The waiver by either party of a breach of any provision must not be held to be a waiver of any succeeding breach of the provision or a waiver of the provision itself.
Thus, failure of the plaintiff to require timely performance by the defendant of any provision of the agreement (such as cl 6.5) did not effect a waiver of any breach, or of any succeeding breach, or of the provision itself.
Pursuant to cl 14.10, each party was required to promptly execute all documents and do all things to effect, perfect or complete the provisions of the contract and transactions contemplated by it, provided that the same were reasonably required by the other party.
Pursuant to cl 4.1(a), the plaintiff was required to perform the 'Duties and Responsibilities' comprising, initially, those set out in 'Annexure A', which was not exhaustive and was able to be altered by the defendant from time to time. There was actually no annexure 'A' as such, but there was an attachment entitled 'Position Description' which I infer was intended to fulfil that purpose.
The plaintiff's remuneration package and benefits were set out in cl 6.
Pursuant to cl 6.1, read with cl 6.3 and item 4 of the Schedule, the plaintiff was entitled to a base salary on commencement of $350,000 inclusive of statutory superannuation.
Pursuant to cl 6.5, the plaintiff was also 'entitled to participate in' the PBP. The 'scope' of the PBP was to 'be established in conjunction with the development of the revised business case referred to in Specific Accountabilities … (and in any case no later than 31 December 2011)'. The 'Specific Accountabilities' were included in the Position Description (see [50] – [51]).
The PBP was not defined, but it was referred to in item 5 of the Schedule as follows (all emphasis in quotations was in the original unless stated otherwise):
5.
Performance Bonus Plan
Short Term Incentive (Paid Annually)
Target Level – 25% of Role Salary (pro‑rata where applicable) subject to meeting annual KPI's set by the Board.
Long Term Incentive (See details)
Target Level – 25% of Role Salary (pro‑rata where applicable)
There were in fact no 'details' of the 'Long Term Incentive' in the Schedule or anywhere else in the contract.
In my opinion the contractual intention was that the 'details' be included in the PBP (see [69]). Incidentally, this points to an intention for the PBP to be established in a timely way.
Pursuant to cl 6.8, the defendant was obliged to review the plaintiff's performance and his base salary on an annual basis, with the first review in December 2012. Changes to his base salary would be effective from 1 January in the following year. Mr Carter for the plaintiff submitted that the contract contemplated that this review would include the assessment of the plaintiff's entitlements under the PBP. There is much to be said for that submission, at least in relation to STIPs which were payable having regard to annual KPIs set by the Board.
Clause 9.4 dealt with the plaintiff's redundancy entitlements. Amongst other things, it provided that 'any entitlements' under the PBP 'will be paid in at the prescribed level where applicable'.
I return now to the Position Description. It was divided into three lengthy and detailed sections entitled 'Organisation Environment', 'Primary Objective of Role' and 'Specific Accountabilities'.
The defendant's goals were stated under the heading 'Organisation Environment' and included (amongst other things):
To secure and develop timely and cost effective infrastructure solutions for the Shareholders' projects in the Pilbara region with the primary focus of securing the development of port facilities in the Port Hedland South West Creek, which includes the [defendant's] Port Hedland South West Creek port infrastructure and related stockyard ('Port Facilities').
The primary objective of the plaintiff's role was said to be responsibility 'for providing leadership and operational responsibility of [the defendant] in relation to the study, financing (if required, or in any case support to financing efforts) and development of the Port Facilities by working with the Board and the … management team to establish, implement and oversee the short and long range goals, strategies, plans and policies of the [the defendant] as directed by the Shareholders' (emphasis added).
I pause to comment that there is much to be said for the notion that the phrase 'short and long range goals' correlate to some extent to the KPIs for STIPs and the criteria for LTIPs.
The 'Specific Accountabilities' ran to almost three pages under the headings of 'Leadership', 'Communication (Internal and External)' and 'Operational Responsibilities'.
It is helpful to set out the Operational Responsibilities in full:
Operational Responsibilities (based on a dynamic plan which once signed off by the Shareholders becomes 'The Plan' for [the defendant].
•Progression of port development proposals as directed by Shareholders;
•Advancing and securing all required approvals and supporting infrastructure to facilitate the timely development of the port facilities, stock yards and connecting rail;
•Maintaining project schedules, risk reviews, and all appropriate oversight (project controls) to progress the project and keep shareholders abreast of challenges and opportunities to advance the project to the target timeframe;
•At Shareholder request, consider the inclusion of a rail solution within [the defendant's] study program, or cooperation in this respect with shareholders and third party infrastructure providers (as agreed by Shareholders);
•Responsible for aligning the project progress, including working with financial institutions, to achieve [the defendant's] objectives and shareholders strategic delivery.
The Plan (as at 08 Nov 11)
1.Wk 1 – Ending 4th Nov: Initiate a review of the NWI team (Complete);
2.Wk 2 - Ending 11th Nov: Finalise Role Accountabilities, Propose New NWI Structure;
3.Wk 3 - Ending 18th Nov: Commence Transition Plan;
4.Ensure the controls around the dedication of scarce resources are appropriate to efficiently and effectively secure the objectives of NWI;
5.Focus resources on securing alternatives to deliver key utilities for the port facility, including water, accommodation and power, for consideration in development studies;
6.With Shareholders identify a process to secure removal of the 'outer harbour provision' from the NWI port allocation conferral and execute process to secure the removal to facilitate the granting of the lease;
7.Secure the execution of the Shareholder approved form of the Conditions Precedent Deed and attached final agreed form of the port lease (target submission for Government approval and execution process by cob December 2011);
8.Develop a process and seek to secure land vesting in the [Port Authority] to facilitate the granting of the lease to NWI;
9.Consider alternatives and develop preferred solution for dredging spoils deposition from future dredging and develop process to secure tenure required;
10.Facilitating the development of the Shareholders' revised business case for NWIOA over the 6 weeks immediately following appointment, setting out key criteria for the sensible and optimal economic phasing of the Port Facilities;
11.Refocusing of the project development and study on the basis of the revised business case, in order to deliver an updated study to the required standards, as soon as practically achievable, targeting Q1 2012;
12.Conducting value engineering during the refocusing period to ensure an appropriate and optimised basis of design and capital intensity for the funding Shareholders, with the intention of minimising capital expenditure, whilst delivering a competitive and sustainable operating cost solution;
13.Develop for Board approval a budget for overhead costs for the period 1 Jan to 30 June 2012, and a listing and explanation of target resources required to achieve the new base case through to 30 June 2012.
I pause to comment that the Plan as set out above did not include any obviously long term goals as set out elsewhere in the contract (such as securing infrastructure solutions and securing the development of the port) and, instead, seems to be limited in scope to a period up to mid‑2012.
Construction of the contract - Relevant legal principles
The role of the court in construing a written contract is to identify the common intention of the parties as expressed in the written words. The ordinary rule of construction is that the intention is to be ascertained objectively from the point of view of what a reasonable business person in the circumstances would have understood the words to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. Ordinarily, this process is possible by reference to the contract alone, but the court is not obliged to construe it in a vacuum without any regard to surrounding circumstances known to the parties. (Hancock Prospecting v Wright Prospecting Pty Ltd (2012) 45 WAR 29 [75] McLure P; Electricity Generation Corporation v Woodside Energy Ltd (2004) 251 CLR 640 [35] French CJ, Crennan and Kiefel JJ).
As it happens, I am satisfied that the plaintiff's contract is susceptible to construction having regard to its own terms. Notwithstanding some infelicities of style in places (see [37], [42]), the document clearly articulates the objectives of the defendant, its shareholders and the contract itself and contains extensive provisions for that purpose.
The conduct of the parties subsequent to the formation of a contract cannot be used to construe its terms. (L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235). However, such conduct is relevant to the issues of breach, waiver, variation, election and estoppel, and the assessment of damages for loss of bargain.
Submissions and construction of the Plaintiff's contract
At face value, cl 6.5 of the contract (read with the Schedule) required the scope of a PBP to be established by no later than 31 December 2011. In my opinion the phrase 'in any case not later than' connotes a finite timeframe. The defendant did not agree and it is therefore convenient to commence by setting out its submissions.
Mr De Kerloy submitted that a performance‑based bonus plan is by its very nature discretionary and aspirational and must involve an employer reserving to itself two types of discretion. First, to determine whether any bonuses can be, or should be, paid at all. Second, to judge an employee's performance.
At the risk of oversimplification, he then submitted that the plaintiff's PBP was intended to be of that kind, that is, entirely subject to the exercise of discretionary powers vested in the defendant's Board. It followed that cl 6.5 vested a discretionary power in the Board to even establish a PBP and it could do so (if it was so minded) from time to time. As such, the provision for the establishment of a PBP by 31 December 2011 was not binding on the defendant.
The difficulty with that submission is that there is no reason in principle or practice, or in the plaintiff's contract, as to why a performance‑based incentive plan must be discretionary. Performance can be measured by reference to objective criteria or KPIs which can give rise (if satisfied) to liquidated entitlements. After all, that is the essence of commission‑agency.
Mr De Kerloy submitted that the defendant's submission is supported by the phrase in cl 6.5(a): 'will be established in conjunction with the development of the revised business case'. Given that the revised business case would be an integral part of the 'dynamic Plan', it too would necessarily be dynamic at all material times and, a fortiori, so would the PBP.
Mr De Kerloy did not submit that the plaintiff could thus be left with no entitlement to any STIP or LTIP at the sole discretion of the defendant. He submitted that the contract intended that the plaintiff would be entitled to participate in a PBP based on an annual performance review which, amongst other things, involved the defendant setting him 'a reasonable LTIP target which aligns shareholder's and company expectations with a target as well as KPIs for STIP purposes'.
Mr Carter submitted that the contract expressly assumed (item 10 of the Plan as at 8 November 2011) that it would be possible for the plaintiff to facilitate the development of the revised business case (including 'key criteria for the … economic phasing of the Port Facilities') over the six weeks following his appointment and that it was therefore intended that the defendant would be in a position to establish STIP and LTIP criteria tailored to the business case.
He submitted that the defendant's submission wrongly treated an assumption which formed part of the contractual matrix (that the business case could be revised within six weeks) as a condition precedent to the performance of cl 6.5. In his submission the construction of cl 6.5 is to be informed by item 10 of the Plan as at 8 November 2011, but not conditional on its performance.
In my opinion there is force in Mr Carter's submissions and the plaintiff's construction should be accepted.
I commence by examining the phrase 'in conjunction with' in cl 6.5. Having regard to the Shorter Oxford English Dictionary (SOED), I construe it to mean 'joined together, united or combined'. Thus, the process of establishing the scope of the PBP was to be combined with the development of the revised business case. That is to say, the establishment of the scope of the performance criteria for STIPs (KPIs) and for LTIPs would be informed by the evolving business case and, in particular as to LTIPs, the 'key criteria'.
According to the SOED, the word 'scope' has numerous subtly different (but potentially overlapping) meanings, including 'target' (which connotes something fixed and inelastic) and 'extent of view, outlook or survey' (which connotes something that is potentially elastic). Having regard to the express terms of the contract as a whole in my opinion both meanings apply in this instance. Thus 'scope' connotes that the PBP would identify both specific objective targets or milestones as well as more abstract and elastic criteria.
Based on the SOED, I construe the word 'establish' to mean 'to fix or settle permanently', that is to say, the contract contemplated that the scope of the PBP would have a degree of fixity or permanence in its terms.
Mr Carter submitted that the contract required the defendant 'to establish STIP and LTIP criteria under the PBP … tailored to the prevailing circumstances in December 2011 in order to give the plaintiff the benefit of the PBP by no later 31 December 2011'.
I accept that submission. It is consistent with the fact that the PBP was undoubtedly intended to be an important component of the plaintiff's remuneration (it contemplated a salary uplift of as much as 50% of his base salary per annum). It is to be inferred from the contract that the 'details' in cl 5 of the Schedule (ie, the establishment of the scope of the PBP for LTIPs) was only deferred to 31 December 2011 so that it could be informed by the 'key criteria' in the revised business case which, it was envisaged, would be identified in a matter of weeks. The fact that subsequent events negatived that assumption is irrelevant to the construction point.
In my opinion 'the short term' envisaged a period of about 12 months maximum given the provision for setting annual KPIs for STIPs. That construction is supported by the three categories of responsibility in the Position Description. The first two involved routine day‑to-day (short term) executive responsibilities. The third (which involved work in relation to the Plan as at 8 November 2011) related to objective and tangible events, which as I have commented, contemplated steps which it was expected would be attended to by mid‑2012.
In my opinion the phrase 'long term' is to be construed by reference to the ultimate goals of the Project of the kind referred to at [47] above, (none of which were included in the Plan as at 8 November 2011) and the 'key criteria' in the revised business case.
There is nothing in the contract to support a construction whereby the scope of the LTIP criteria had to be limited to goals which were attained during the term of the plaintiff's employment. Put shortly, in my opinion the 'long term' was not necessarily co‑terminous with the period of employment.
Mr De Kerloy's submission was not totally misconceived. On the contrary, I accept that the contract intended that the plaintiff's entitlements would be partly subject to discretionary or unilateral decisions of the defendant, especially as to STIP where the defendant decided the annual KPIs, and to the extent that the assessment of KPI performances would or could call for a qualitative or subjective judgment.
But, that discretion was not totally unfettered or open‑ended. The Position Description includes a mixture of objective tangibles and qualitative guidelines and responsibilities. Both had to be taken into account in the formulation of the annual scope of the PBP and the annual KPIs.
Drawing all of these considerations together, I am satisfied that on its true construction cl 6.5 obliged the defendant to establish the scope of a PBP by 31 December 2011 and (if required by the plaintiff pursuant to cl 14.10) to put the same in writing. It was necessary for the PBP to include annual KPIs and criteria for LTIPs.
Mr Carter went further and submitted that the contract required that if at any time during the course of the plaintiff's employment an event arose which rendered an STIP or LTIP criterion redundant, or not 'fit for purpose' in any material respect, then the defendant was required to 'set alternative reasonable performance criteria, or modify existing criteria'. He submitted that the scope of any PBP thus established and revised by the defendant would have included criteria which he could (and in fact did) meet throughout his employment and would thus have become entitled to the full 25% STIP and LTIP per annum.
That construction was relied upon to justify the claim for $404,453 in damages.
The defendant strongly resisted that construction and, for reasons set out above, I concur. In my opinion, the contract intended that criteria would be set prospectively and with a degree of permanence (especially the LTIP criteria) and in the event of an annual KPI for an STIP or criterion for LTIP becoming redundant (unattainable) then it was simply not achieved or achievable and not available for consideration in determining STIPs or LTIPs. That is one of the reasons that cl 6.5 contemplated the annual review and annual setting of STIP KPIs.
Mr De Kerloy summarised the plaintiff's argument as follows:
In essence the plaintiff's claim is premised on he being entitled to a further 50 percent of his annual salary each year, or, putting it in another way, this claim is premised on the basis that the defendant was contractually entitled to establish a PBP which guaranteed that outcome.
There is no basis for that construction in the contract. To the contrary, it runs counter to the fundamental concept of an incentive (or target) based performance plan with an element of fixity or permanency in its terms, as the PBP was intended to be.
I can understand why it might be thought to be commercially prudent for the long term goals of the defendant (and hence criteria for LTIP) to be modified if they became redundant, but that could only occur by negotiation (which is what the plaintiff endeavoured to do: see below). The inference from the contract is that the parties had the long term goals of the Project in mind when the contract was entered into, and in my opinion, the intention was that these would be permanently reflected in the LTIP criteria from 31 December 2011.
Alleged implied term of the Plaintiff's contract
The plaintiff contends that there was an implied term of the contract to the effect that the defendant would assess his performance against the PBP for the purpose of determining his entitlement for STIPs and LTIPs. This is denied by the defendant.
For a term to be implied the following conditions (which may overlap) must be satisfied:
(i)it must be reasonable and equitable;
(ii)it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(iii)it must be so obvious that it 'goes without saying';
(iv)it must be capable of clear expression;
(v)it must not contradict any express term of the contract.
(BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337).
In my opinion the implication of the proposed implied term should be rejected since, in short, it is not necessary to give business efficacy to the contract. The contract is comprehensive and (by cl 6.8 and cl 9.) provided an express mechanism for the determination of the plaintiff's remuneration and the annual review of his KPIs.
Performance and breach of contract: 1 January 2012 to 6 October 2014
At a meeting on 3 October 2012 the defendant's Board resolved, in effect, that STIPs would be paid 'at target level'. It was resolved that the plaintiff would 'conduct a benchmarking exercise and work with the shareholders to provide a recommendation covering salary, benefits, STIP and LTIP (where applicable)'.
On 10 December 2012 the plaintiff wrote to Ms Linda Devereux of Atlas Iron as follows:
I need to complete a self-assessment and make a recommendation about my own performance and bonus.
When we speak tomorrow I'd appreciate your thoughts on my LTIP. My contract is 'free of detail' other than the target level is 25% of base. As NWI does not have mechanism for equity via options or shares, this would lead me to conclude the payment is cash. However, to differentiate LTIP from STIP it would not usually be paid annually (exhibit 1.15).
When he did the performance appraisal (self-assessment) the plaintiff dealt with the PBP at length (exhibit 1.16). In relation to LTIPs he said (emphasis added):
When considered in the NWI context, an LTIP structured around Project Execution could have milestone targets. At present, with the work still in the Study Stages it may be more appropriate to modify the LTIP to better reflect what it rewards in the fact that NWI cannot offer shares/options to employees.
… [T]he recommendation is as follows;
•The LTIP is renamed to Retention Payment.
•Once the Award level is agreed, 50% is payable at the same time as the STIP and 50% is carried forward until the following year (indexed for CPI only).
•In the event of resignation, the unpaid amount is forfeited.
•When the NWI Project is approved, the scheme will be redesigned along Project Lines etc.
He went on to make proposals which, if accepted by the defendant, would have aligned the STIP and LTIP criteria with the case that he advanced in these proceedings. The defendant rejected the proposal.
The defendant ultimately resolved (exhibit 1.18) that the plaintiff's STIP from 31 December 2012 would be based on his 'self-assessment of performance against his Job Description' given that 'no formal KPIs had been put in place by the NWI Board at December 2011'. It resolved to pay an advance of $60,000 and did so.
The defendant also resolved to defer 'consideration of the long term incentive program … until the New Year'.
So, as at December 2012 the scope of a PBP had not been established (because there were no KPIs for STIP and no criteria for LTIP), but consideration of LTIP criteria was to occur in early 2013.
On 1 February 2013 the plaintiff wrote to Mr Campbell proposing that:
(i)STIP for the period 1 November 2011 to 31 December 2012 be paid at 100% of target level less the $60,000 already paid.
(ii)An LTIP be awarded at 100% of target level pro‑rated for 14 months, with the timing of the payment to be agreed.
The plaintiff and Mr Campbell then entered into oral and written discussions with a view to settling the matter.
I am satisfied based on their evidence that in‑principle agreement was reached in relation to STIP and LTIP. As to LTIP, it was to the effect that the 'successful attainment of a Final Investment Decision' (FID) in relation to the port facility would be the sole criterion, but the defendant wanted clarification of the meaning of the terminology. The evidence was as follows.
Mr Campbell testified that the defendant's Board resolved at a meeting on 11 February 2013 to adopt an LTIP criterion of 75% of base salary (at the relevant time) to be paid on successful achievement of FID. He informed the plaintiff at a meeting on 13 February 2013. The plaintiff was in agreement, although he indicated that he 'would like to work with the board to refine the definition of 'FID'.
The plaintiff's evidence was broadly consistent. That is, there was an in‑principle agreement that the achievement of successful FID would be the LTIP criterion, but the plaintiff declined to bind himself until the meaning of 'successful FID' had been fleshed out to the parties' mutual satisfaction. So, in contractual terms there was no consensus.
On 13 February 2013 Mr Campbell wrote an email to Mr Wilson (copied to the plaintiff: exhibit 1.23) as follows:
I've held a meeting with Mike to pass on to him the outcomes of the [Remuneration] Committee deliberations. I have told him that the 'polished' letter follows shortly. Mike is broadly happy with the outcomes, however would like to make a couple of clarifications that he will formalise in an email.
In relation to the 2012 STIP, Mike has accepted the 75% award of target, [75% x25% x380,000 = $71,250] but will provide an accurate calculation of what that converts to in terms of the payment, over and above the interim payment that was made on Christmas Eve [$60,000].
In relation to the LTIP, Mike would like to work with us to refine the definition of 'Final Investment Decision'.
Shortly afterwards (on the same day) the plaintiff made a file note in similar terms.
On 21 February 2013 Mr Campbell wrote to the plaintiff (exhibit 1.24) stating that:
(i)The defendant had decided not to increase the STIP for 2011 ‑ 2012 beyond $60,000. (My emphasis is intended to draw attention to the apparent retreat from 13 February when the $60,000 payment was regarded as an 'interim' payment towards $71,250).
(ii)The defendant's Remuneration Committee would like to confer to agree on 'an appropriate set of STIP targets for 2013'.
(iii)The Remuneration Committee considered that 'an LTIP of 75% of base salary … on successful completion of the FID' was appropriate and that any 'upside increases to the LTIP percentage will be at the complete discretion of the Remuneration Committee'.
There is no evidence that the plaintiff accepted this proposal and nothing further of relevance occurred in relation to the establishment of a PBP.
The defendant admits that it never established a PBP for the plaintiff and says that it could not do so because of the inability of the parties to develop or complete a business case. However, it does not plead that cl 6.5 was frustrated.
The defendant contends that it did not breach the contract because it fairly assessed STIPs using Atlas Iron's Executive Remuneration Package Guidelines.
The task of identifying and setting STIP KPIs changed somewhat between 16 November and 31 December 2011, and even more so subsequently as the problems for the Project mounted. But short term goals and responsibilities (KPIs) still remained and could be identified at any time. Some of them were set out in the contract and the plaintiff's December 2011 board presentation and, indeed, in subsequent board presentations.
As for LTIPs, the defendant's long term goals for the Project never changed and certainly not prior to 31 December 2011. In my opinion such (or similar) could have been used to establish LTIP criteria on 31 December 2011 or at any time subsequently.
Mr Campbell accepted that a PBP could have been established by 31 December 2011 and in evidence Mr Wilson and Mr Humphrey accepted that the setting of annual KPIs would not have been impossible. They did not accept that it would have been possible to set LTIP criteria because of uncertainty about the business case.
Based on the evidence, I do not accept that it was impossible for the defendant to establish the scope of a PBP addressing both STIP and LTIP on 31 December 2011 or at any subsequent time.
It follows that the defendant was in breach of contract at all material times after 31 December 2011 unless or until the breach was remedied or forgone by a contractually compliant waiver (or election) or compounded by a contractual variation.
I am not satisfied that the plaintiff ever waived or compounded his fundamental right to have a PBP established. The matters referred to above did not amount to a waiver and no agreement was reached. Both parties regarded cl 6.5 as remaining on foot.
Mr Carter contended that the timeframe for establishing the PBP (ie, no later than 31 December 2011) was of the essence of cl 6.5 and the defendant's breach could not be remedied thereafter.
There are a number of reasons why that construction should be rejected.
The scope of the PBP was to be established in conjunction with the work of both parties on the revised business case. So, although the establishment of the PBP was a unilateral obligation of the defendant, it was also to some extent a bilateral process.
Also, whilst the parties envisaged that the revision of the business case would occupy six weeks, that was not absolute because it was part of the 'dynamic Plan'.
Also, the contract contemplated that the STIP KPIs would be renewed annually.
It follows that the establishment of the scope of the PBP would evolve and, as at 31 December, needed to be informed by the status of the revised business case as at that date. Conceivably it could still be a work in progress and for some time afterwards.
There is nothing in the wording of the contract to suggest that 31 December 2011 was so critical that non‑compliance could not be made good the following day or much later.
The construction contended for by the plaintiff predicates an unworkable situation whereby the parties intended that there would no longer be any role for an incentive based remuneration package (even as to STIPs) if the PBP process was not established by 31 December and, if he did not terminate his employment, the plaintiff would be limited to an entitlement to unliquidated damages in addition to his base salary.
In my opinion the defendant was entitled to remedy its breach of cl 6.5 at any time unless and until the contract was terminated for any reason.
I am satisfied that the breach was remedied in respect of LTIPs by 13 or 21 February 2013 when the defendant nominated the successful achievement of FID as the sole criterion (see [99]).
Mr Carter submitted otherwise. He argued that the defendant had merely made a unilateral and non-binding attempt to vary the contract. I do not accept that submission because the defendant actually had a unilateral power to determine the scope of the LTIP component of the PBP, albeit, possibly, after conferring with the plaintiff (which it did).
I recognize that the term 'final investment decision' might be considered broad, but I am not satisfied that LTIP criteria had to be expressed in terms of an inelastic or concrete objective event such as 'loading the first ship'. In my opinion 'successful achievement of FID' was not so broad as to be uncertain and thus vitiate the determination. The contract itself and many of the extra-contractual documents that were received in evidence contain a deal of similarly generalist terminology of this kind which the parties evidently understood and/or regarded as workable. For example, the plaintiff evidently understood the term 'when the NWI Project is approved' (see [87]) and in evidence he defined 'FID' as follows (ts 114):
It means the organisation believes they have an MPV [sic: NPV] positive business case that will be able to be funded and then move into the construction phase.
That is reasonably clear and not much different to 'when the Project is approved', if it is different at all.
The plaintiff felt that the defendant's representatives may have had a different understanding, which is possible. However, in the overall scheme of things it matters not. Both parties were clearly using the term 'FID' in its commercial or technical sense and a court called upon to declare and give effect to the plaintiff's entitlements under the PBP would apply the same if it ever became necessary to do so.
I am also satisfied that 'the successful achievement of FID' was a reasonable and appropriate LTIP criterion within the contractual framework. It connoted an event which could be regarded or adopted as a key long term criterion in the revised business case and thus a long term goal. It would probably be the first of many other long term goals which were contemplated, such as the commencement of construction or the shipping of iron ore. Given that the LTIP would be 75% of base salary (ie, the full three year target amount), the criterion could never be criticized as unreasonable.
Mr Carter submitted that the parties did not intend that LTIP would be an 'all or nothing' bonus, given that item 5 of the Schedule referred to LTIP as being a target of 25% of annual remuneration. In my opinion this submission is correct up to a point having regard to the use of the word 'target' and the notion of a milestone‑based yet potentially discretionary incentive plan. However, in substance the contract intended that the PBP would be whatever the defendant decided consistently with the contract. There is nothing in the contract to prohibit the scope of the LTIP criteria being confined to a single event as opposed to multiple events (especially if that event was the first, or one of the first, long term goals). That is probably why the defendant set the LTIP rate at 75% of base salary (ie, 3 x 25% for 3 years' work).
The defendant was still in breach when the contract ended in relation to STIPs. It matters not that the plaintiff abetted that breach to some extent. Under the circumstances, he had little choice and he never went so far as to agree with the defendant's actions or decisions. Certainly, the contract itself was not varied.
This brings me to the plaintiff's redundancy package and whether he waived the benefit and breach as to STIP and LTIP at that point.
The plaintiff was apprised of his imminent redundancy no later than 23 September 2014. In an email of that date (exhibit 1.28) he set out redundancy proposals for himself and other senior staff. For himself, he claimed approximately $358,000 including STIP and LTIP at 25% of his 2014 salary pro‑rated to allow for his early departure ($72,889 in each case).
The defendant's board rejected the plaintiff's claim in relation to LTIP, but with no confidence that he would accept their proposal (see emails comprised in exhibit 1.30). Atlas Iron's managing director, Mr Ken Brinsden, wrote to Mr Campbell on 2 October 2014 as follows:
I would simply pay our view of the redundancy amount and then it is up to Mike to challenge that outcome.
And challenge the outcome he did. It is difficult to see how his actions could be construed as a waiver. The establishment of any further STIP or LTIP criteria became otiose upon the termination of his employment. The plaintiff was left to claim any LTIP that he felt had accrued and damages in respect of the remaining breach of cl 6.5. It was possible for these to be compounded by negotiated settlement. But that never occurred. At its highest, the plaintiff's offer of $72,889 for each of LTIP and STIP serves as an evidentiary admission as to his loss (see [150](iv)).
Mr De Kerloy conceded that estoppel is not applicable (it was pleaded) because the defendant cannot point to any detriment having accrued to it by reason of the plaintiff's conduct. (See Waltons Stores (Interstate) Ltd vMaher (1988) 164 CLR 387).
So, in summary:
(i)At all material times during the plaintiff's employment cl 6.5 remained on foot and only partly performed by the defendant (as to LTIP).
(ii)The plaintiff did not waive his right to performance of cl 6.5.
(iii)Upon the termination of the contract the plaintiff's rights consisted of an entitlement to any accrued LTIP and unliquidated damages for breach of cl 6.5 in respect of STIP, neither of which he waived, abandoned or compounded.
(iv)The payment of $290,917.25 included part payment of the plaintiff's damages.
Damages
The plaintiff claims damages representing the value of a lost opportunity.
The assessment of damages is discretionary and is not a precise science. It is common for the courts to do so even if it is a difficult process. Sometimes expert evidence is required.
Principles relevant to this type of case are helpfully set out in Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 ([2], [5] ‑ [6], [9], [11], Allsop P; [46] – [52] Hammerschlag J). The court is required to perform an evidence‑based assessment of probabilities and possibilities (eschewing speculation). The court may take into account events which actually occurred as circumstantial evidence about things that should and/or would have occurred if the plaintiff's contract had been performed.
I have been hindered by the parties' complete failure to provide me with detailed submissions and, in the plaintiff's case, from the lack of evidence about the status of the Project as at September 2014. But this does not mean that damages cannot be assessed. The court is required to do the best that it can.
The plaintiff's submission is based on the contention (see [76]) that the scope of a PBP established conformably with the contract would have involved LTIP criteria, and annual KPIs for STIP, which correspond with what he actually achieved whilst the contract was on foot. There is some force in that contention in relation to STIPs, but it is flawed in relation to LTIPs both contractually (see [80]) and factually (see [150](ii)).
Taken to its logical conclusion, the plaintiff's submission predicates that the mothballing of the Project would have been one of the long term goals of the Project at all material times. I have no doubt that such would not have been an LTIP criterion. It could have become an STIP KPI for 2014 or subsequently, which may very well explain why the defendant paid STIP for 2014 at the full target rate (25%).
In summary, an ipse dixit argument which seeks to retrospectively align events which would have been stipulated as criteria with events as they occurred is simplistic and entirely self‑serving and would never have found expression in the PBP.
It is necessary to identify and characterise what in substance was promised and what has been lost or denied by the breach of contract (Silverbrook [2] Allsop P; emphasis added). It is convenient to commence by examining STIPs and LTIPs as separate heads of damage and then revert to a final global assessment.
As a starting point, it must be recognised that the scope of a PBP established on or about 31 December 2011, or later, would have to be informed by the revised business case. It is clear on the evidence that the defendant's sanguine goals (and expectations) as at 16 November had been somewhat deflated by 31 December and things did not improve.
As I have said, in my opinion all of the steps set out in items 1 ‑ 13 of the Plan as at 8 November were short term goals of a kind which would very probably have been included in the STIP KPIs on 31 December 2011 (had one been established) together with any additional short term steps identified by the plaintiff in his review of the business case, plus the routine responsibilities set out in the Position Description.
Having regard to the defendant's post‑contractual approach to STIPs, I am satisfied the plaintiff would have easily fulfilled most of the STIP KPI's in 2012 and been paid an STIP accordingly. This is evidenced by the fact that he was paid $60,000 STIP for his first 14 months when (on the evidence) very little seems to have been actually achieved in terms of the ultimate success of the Project or, indeed, the Plan as at 8 November 2011.
Indeed, on the evidence, very few (if any) of the items in the Plan as at 8 November 2011 were ever achieved. In my opinion the defendant should be taken at its own valuation (see [99](i)) and damages assessed for 2011 – 2012 at $71,250 less $60,000 ($11,250).
The strong probability is that all of the mundane KPIs (as revised in December 2012) would have been and/or were met in 2013. That year was only treated differently from 2011 – 2012 because of irrelevant fiscal considerations. Damages should be assessed accordingly.
If a PBP had been established in a timely way the defendant would have been unable to take the stance that it did as regards 2013. There would have been negative and positive contingencies, but given the uncontested fact that the plaintiff performed all his duties satisfactorily, a figure of $70,000 would be appropriate.
The 2014 STIP payment represented 25% of the plaintiff's base salary pro‑rated for the period of employment and he suffered no loss.
So far as LTIP is concerned, the breach was remedied by 21 February 2013 and the sole criterion was not achieved. The issue is whether the plaintiff suffered any loss by reason of the breach between 31 December 2011 and 21 February 2013. Subject to what I say at [152] and following, I find in the negative. On the evidence, nothing was achieved during that period that could or would have satisfied an LTIP criterion.
I am of the same opinion even if I am in error about the events of February 2013 and must assess damages on the basis that the defendant's breach of contract regarding LTIP was never remedied.
But, that is not the end of the matter. As I have said, whilst the defendant would have established a scope for LTIP criteria on 31 December 2011 that represented the same long term goals as existed upon the formation of the contract (and expressed in it), namely securing the development of port facilities, it could have added others which came up during the revision of the business case.
For instance, the achievement of positive net present value (NPV) (see [20](i)) based on intangible assets of the defendant such as technical knowledge, approvals, heads of agreement and so on could be a long term goal that could arise independently of successful achievement of FID (and prior to it). It might even be achieved (and crystallize an LTIP) even if the Project itself was mothballed.
Overall, in my opinion the most important considerations are:
(i)LTIP criteria adopted conformably to the contract on 31 December 2011 and subsequently would have been informed by the dynamic and increasingly pessimistic prospects of the existing goals being achieved, but would not have significantly departed from them. Rather, additional LTIP criteria might have been adopted, such as achieving a positive NPV which I would interpret as being an easier goal than successfully achieving FID.
(ii)On the evidence, nothing which might correspond to a long term objective of the defendant has been achieved, including a positive NPV. There is no evidence that a successful FID was or is imminent. On the contrary, the company reached a point where it was placed on a 'care and record' basis and all but one employee was made redundant.
(iii)The failure of the defendant to establish LTIP criteria has deprived the plaintiff of a right to profit from any future success that the defendant may have with the Project (even if only by selling it 'as is' and realising the NPV, if any), but this head of damage must be valued in accordance with the events that have transpired. There is no evidence that the present stasis is not permanent. At best, the bare possibility cannot be ruled out that circumstances might change in the future and long term goals be attained which could be said to be the fruits of the plaintiff's employment.
(iv)As to the parties' positions, at the upper end of the range there is much to be said for taking the plaintiff at his own valuation, namely $72,889 (see exhibits 1.28 and 1.29). The defendant's provision of $5,101 is difficult to assess. No specific evidence was given as to its significance, but it may be inferred that it was a nominal amount intended to provide some contractual consideration for compounding an entitlement which the defendant regarded as highly contingent on events which had not occurred and would not occur.
In summary, I find that if a PBP had been established conformably with the contract on or subsequent to 31 December 2011 then the value of the plaintiff's LTIP entitlements (including contingent entitlements) when the contract was terminated would have been negligible. Subject to what I have said below, I am not satisfied that the plaintiff has proven any damages in respect of LTIP.
I turn now to take a global view. In my opinion, some provision should be made to recognize the commercial value to the plaintiff of having the scope of a PBP established under the contract in a timely way, as opposed to the ad hoc situation which evolved. In my assessment that left the plaintiff in a state of uncertainty and commercially weakened.
I shall elaborate. It seems to me that the plaintiff's 'market value' would have been enhanced by having a defined (and potentially generous) PBP established for him in a timely way when the future for the Project appeared to be rosy. It must be remembered that his employment was marketable (transferable) because he could resign and move elsewhere on giving three months' notice. Another putative employer could have been asked to better the plaintiff's terms under the contract.
Further, or in any event, although the contract contemplated that LTIPs would be paid in cash, there is evidence that payment might have been made in shares. In other words, the plaintiff would be working for equity in the business, albeit in a way that may not crystallize for some time (if at all). This method was not taken up, but it shows that LTIP was not necessarily a wage but a commodity, just like the plaintiff's services.
Therefore, in my view compliance with cl 6.5 of the contract had a commercial value in its own right and some recognition should be made for its denial, albeit informed by the fact that as time passed the value of the PBP would have fallen. In my assessment the defendant's payment of $5,101 fell outside the appropriate range for the lost commercial value for LTIP.
In my view, taking a global view, it remains reasonable to assess separate round figures for the unpaid values of the breaches regarding STIP and LTIP ie, $81,250 and $30,000 (less $5,101) respectively, and aggregate them.
This results in an assessment of damages in the sum of $106,149.
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