Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 2]
[2016] WASC 340
•19 OCTOBER 2016
MORGAN STANLEY WEALTH MANAGEMENT AUSTRALIA PTY LTD -v- DETATA [No 2] [2016] WASC 340
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WASC 340 | |
| Case No: | CIV:2461/2013 | ON THE PAPERS | |
| Coram: | BANKS-SMITH J | 19/10/16 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Application allowed in part | ||
| B | |||
| PDF Version |
| Parties: | MORGAN STANLEY WEALTH MANAGEMENT AUSTRALIA PTY LTD LOUIS DETATA |
Catchwords: | Practice and procedure Amendment to pleading where trial part heard Discretionary considerations Turns on own facts |
Legislation: | Nil |
Case References: | Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296 Idameneo (No 123) Pty Ltd v Auzcare Pty Ltd [2015] NSWSC 1318 Morgan Stanley Wealth Management Australia Pty Ltd v Detata [2014] WASC 397 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
LOUIS DETATA
Defendant
Catchwords:
Practice and procedure - Amendment to pleading where trial part heard - Discretionary considerations - Turns on own facts
Legislation:
Nil
Result:
Application allowed in part
Category: B
Representation:
Counsel:
Plaintiff : No appearance
Defendant : No appearance
Solicitors:
Plaintiff : King & Wood Mallesons
Defendant : Chalmers Legal Studio
Case(s) referred to in judgment(s):
Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296
Idameneo (No 123) Pty Ltd v Auzcare Pty Ltd [2015] NSWSC 1318
Morgan Stanley Wealth Management Australia Pty Ltd v Detata [2014] WASC 397
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28
1 BANKS-SMITH J: The defendant seeks leave to amend its defence. For the reasons that follow, I allow that application in part only.
The pleadings and issues
2 The pleadings and issues in this matter were summarised by Beech J in his reasons refusing the defendant's application for discovery of categories.1 I adopt Beech J's summary:
It is common ground between the parties that the plaintiff (Morgan Stanley) employed the defendant (Mr Detata) from October 2010 until 12 February 2013 under a contract of employment made in August 2010.
Morgan Stanley sues for an amount of about $1.1 million said to be due to it from Mr Detata under the contract of employment and under a deed entered into between the parties around the time of the termination of Mr Detata's employment. By way of broad summary, there were terms of the contract of employment that:
(a) Morgan Stanley would pay Mr Detata two sums, referred to as a gross retention payment and a long term incentive award;
(b) if at any time in the first five years from the date of payment of those sums Mr Detata terminated his employment for any reason then he would be required to immediately repay those sums in accordance with a sliding scale;
(c) if the termination was within the first year of employment, 100% would be repaid, if within the second year, 80%, and so on, so that if termination was in the fifth year, 20% of those sums would be repaid.
Mr Detata pleads that from about September 2012 Morgan Stanley acted in breach of the contract in various respects, including:
(a) by instructing him not to trade for a client who had, unknown to Mr Detata, engaged in what is referred to as Wash Trades;
(b) by instructing Mr Detata not to engage in trading referred to as Forward Settling.
That conduct on the part of Morgan Stanley is said to have breached implied terms in the contract of employment. Mr Detata pleads implied terms that:
(a) he was to trade in listed shares using Forward Settling as the means by which clients were to pay for share acquisitions;
(b) existing clients of Mr Detata would, upon his cessation of his employment with Morgan Stanley, remain his clients;
(c) Morgan Stanley would do all things necessary for Mr Detata to perform his obligations as an employee;
(d) Morgan Stanley would not without reasonable and proper cause act in a manner calculated or likely to cause serious damage to the relationship of trust between Morgan Stanley and Mr Detata as an employee.
Mr Detata pleads that the giving of the instructions by Morgan Stanley had devastating financial and psychological consequences for him, including that he could no longer earn the income that he needed in order to support his high level of gearing.
Mr Detata claims that the deed entered into between the parties in February 2013 was entered into by him under duress or as a result of unconscionable conduct on the part of Morgan Stanley.
The main issues in the action would appear to be:
(a) did the contract of employment contain the implied terms pleaded in par 2.6 of the defence?;
(b) were Morgan Stanley's instructions to Mr Detata a breach of contract or otherwise unlawful?;
(c) are relevant clauses of the contract of employment void and unenforceable as a penalty?;
(d) is the deed of February 2013 vitiated by economic duress or unconscionable conduct?
3 Of particular relevance to this application is the question as to whether the terms providing for repayment of the retention payment and long term incentive award are void and unenforceable as penalties. The pleading currently confines the allegation that the repayment obligations comprise penalties to the contract of employment.
4 Under the deed, the plaintiff agrees to accept the sum of $300,000 by way of payments over time in full and final settlement of any right it may have to repayment of the retention payment and long term incentive award. Upon breach, the defendant is to repay the retention payment and long term incentive award in accordance with the terms that apply under the contract of employment (the relevant clause is set out in the proposed amendment included below).
5 By the proposed amendment, the defendant seeks to argue that the clause that applies upon breach of the deed is void and unenforceable as a penalty.
Timing of application to amend
6 The timing of any application to amend a pleading is relevant to the exercise of discretion. The application to amend was brought on the second day of a trial which commenced on 8 August 2016. The trial was adjourned part-heard on that date, and is now listed to re-commence on 6 December 2016.
7 The usual pre-trial orders that are made in matters in the CMC List for the exchange of objections with respect to witness statements and tender documents were made in this case. It is fair to say that the defendant's lawyers reviewed the plaintiff's witness statements and proposed documents with an eye keenly attuned to the possibility of the slightest ground of objection. The end result was a significant number of objections notified by the defendant. At the commencement of the trial, I was informed of the number and nature of objections which remained unresolved, despite conferral.
8 The trial commenced on the basis that counsel would confer further about the position with objections during a lunch adjournment and overnight.
9 At the commencement of the second day of trial, counsel for both parties informed me that in their view the most sensible course was an adjournment of the trial, accepting that with so many unresolved objections the trial would be unworkable. As s 79C of the Evidence Act 1906 (WA) loomed large in many of the objections, the plaintiff also needed to re-consider the foundation with respect to each communication it sought to tender under s 79C. Accordingly, the trial was adjourned. Orders were made for conferral between counsel to attempt to narrow the number of objections maintained and for the provision of further submissions on some aspects of the objections. That process is ongoing.
10 Also at the commencement of the second day of trial, the defendant's counsel handed up in court a proposed minute of amended defence. I directed that the defendant provide an affidavit in support justifying the late application and submissions in support of the application to amend.
11 An application attaching a minute of proposed amendment was filed on 23 August 2016. On 29 August 2016, a further amended minute was provided. A further variation was attached to the defendant's supplementary submissions of 15 September 2016.
Principles
12 The principles on an application to amend pleadings are well known. They are usefully summarised by Beech J in Hightime Investments Pty Ltd v Lungan,2 and I respectfully adopt his summary:3
In Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 the High Court made observations about the considerations relevant to the exercise of a discretionary power to allow or refuse amendment to a pleading in the Australian Capital Territory. Notwithstanding some differences in the language of the relevant rules, their Honours' observations are of valuable assistance in Western Australia and have been applied by courts in Western Australia. Those observations include the following:
(a) the effect of an amendment on the court and on other litigants is relevant;
(b) there is no right to amend to introduce an arguable case and it is wrong to say that only in extreme circumstances would a party be shut out from litigating an arguable case;
(c) justice requires that parties have a proper opportunity to plead their case, but limits may be placed on repleading when delay and cost are taken into account;
(d) a just resolution does not mean that a party will always be permitted to raise any arguable case at any point in the proceedings, on payment of costs, even indemnity costs;
(e) the inevitable strains of litigation must be taken into account in weighing the adverse consequences of delay - this applies to natural persons and other litigants;
(f) the nature and importance of the amendment to the party amending must be taken into account;
(g) attention must be given to the extent of the delay, and the costs associated with it, the prejudice which might reasonably be assumed to follow from it and any prejudice that is shown;
(h) the point in the litigation relative to the trial may be an important consideration;
(i) where a discretion is sought to be exercised in favour of a party, an explanation will be called for;
(j) the point can be reached where a party has had a sufficient opportunity to put its case.
[89] - [103]; [111] - [112].
The proposed amendment
13 The final version of the amended minute proposed the inclusion of the following paragraph in the defence:
4.30 In the further alternative, if the Deed be adjudged to stand:
(a) the third clause of part 3 of the Deed (p5) provides:
Employee acknowledges and agrees that if he breaches his obligations under this Deed (including but not limited to his obligations under section 6.3(a)), his employment shall be treated as having terminated by reason of resignation and he shall be required to repay the Retention Payment and Long Term Incentive Award on the terms of sections 3.2(b) and 8.1(c) of the Contract.
(b) the defendant did not terminate his employment under the Contract of Employment as provided in sub-clauses 3.2(a)·and 8.1(c)(1) of the Employment Contract;
(c) the clause imposed on the defendant a very substantial obligation he did not otherwise have, he not having terminated his said employment;
(d) the clause is a coercion of the performance by the defendant of the Deed;
(e) (further or alternatively) the clause requires the payment by the defendant of an amount of money disproportionate to the loss to the plaintiff by breach of the Deed, viz the payment of $300,000 together with interest from the date(s) of non-payment;
(f) the clause is unenforceable as a penalty;
(g) the defendant's employment may not be treated as having 'terminated by resignation' and the defendant is not liable to repay the Retention Payment and Long Term Incentive Award on the terms of sections 3.2(b) and 8.1(c) of the Contract [of Employment].
The plaintiff's submissions on proposed par 4.30
15 The plaintiff's complaints about the proposed pleading focus on two categories: the termination point and the coercion point.
16 The plaintiff says the relevance and intent of proposed par 4.30(b) is unclear and inconsistent with a positive plea in par 4.29 of the defence of termination by the defendant. It says that par 4.30(c) and par 4.30(g) are defective and embarrassing for the same reason.4
17 The plaintiff contends proposed par 4.30(d) is embarrassing. The plaintiff's solicitors asked the defendant's solicitors to clarify what was meant by the plea of coercion and received the following response by way of letter:
Coercion in paragraph 4.30(d) of the Minute is to be understood in the context of the Coercion Theory of Law being that laws or commands akin [to] obligations imposed by contract that are backed by the threat of sanctions for non-compliance. What is pleaded in paragraph 4.30(e) of the Minute puts the coercion (penal nature for performance of the obligation) a penalty.
- There was then reference to certain paragraphs of the High Court's consideration of penalty principles in Paciocco v Australia and New Zealand Banking Group Ltd.5
Consideration - pleading
18 There are aspects of the drafting of the proposed clause that are, in my view, embarrassing, as that term is used in the context of pleadings.
19 Based on the plaintiff's supplementary submissions, I understand that the argument the defendant wishes to pursue is that:
1. the amount to be paid by the defendant upon a breach of the deed is disproportionate to any loss incurred by that breach and so the penalty principle is engaged;
2. the amount payable upon a breach is assessed by reference to the amounts in the contract of employment which would have been payable by the defendant had he terminated his employment; and
3. under the deed, payment of those amounts must be made without regard to whether or not the defendant in fact terminated his employment, and the inclusion of such a deemed termination is said to be relevant to an application of the penalty doctrine.
20 However, it is not clear whether the defendant asserts by proposed par 4.30 that:
1. he did not terminate his employment at all;
2. he terminated his employment by entry into the deed but such termination is not termination within the meaning of cl 3.2(a), cl 3.2(b) or cl 8.1(c) of the contract of employment; or
3. another iteration.
21 If the defendant wishes to rely on the inclusion of a deemed termination provision in support of the substantive proposed penalty argument, he needs to make clear his case as to how he says his employment was terminated. Otherwise, no comparison with the effect of the deemed termination can be drawn. There is a particular need for clarity in light of the positive plea contained in par 4.29 that the defendant terminated his employment because of alleged breaches by the plaintiff: there can be no introduction of inconsistency. Whether or not a further amendment will be permitted will depend upon its form. However, without indicating what might be a permissible amendment, it seems to me that an amendment in the form of the first iteration in [20] will not be permitted at this stage in light of the terms of the deed and the pleaded case.
22 As to the coercion plea, with respect, the explanation provided by the defendant's lawyers by their letter was not helpful. It in fact highlights the absence of clarity. The defendant's supplementary submissions explained some aspects of the pleading, although I note that what is meant by pleadings should be apparent on their face. The supplementary submissions explained that the claim being introduced by par 4.30 (as a whole) is as follows:6
The proposed paragraph 4.30 addresses 'the clause' (paragraph 4.30(a)) being unenforceable as a penalty.
23 The submissions do not suggest that 'coercion' is relied upon as any separate basis of a defence or element of a defence. The use of the term appears to be no more than a description of an alleged effect of the impugned clause which is in any event encompassed by the overarching allegation that the clause operates by way of a penalty. I accept the plaintiff's submission that the plea is confusing and embarrassing. It would seem to add nothing to the plea in par 4.30(c), par 4.30(e) and par 4.30(f).
24 Accordingly, I would grant leave to amend the defence but only in part.
25 I grant leave to amend in accordance with proposed par 4.30(a), (c) (save for the words 'he not having terminated his said employment'), (e) (save for the words 'further or alternatively'), (f) and (g) (save for the words 'the defendant's employment may not be treated as having "terminated by resignation"'). I decline to grant leave to amend to the extent the amendment includes par 4.30(b) and par 4.30(d).
26 I note that in the supplementary submissions, the defendant's counsel described proposed par 4.30(f) and (g) as stating the consequence of the clause being a penalty, and I have taken that into account in granting leave with respect to those subparagraphs. They are so confined.
27 I will allow the defendant to seek leave to amend the defence to plead the manner in which the defendant says his employment was terminated, if he wishes to do so. That is to be dealt with by the inclusion of a suitable subparagraph to par 4.30. A minute should be provided within seven days and the plaintiff's right to object to any amendment is reserved.
Application of case management principles
28 It then remains to explain why, despite the lateness of the proposed amendment, I am prepared to grant leave, at least in part. Four matters are of particular relevance in this case.
29 First, the circumstances surrounding the entry into the contract of employment and the deed are already the subject of evidence in light of the penalty claim (insofar as it relates to the contract of employment) and the duress and unconscionable conduct claims (insofar as they relate to the deed). The calculation of the repayment obligations is the subject of evidence. I do not dispute that there may be additional evidence that the plaintiff wishes to consider and adduce with respect to entry into the deed, and an opportunity will be afforded to it to do so. However, in my view there will be a significant overlap with evidence already available.
30 Second, the plaintiff has referred to difficulties that it says undermine the prospect of any success of the par 4.30 claim.7 It will be at liberty to address those difficulties at trial. In my view, the claim is not without difficulties for the defendant. It is not uncommon for a deed of settlement or release to provide that a lesser sum will be accepted by way of compromise, but that upon default a greater sum is payable. Such a regime of itself is not a penalty. There are examples of the penalty doctrine being raised in the context of deeds of settlement or release. The circumstances and construction of the agreement in each case needs to be considered on its facts.8 I consider the proposed claim is at least arguable and on that basis I do not consider the defendant should be shut out from pursuing it as part of his broader attack on the same deed. I add that the genesis of the deed lies in the contract of employment and the obligations under that contract, and it will be artificial to consider the deed absent consideration of that context.
31 Third, the plaintiff complains that the defendant has not provided a proper explanation for the delay. The explanation provided by the defendant's solicitor is brief. Mr Barker says, in effect, that senior counsel first raised the issue of the relevant clause being a penalty upon the High Court delivering its reasons in Paciocco (27 July 2016). As the penalty principle was already alive in this action, it is somewhat surprising that the issue was not considered by the defendant's lawyers earlier. However, I accept that the delivery of those reasons agitated further consideration of the matter.
32 Fourth, the plaintiff has properly complained of potential prejudice. The defendant described the plaintiff's submissions as to potential prejudice as 'tactical decoration'. I reject that description. I accept the plaintiff will be put to some additional expense by way of reassessing witness statements and considering what if any further evidence needs to be evinced in light of the amended plea. However, as I have already noted there is substantial overlap with existing claims and there is time in which the plaintiff should be able to undertake those tasks before the hearing resumes. I am also aware that this is a matter where the plaintiff has incurred significant costs already, particularly in respect to what appears to have been a very time consuming discovery process. It is unfortunate that this amendment comes after trial preparation is otherwise complete, aside from the objection process. I have taken into account such matters in the balance.
33 I will hear from the parties with respect to the costs orders that should follow these reasons and any other directions the plaintiff seeks. For example, the plaintiff has opened its case and its first witness has been called. Both of those matters can be addressed by appropriate directions.
1Morgan Stanley Wealth Management Australia Pty Ltd v Detata [2014] WASC 397 [2] - [8].
2Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296.
3Hightime Investment v Lungan [52].
4 Plaintiff's submissions, 5 September 2016 [22] - [32].
5Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28.
6 Defendant's supplementary submissions filed 15 September 2016 [21].
7 Plaintiff's submissions, 4 October 2016 [17] - [24].
8 See, for example, Idameneo (No 123) Pty Ltd v Auzcare Pty Ltd [2015] NSWSC 1318.
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