Silverbrook Research Pty Ltd v Lindley

[2010] NSWCA 357

New South Wales

Court of Appeal

CITATION:	Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357
HEARING DATE(S):	18 October 2010
JUDGMENT DATE:	17 December 2010
JUDGMENT OF:	Allsop P at 1; Beazley JA at 19; Hammerschlag J at 20
DECISION:	On or before 28 January 2011, the parties bring in short minutes giving effect to the reasons of Allsop P and Beazley JA, including proposed orders for costs and submissions of no more than two pages if the orders for costs are not agreed. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
CATCHWORDS:	DAMAGES – employment contract – breach – failure of employer to review salary – failure of employer to set objectives and review performance for payment of bonus – loss of commercial opportunity or chance – loss of opportunity to increase remuneration – loss of opportunity to be paid a bonus – assessment of value requires proper understanding of content of obligations and entitlements under the contract – opportunity or chance to be measured by the probabilities and possibilities - DAMAGES – award – reduction in damages – ex gratia payment – sufficient connection to the contractual claim to be taken into account – overriding principle of compensation - CONTRACT – employment contract – breach – implied terms of good faith, trust and confidence – contract provided for review of remuneration and for employer to set performance objectives relevant to bonus payments – discretion of employer to decide whether performance bonus paid – discretion to be understood against the proper scope and content of the contract
LEGISLATION CITED:	Trade Practices Act 1974 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Black v Brimbank City Council (1998) 152 ALR 491 Blatch v Archer (1774) 1 Cowp 63 Blundell v Musgrave [1956] HCA 66; 96 CLR 73 Carr v J A Berriman Pty Ltd [1953] HCA 31; 89 CLR 327 Chaplin v Hicks [1911] 2 KB 786 Commissioner for Railways (NSW) v Scott [1959] HCA 29; 102 CLR 392 Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 Daniels v Anderson (1995) 37 NSWLR 438 Fink v Fink [1946] HCA 54; 74 CLR 127 Furey v Civil Service Association of WA (Inc) [1999] FCA 1492 Gaca v Pirelli General Plc [2004] 1 WLR 2683 Gardiner v Orchard [1910] HCA 18; 10 CLR 722 Godfrey Constructions Pty Ltd v Kanangra Park Pty Ltd [1972] HCA 36; 128 CLR 529 Greaves v Wilson (1858) 25 Beav 290 Haines v Bendall [1991] HCA 15; 172 CLR 60 Hampton Court Ltd v Crooks [1957] HCA 28; 97 CLR 367 Hunt v Severs [1994] 2 AC 350 Hussain v New Taplow Paper Mills Ltd [1987] 1 WLR 336 Intico (Vic) Pty Ltd v Peter Walmsley [2004] VSCA 90 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 Malloch v Aberdeen Corporation [1971] 1 WLR 1578 McCamley v Cammell Laird Shipbuilders Ltd [1990] 1 WLR 963 Parry v Cleaver [1970] AC 1 Pierce Bell Sales Pty Ltd v Frazer [1973] HCA 13; 130 CLR 575 Selkirk v Romar Investments Ltd [1963] 1 WLR 1415 Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332 Skelton v Collins [1966] HCA 14; 115 CLR 94 Stadhard v Lee (1863) 3 B & S 364 Tabet v Gett (2010) 240 CLR 537 TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 Wenham v Ella (1972) 127 CLR 454
TEXTS CITED:	H Luntz, Assessment of Damages for Personal Injury and Death (2006, 4th Ed, LexisNexis Butterworths) McGregor on Damages (2009, 18th Ed, Sweet & Maxwell) J W Carter, E Peden and G J Tolhurst, Contract Law in Australia (2007, 5th Ed, LexisNexis Butterworths)
PARTIES:	Silverbrook Research Pty Ltd (Appellant) Robyn Alice Lindley (Respondent)
FILE NUMBER(S):	CA 2010/41756
COUNSEL:	Mr P J Newall (Appellant) Mr J C Sheller (Respondent)
SOLICITORS:	Truman Hoyle Lawyers (Appellant) DGB Lawyers (Respondent)
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	5519/08
LOWER COURT JUDICIAL OFFICER:	Walmsley SC DCJ
LOWER COURT DATE OF DECISION:	13 November 2009
LOWER COURT MEDIUM NEUTRAL CITATION:	Robyn Alice Lindley v Silverbrook Research Pty Limited [2009] NSWDC 396

2010/41756

ALLSOP P
BEAZLEY JA
HAMMERSCHLAG J

Friday 17 December 2010

SILVERBROOK RESEARCH PTY LTD v LINDLEY

Headnote

[This headnote is not part of the reasons of the Court.]

The respondent (“Lindley”) commenced employment as a Business Development Strategist with the appellant (“Silverbrook”) under a written service agreement on 8 September 2003.

Under cl 3 of the agreement, Silverbrook was to pay Lindley her annual salary of $210,000 on a fortnightly basis. Clause 3.2 provided that Lindley’s salary would be reviewed annually, but that Silverbrook was not obliged to increase her rate of remuneration at any time.

Under cl 4.1 of the agreement, Lindley was eligible to receive an “Annual Performance Bonus” ($40,000) subject to cll 4.2 and 4.3. Clause 4.2 provided that Silverbrook would assess Lindley’s performance against set objectives at the end of each quarter, and provided her performance satisfied the set objectives and subject to cl 4.3, one quarter of the Bonus would be paid to Lindley within 21 days of the end of each quarter. Clause 4.3 provided that the decision as to whether Lindley should receive the Bonus was entirely within the discretion of Silverbrook.

On 7 May 2008, Lindley terminated the service agreement in accordance with the notice period, ceasing to work for Silverbrook on 15 July 2008.

During the life of the service agreement, Lindley’s salary was never increased. In 2007, Lindley had requested a raise but none was given. At no time did Silverbrook set objectives for Lindley as contemplated by cl 4.2. As such, there was never an assessment of Lindley’s performance and no bonus was paid.

On 15 August 2008, Silverbrook paid a sum of $55,575.15 to Lindley, which represented $7410.02 for her final two weeks’ of employment and an ex gratia payment of $48,165.13.

Lindley commenced proceedings for damages in the District Court of NSW claiming that Silverbrook had breached the service agreement by:

a) failing to review her remuneration annually or at all, which resulted in her losing the opportunity to increase her remuneration;
b) failing to formulate a set of objectives relevant to her ability to receive the Bonus; and
c) failing to review her performance against those objectives at the end of each quarter for the purpose of determining her entitlement to the Bonus.

Lindley claimed damages on the basis that Silverbrook’s failure to review her remuneration and failure to set the objectives relevant to the Bonus and review her performance against them caused her to lose the opportunity to have her salary increased and the opportunity to be paid the Bonus. A claim for damages based on misleading and deceptive conduct on contravention of the Trade Practices Act 1974 (Cth) was abandoned at trial.

The primary judge (Walmsley SC DCJ) found that Silverbrook had breached the service agreement in the respects alleged. In the assessment of damages for the loss of the opportunity to increase her remuneration, the primary judge was not persuaded that Silverbrook’s breach on its own led to the loss of any commercial opportunity of any value and awarded no damages for this. In the assessment of damages for the loss of the opportunity to be paid the Bonus, the primary judge found it probable that had Silverbrook set objectives, Lindley would have met them for the whole of the period of the agreement and awarded damages of $74,000. The primary judge rejected Silverbrook’s submission that its ex gratia payment should be set off against the damages. In a separate judgment of 26 November 2009, the primary judge ordered Silverbrook to pay Lindley’s costs.

Silverbrook appealed against the verdict and costs order on the following grounds:

i. that the primary judge had erroneously characterised Lindley’s claim as one representing loss of a commercial opportunity;
ii. that Lindley had not proved damage because under cl 4.3 of the agreement, the decision to pay the Bonus was entirely in the discretion of Silverbrook;
iii. that the ex gratia payment should have been taken into account to reduce any award of damages to which Lindley was otherwise entitled;
iv. that Lindley should not have all of her costs where she abandoned a substantial part of her case in opening (referring to the Trade Practices claim).

In relation to (i):

Held (per Allsop P, Beazley JA agreeing, Hammerschlag disagreeing):

a) The primary judge did not err in approaching the matter as the loss of a valuable commercial opportunity. Damages for loss of a commercial chance will be recoverable in contract when the contract as a whole or a particular provision of the contract promises an opportunity to obtain a benefit and where the loss of a commercial opportunity is the consequence of a breach of contract and the loss of the chance is not too remote.
b) In assessing the value of the lost opportunity, the task is to identify and characterise what was promised and what has been denied by the breach of contract. This requires a proper understanding of the contractual content of the obligations and entitlements.

In relation to (ii):

Held (per Allsop P, Beazley JA agreeing):

a) The relevant discretion should be understood against the proper scope and content of the contract and exercised honestly and conformably with the purpose of the contract.
b) A bargained-for bonus to be assessed against set objectives should receive a reasonable construction and not permit Silverbrook to choose arbitrarily or capriciously that it need not pay money the set objectives having been satisfied.
c) The opportunity or chance was not so dependent upon Silverbrook’s unrestrained discretion as to be impossible to say that the opportunity had a value.
d) The trial judge’s assessment of the value of the last chance should not be disturbed.

In relation to (iii):

Held (per Allsop P and Hammerschlag J, Beazley JA agreeing):

a) Whether the ex gratia payment should be taken into account as reducing Lindley’s claim depends on whether, properly characterised, it is to be seen as part of the compensation in respect of which the claim is made and to which the respondent is entitled.
b) The ex gratia payment had a sufficient connection, both temporally and with respect to subject, to the claim on which the respondent succeeded. Not to take it into account would result in Lindley recovering more than she lost.

In relation to (iv):

Held (per Hammerschlag J, Allsop P and Beazley JA agreeing):

a) The primary judge erred in not making allowance in the costs orders in favour of Silverbrook for the abandonment of the Trade Practices claim.

2010/41756

ALLSOP P
BEAZLEY JA
HAMMERSCHLAG J

Friday 17 December 2010

SILVERBROOK RESEARCH PTY LTD v LINDLEY

Judgment

1 ALLSOP P: I have had the advantage of reading the reasons in draft of Hammerschlag J. I have some disagreement with his Honour’s reasoning which leads to a disagreement as to the orders. Hammerschlag J’s statement of the facts and of the circumstances of the dispute enable me to state my views directly.

2 I disagree with the view of Hammerschlag J that the learned primary judge erred by approaching the matter as the loss of a valuable commercial opportunity. As a matter of general principle, damages for loss of a commercial chance or opportunity will be recoverable in contract when the contract as a whole (see Chaplin v Hicks [1911] 2 KB 786) or a particular provision of a contract (see Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64) is such as to promise an opportunity or chance to obtain a benefit and, in other cases, where the loss of a business or commercial opportunity is the consequence of a breach of contract and the loss of the opportunity or chance falls within the rules of remoteness in contract. See generally J W Carter, E Peden and G J Tolhurst, Contract Law in Australia (2007, 5^th Ed, LexisNexis Butterworths) at 856-858. The task is to identify and characterise what, in substance, was promised and what has been lost or denied by the breach of contract.

3 Here, the appellant promised, by item 4 of the terms sheet and cl 4.2 of the contract, that it would establish set objectives at the end of each quarter, assess the respondent’s performance against those objectives and, subject to the appellant’s discretion in cl 4.3, if the set objectives were satisfied a bonus would be paid. This was not a promise to pay the bonus. Clause 4.3 makes that clear. The respondent was promised the setting up and undertaking of a process of assessment of performance with the contractual opportunity or chance of obtaining bonuses should the results of the process be favourable and subject to the exercise of any discretion in cl 4.3.

4 It was common ground that that opportunity or clause was denied to the respondent. There is no call to assess whether, on the balance of probabilities, the respondent would have taken some step to obtain the chance: cf Daniels v Anderson (1995) 37 NSWLR 438 at 529-530 especially 530G. The opportunity or chance that was agreed and to which the respondent was entitled, without more, was denied to her.

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.

8 Here, properly construed, the opportunity or chance was not so dependent upon the appellant’s unrestrained discretion as to be impossible to say that the opportunity had a value: cf Fink v Fink [1946] HCA 54; 74 CLR 127.

9 The opportunity or chance is to be measured by the probabilities and possibilities: Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332 at 349. Those possibilities and probabilities include how the appellant would or might act. That, however, is an assessment of how the appellant would or might act conformably with its contractual obligations in the manner I have discussed.

10 It is in the above context that one must assess the utility of the evidence of Ms Lee. Not only did the appellant breach its contract in failing to set objectives and undertake the promised contractual process, Ms Lee’s evidence reveals no appreciation of the appellant’s obligation. She gave no explanation for the failure to set up the objectives and the deliberate decisions in that regard. There was no foundation to conclude from her evidence that she had any appreciation of the contractual obligations in cl 4 undertaken by the appellant. In that context, her evidence was of little weight or utility in valuing the chance.

11 Like Hammerschlag J, I consider that some of the factors taken into account by the primary judge in valuing the chance were of doubtful validity. However, to be balanced against that was the inference that the respondent was otherwise a satisfactory employee. No evidence was led by the respondent upon which it would be concluded that there were likely to be circumstances attending the affairs of the appellant or the employment relationship as to permit the invocation of the discretion in cl 4.3 conformable with the limitations upon it that I have discussed. That is not to reverse any onus of proof, but merely to recognise the valuation task is to be performed by reference to the evidence led and to recognise that evidence is to be assessed and weighed according to the power of the party to produce it: Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 971 and Hampton Court Ltd v Crooks [1957] HCA 28; 97 CLR 367 at 371-372. In these circumstances, I would have valued the chance or opportunity somewhat higher than did the primary judge. Nevertheless there was no cross appeal nor a notice of contention. Thus, I would not interfere with the conclusion of his Honour as to $74,000.

12 I agree with Hammerschlag J as to the taking into account of the ex gratia payment not directly referable to wages, that is the balance of $48,165.13. The aim of damages is compensation; compensation is the cardinal concept; it is the principle that is “absolutely firm and which must control all else”: Skelton v Collins [1966] HCA 14; 115 CLR 94 at 128; Haines v Bendall [1991] HCA 15; 172 CLR 60 at 63; cf Parry v Cleaver [1970] AC 1 at 13. What is too collateral or too remote to be considered relevant compensation is a question of characterisation of the relevant payment and assessment of its connection in legal and factual relationship with the loss: Haines v Bendall at 67-70. The factors discussed by Hammerschlag J – the temporal and purposive connection, the absence of any contractual or social reason for the payment other than towards compensation or a surrogate for it without admissions – are relevant to this analysis.

13 The sums are quite unlike moneys gratuitously conferred from private sources as a mark of sympathy or assistance. These are ignored because to take them into account would offend a sense of justice and be contrary to public policy: Parry v Cleaver at 31. When courts will deduct benefits obtained by a plaintiff is not without its uncertainty: Blundell v Musgrave [1956] HCA 66; 96 CLR 73 at 93; H Luntz, Assessment of Damages for Personal Injury and Death (2006, 4^th Ed, LexisNexis Butterworths) at 424, Ch 8 generally and see the valuable exposition of principles at [8.1.5], [8.3.7] and [8.3.14]. Whilst many of the cases are concerned with personal injury to the plaintiff, the principle and policy embedded within them assists in the resolution of this case. In circumstances, at least where the intention of the employer is not that the ex gratia payment was to be additional to damages (cf McCamley v Cammell Laird Shipbuilders Ltd [1990] 1 WLR 963), an ex gratia payment by an employer, being the person against whom the claim is made, will be taken into account in reduction of damages: Hussain v New Taplow Paper Mills Ltd [1987] 1 WLR 336 (CA); and [1988] AC 514 (HL); Commissioner for Railways (NSW) v Scott [1959] HCA 29; 102 CLR 392 at 440; Gaca v Pirelli General Plc [2004] 1 WLR 2683; and Hunt v Severs [1994] 2 AC 350; and see McGregor on Damages (2009, 18^th Ed, Sweet & Maxwell) at 1391–1394.

14 This expression of the matter and the conclusion here to take into account the payment are in accordance with the overriding principle of compensation and accord with “justice, reasonableness and public policy”: Parry v Cleaver at 13 (per Lord Reid) and “common sense”: Hussain [1988] AC at 528 (per Lord Bridge of Harwich).

15 Here, there was no basis to conclude other than that the ex gratia payment related to the contractual claims being made by the respondent. There was no basis to conclude that it was intended to be retained in addition to any claim to which the respondent was found to be entitled and for which the appellant was found to be liable. The respondent would be overcompensated if it were not to be deducted.

16 The orders of the primary judge should be varied to provide for judgment for a sum of money calculated by reference to the sums found by the primary judge together with the interest from at the relevant dates until the payment of the ex gratia payment from which time interest would accrue upon $25,834.87 ($74,000 less $48,165.13).

17 As to the costs, I would give the parties an opportunity in no more than two pages of written submissions of addressing the question of costs. The resolution of appropriate orders, including costs orders can be resolved on the papers.

18 I would require the parties to bring in short minutes of order to give effect to these reasons.

19 BEAZLEY JA: I agree with Allsop P.

20 HAMMERSCHLAG J: By written service agreement (“the Agreement”) which commenced on 8 September 2003 the appellant (referred to in the Agreement as Silverbrook) employed the respondent (referred to in the Agreement as Lindley) as a Business Development Strategist at an annual salary of $210,000 and with the prospect of an Annual Performance Bonus of $40,000. A terms sheet incorporated into the Agreement provided that the Bonus was “subject to achievement of set quarterly objectives and payable within 21 days of the end of each quarter”.

21 Clause 3 of the Agreement was entitled Remuneration. Clause 3.1 provided that the appellant was to pay the respondent her annual salary on a fortnightly basis. Clause 3.2 provided that the respondent’s remuneration would be reviewed annually, but that the appellant was not obliged to increase her salary at any time.

22 Clause 4 of the Agreement was in the following terms:

4. ANNUAL PERFORMANCE BONUS
4.1 Lindley will be eligible to receive the Annual Performance Bonus subjecvt [sic] to clause 4.2 and 4.3.
4.2 Silverbrook will assess Lindley’s performance against set objectives at the end of each quarter commencing from the date of her employment. Provided her performance satisfies the set objectives and subject to clause 4.3, one quarter of the Annual Performance bonus will be paid to Lindley within 21 days of the end of each quarter.
4.3 The decision as to whether Lindley should receive the Performance Bonus is entirely within the discretion of Silverbrook. Lindley must be in the employ of Silverbrook at the time bonuses are determined to be eligible to receive the Annual Performance Bonus.

23 The notice period was two months by either party. On 7 May 2008 the respondent gave two months notice. She ceased working for the appellant on 15 July 2008.

24 During the period of her employment the respondent’s salary was not increased. In 2007 she had written requesting a salary increase but none had been given.

25 At no time during the Agreement did the appellant set the objectives contemplated by cl 4.2. Consequently, at no time was there ever an assessment of the respondent’s performance as contemplated by that provision. At no time did the appellant pay the Bonus.

26 On 15 August 2008 (that is, a month after the respondent ceased working for the appellant), the appellant paid her $55,575.15. In response to a Notice to Admit Facts and Authenticity of Documents, the respondent admitted that the payment represented $7,410.02 in respect of the final two weeks remuneration and an ex-gratia payment of an additional three months remuneration of $48,165.13. The documents include a payslip designating payment of the smaller amount as salary for the period 5 July to 18 July 2008 and a cheque and deposit receipt for $55,575.15. The cheque and deposit slip do not make a designation in respect of the payment.

THE PROCEEDINGS BELOW

27 The respondent brought proceedings in the District Court of New South Wales asserting that the appellant had breached the Agreement by:

a failing to review her remuneration annually or at all, which resulted in her losing the opportunity to increase her remuneration;
b failing to formulate a set of objectives relevant to her ability to receive the Bonus; and
c failing to review her performance against those objectives at the end of each quarter for the purpose of determining her entitlement to the Bonus.

28 The respondent claimed damages on the footing that the appellant’s failure to review her remuneration resulted in her losing the opportunity to increase it and that its failure to set the objectives relevant to the Bonus and to review her performance against them caused her to lose the opportunity to be paid the Bonus. A claim for damages on the basis that the appellant had engaged in conduct that was misleading or deceptive in contravention of the Trade Practices Act1974 (Cth) was abandoned at trial.

29 The appellant denied breach of the Agreement and that the respondent had suffered any damage. It pleaded in response to the claim as a whole that the Agreement gave it discretion to award performance bonuses and remuneration increases.

30 Before the primary judge (Walmsley DCJ) it was common cause that during the life of the Agreement there had been no review of the respondent’s salary, that no objectives had been set as envisaged by cl 4 and that no review under that provision had taken place.

31 His Honour described the essence of the defence as being that salary increases and bonuses had been entirely at the appellant’s discretion no matter how well (or badly) the respondent performed and that the appellant had merely exercised the discretion it had not to pay any more than her starting salary.

32 The sole witness called on behalf of the appellant was Ms Jeanette Fay Lee, one of its two directors and an equal shareholder. She gave unchallenged evidence that it had been her deliberate decision not to give the respondent a salary increase and not to pay her the Bonus during the period that she worked for the appellant. Ms Lee also gave evidence that had she carried out a formal review of the respondent’s remuneration, it would not have changed her mind about giving the respondent a salary increase, and that had she assessed the respondent’s performance against set objectives, she would not have given the respondent the Bonus. Although the appellant had in its defence admitted that it was a term of the Agreement that it would formulate a set of objectives and provide them to the respondent to enable her to receive a performance bonus, in her evidence Ms Lee did not accept that it was the appellant’s responsibility to set objectives.

33 The primary judge found that the appellant breached the Agreement in each of the respects alleged.

34 He approached the assessment of damages on the footing that the appellant’s breaches had, on the balance of probabilities, caused the respondent to lose a valuable opportunity to have salary increases and bonuses and proceeded to assess damages on that basis by attributing a value to the lost chances.

35 As to salary, the primary judge inferred from the unsuccessful outcome of the respondent’s one request for a salary increase in 2007 that had the appellant reviewed her salary in that year or the following years, the chance that she would have received any increase was negligible. The primary judge reached the same conclusion with respect to the chances of an increase in 2004, 2005 and 2006 because, on commencement, the respondent’s salary had been considerably higher than it had been with a former employer and Ms Lee’s own salary. Although his Honour concluded that there had been a breach of cl 3.2, he was not persuaded on the balance of probabilities that this breach on its own led to the loss of any commercial opportunity of any value. His Honour awarded no damages for this breach.

36 The primary judge took a different view with respect to the Bonus. He gave limited weight to Ms Lee’s evidence that bonuses would not have been paid had objectives been set. He found it probable that had the appellant set objectives, the respondent would have met them for the whole of the period of the Agreement. He then went on to assess in respect of each year of the Agreement the chance that the bonus would have been paid. He inferred that the respondent would have been in a far stronger bargaining position in the early part of the Agreement than she was in later years and that at least in the early part the appellant would have been concerned to try and keep her on its staff. He concluded as follows:

“57. I am persuaded on the balance of probabilities that Dr Lindley lost a commercial opportunity of some value: ( Sellars at 355) by reason of the breach of clause 4.2. I find that in the first employment year, there was a 75% chance had Silverbrook set appropriate objectives it would have exercised its discretion to pay $40,000. For the second year, to 7 September 2005, I find there was a 60% chance Silverbrook would have exercised its discretion to pay $40,000. For the third year, to 7 September 2006, I find there was a 50% chance of this occurring. Once Silverbrook had begun paying bonuses, I consider it would have continued to pay them for several years, although having a discretion not to. The fact that no salary increases would have been paid, I think, adds weight to this conclusion. In other words, Silverbrook would at that time have found it more difficult in dealing with Dr Lindley on the bonuses issue, to avoid paying bonuses, given it was not increasing salary.

58. As I have noted above, I infer that by 2007, when it rejected her one request for a salary increase, Silverbrook’s initial enthusiasm for having her services had waned. I consider the chances are negligible that even if objectives had been set and Silverbrook had paid bonuses from 2003 onwards, after 5 April 2007 (the date of her letter requesting a salary increase) she would have been paid any further bonuses.

59. Based on the above findings, the value of the lost chance of a bonus for the first year would be $30,000, for the second, $24,000, and for the third $20,000, making a total of $74,000. Subject to what I say below, I assess damages which I find were caused by Silverbrook’s breaches, at that sum, which should carry interest at Civil Procedure Act rates, as to $30,000 from 7 September 2004, (a year from commencement) $24,000 from 7 September 2005, (two years from commencement) and $20,000 from 7 September 2006 (three years from commencement).”

37 The primary judge rejected the appellant’s submission that the appellant should be given credit for the ex gratia payment. He said the following:

“61. Although no set off was pleaded, Mr Newall argued that as a matter of fairness I should give Silverbrook credit for the ex gratia payment, and set it off against any damages otherwise payable. Since the ex gratia payment was $55,575, that would (subject to interest) leave a net sum payable by Silverbrook of $18,425. However, I reject that argument. There was no evidence of the reasons the ex gratia sum was paid or by reference to what criteria. It was agreed that it represented three months salary, but otherwise the evidence was silent about it. In support of his submission Mr Newall referred to and relied on Saddington v Builders Workers Industrial Union of Australia and Anor(1993) 49 IR 323. However that case is distinguishable on its facts. It concerned a claim for loss of wages after repudiation of a contract of employment. Although breach was found, because the former employer had paid the employee a sum for a certain period from a date he was found to have accepted the repudiation, the employee was not found to have proved loss, and so was found to have had no claim even to nominal damages. I accept Mr Sheller’s submission that although not completely on point, the better analogy is to be found in tort law. In Hussain v New Taplow Paper Mills Ltd[1987] 1 All ER 417 , the English Court of Appeal held that an ex gratia payment by an employer to an employee who had suffered injuries in his employment could be taken into account in his damages claim against the employer. At 428, Lloyd LJ, speaking for the court, said:
" If an employee is injured in the course of his employment and the employer makes him an immediate ex gratia payment, as any good employer might, I see no reason why such a payment should not be taken into account in reduction of any damages for which the employer may ultimately be held liable. Employers should be encouraged to make an ex gratia payment in such circumstances. If so, then public policy would seem to require that such payments be brought into account."

62. There is here nothing in the evidence to suggest the ex gratia payment was referable to Dr Lindley’s loss. Since there is no nexus established between the payment and her loss, I decline to take it into account.”

38 The primary judge awarded damages of $74,000 to the respondent. With interest the verdict was for $104,515.90.

39 In a separate ex tempore judgment given on 26 November 2009, the primary judge ordered the appellant to pay the respondent’s costs.

40 The appellant appeals as of right against the verdict and costs order. There is no cross-appeal.

THE APPELLANT’S SUBMISSIONS

41 Firstly, the appellant submitted that the primary judge erroneously characterised the respondent’s claim as one representing loss of a commercial opportunity. This, it was put, induced the primary judge erroneously to assess damages by assessing the percentage chance the Bonus would have been paid whereas to establish loss it was for the respondent to have established on the balance of probabilities that the Bonus would have been paid.

42 Secondly, the appellant submitted that the respondent had not proved damage because the decision to pay the Bonus was a matter which under cl 4.3 of the Agreement was entirely in the discretion of the appellant and its objective behaviour demonstrated that that discretion would have been exercised against paying the Bonus.

43 Thirdly, the appellant submitted that the amount of the ex gratia payment should have been taken into account as reducing any award of damages to which the respondent was otherwise entitled.

44 Finally, the appellant submitted that the respondent should in any event not have all of her costs where she abandoned substantial elements of her case (meaning the Trade Practices count) in opening and without comment.

45 I will deal with each of the submissions in turn.

LOSS OF OPPORTUNITY?

46 A plaintiff claiming to have suffered loss by reason of a defendant’s breach of contract bears the onus of proving the extent of that loss or damage: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.

47 The general principle is that when assessing damages for breach of contract, the plaintiff is to be put in the position that he or she would have been in but for the breach, that is, the position if the contract had been performed: Wenham v Ella (1972) 127 CLR 454.

48 The assessment of damages for a loss which depends on future chances or possibility of benefit may be fraught with difficulty and attended by uncertainty, but the mere fact that damages cannot be assessed without difficulty and uncertainty does not relieve a Court from the responsibility of attempting to assess them as best it can. Where there has been an actual loss of some sort the common law does not permit difficulties in estimating the loss in monetary terms to defeat an award of damages. A lost commercial advantage or opportunity is a compensable loss even where there is a less than 50 per cent likelihood that the commercial advantage will be realised. Damages for breach of contract are to be assessed by reference to the probabilities or possibilities of what would have happened: Sellars v Adelaide Petroleum NL (1992) 179 CLR 332 at 349; The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 125.

49 Where future or hypothetical events must be taken account of in assessing damages and proof of them is necessarily unattainable, the Court assesses the probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect that probability: Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643; Sellars v Adelaide Petroleum NL & Ors at 350.

50 An opportunity may be lost because a party fails, in breach of its contractual obligations, to take steps which it is obliged to take. In such a case, in order to discharge its onus on the issue of causation, the plaintiff must establish (on the probabilities) that had there been no breach, the steps concerned would have been taken and it must also establish that the opportunity to gain a financial benefit (or avoid a financial detriment) was thereby lost: Daniels v Anderson (1995) 37 NSWLR 438 at 529.

51 Different standards apply to proof of damage from those that are involved in the assessment of damages. The general standard of proof applies with respect to the issue of causation and whether a party has suffered loss or damage: Tabet v Gett (2010) 240 CLR 537 at 585. In relation to the assessment of damages, “the hypothetical may be conjectured”: Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643.

52 In Tabet v Gett (2010) 240 CLR 537 at 587 Kiefel J said, “[r]esort to the language of ‘chance’ cannot displace the analysis necessary for the determination of the issue of causation of damage”.

53 Properly analysed the chance identified and valued by the primary judge was no more than the chance that the appellant would perform its obligations under the Agreement in a particular way, namely, by setting the objectives and then exercising its discretion in favour of paying the Bonus once it had evaluated the respondent’s performance against those objectives.

54 Framing as a commercial opportunity the possibility of performance by the appellant of its obligations, displaced the requirement on the respondent alleging breach, of establishing on the balance of probabilities that she suffered damage from the breach. The real inquiry should have been whether the plaintiff had, on the probabilities, established that the breach had actually caused her loss.

55 Thus, in taking the approach which he took, the primary judge did that against which Kiefel J cautioned in Tabet v Gett (2010) 240 CLR 537.

56 The consequence of the error is manifested with respect to the primary judge’s finding for the third year of the Agreement to 7 September 2006, namely that there was a 50 per cent chance that the appellant would have exercised its discretion to pay the Bonus. This falls short of a preponderance of probabilities. The articulation of the respondent’s claim as a loss of opportunity had the effect that she recovered damages for a breach which may or may not have led to the Bonus being paid and where she failed to establish that it was more probable than not that she would have received anything.

57 I would therefore uphold the appellant’s submission that the primary judge erred in characterising the respondent’s claim as a loss of opportunity and in dealing with damages on that footing.

58 However, and notwithstanding the error, in my view the trial judge’s finding with respect to years one and two was tantamount to a finding that it was more probable than not that the Bonus would have been paid. This is because for each of those years he found that the probabilities were 75 per cent and 60 per cent respectively that it would have been paid, which is more than a preponderance of probabilities. The same cannot be said for year three.

59 Had the respondent framed her claim, and the primary judge acted, on the footing that she was entitled to damages representing such of the Bonus as would on the probabilities been paid, she would have been awarded damages of $40,000 in respect of both years one and two and would have failed in respect of year three. Albeit that there is no cross-appeal or Notice of Contention, the outcome that results from the approach which the appellant submitted the primary judge should have taken, is that the respondent would be entitled to a verdict of $80,000 rather than $74,000, leaving aside the issue of whether there should be any reduction because of the ex gratia payment. A notional verdict of $80,000 should therefore be taken as the starting point before any consideration is given to the question of whether the ex gratia payment should be deducted.

LOSS AND DAMAGE

60 The appellant put that the discretion to pay the Bonus had been entirely within its discretion and that it was free to exercise its discretion howsoever it wished, even capriciously. In support of this proposition, reliance was placed on the decision of the Victorian Court of Appeal in Intico (Vic) Pty Ltd v Peter Walmsley [2004] VSCA 90, in which Ormiston JA adopted the statement of Lord Reid in Malloch v Aberdeen Corporation [1971] 1 WLR 1578 at 1581 to the effect that a master may act unreasonably or capriciously in dismissing his servant if he so chooses. The appellant also relied on the principle that where there are two or more ways in which a defendant might perform a contract, the Court, in assessing damages, adopts the mode of performance which is most beneficial to the defendant: TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 154; Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 92.

61 It put that the presence of an unfettered discretion, together with both the unchallenged evidence of Ms Lee that the Bonus would not have been paid and the objective reality that it was never paid, dictated a finding that the Bonus would not have been paid even if the objectives had been set and the respondent had met them.

62 I do not find it necessary for present purposes to consider what limitations, if any, bound the appellant in the exercise of its discretion under cl 4.3. This is because the primary judge found (as he was entitled to) in respect of years one and two, a greater than even probability that the discretion would have been exercised in the appellant’s favour. The primary judge was entitled to treat Ms Lee’s evidence with (as he expressed it) reserve and was not bound to accept it although it was (as he expressed it) apparently unchallenged.

63 In his consideration of the probabilities that the appellant would have exercised its discretion in favour of paying the Bonus, the primary judge took account of factors and drew inferences which I consider to be of doubtful validity, including that the respondent had been accustomed to receiving bonuses from her previous employer and the inference that in the early years the appellant would have been concerned to try and keep her on its staff. However, to be balanced against this is the fact that whilst Ms Lee maintained that the Bonus would not have been paid, she provided no evidence of any consideration (let alone any relevant one), which she might have taken into account in deciding not to pay the Bonus in the face of the respondent having met set objectives. Such evidence was within the respondent’s power to adduce and its failure to give it must be evaluated in that light: Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371.

64 In these circumstances I see no reason to interfere with the primary judge’s substantive conclusion that the Bonus would more likely than not have been paid in years one and two.

65 I would accordingly not uphold the appellant’s submission that the respondent failed to prove damage because the discretion under cl 4.3 was entirely in its discretion and it would have been exercised against her.

THE EX GRATIA PAYMENT

66 The settled principle governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party should receive compensation in a sum which, so far as money can do, will put that party in the same position as he or she would have been in had the contract been performed or had the tort not been committed. The respondent cannot recover more than she has lost: Haines v Bendall (1991) 172 CLR 60 at 63.

67 Whether the ex gratia payment should be taken into account as reducing the respondent’s claim depends on whether, properly characterised, it is to be seen as part of the compensation in respect of which the claim is made and to which the respondent was entitled: see, for example Furey v Civil Service Association of WA (Inc) [1999] FCA 1492 at [31]-[33]; Black v Brimbank City Council (1998) 152 ALR 491.

68 The ex gratia payment was made four weeks after the respondent’s last day of employment. It was undoubtedly made in connection with the parties’ relationship under the Agreement. On 17 June 2008, the respondent had noted to the appellant that she considered a “legal solution” to be her only option.

69 The contemporaneous documents designated and appropriated $7,410.02 of it to salary, which was then owing. Clearly, this component is not to be deducted from any award in the respondent’s favour.

70 However, no other amount was in fact owing to the respondent other than the damages she was entitled to receive in relation to the appellant’s breach of the Agreement that has been found.

71 There is no evidence of any contemporaneous designation or appropriation with respect to the balance of $48,165.13. However, it is the subject of an admission that it was “an ex gratia payment of an additional three months remuneration”.

72 The effect of the respondent’s submission is that the balance of $48,165.13 should be treated as remuneration under the Agreement other than the Bonus, and should not be taken into account, even though no other remuneration was owed and a dispute had been foreshadowed.

73 The Agreement deals with salary under the heading “Remuneration” and the Bonus under the heading “Annual Performance Bonus”, but both headings are capitalised. The Concise Macquarie Dictionary defines the term “remunerate” (lower case, as it appears in the Notice to Admit Facts and Authenticity of Documents) as “to pay, recompense or reward for work, trouble, etc”, which is undoubtedly wide enough to cover both salary and the Bonus.

74 In my view, the amount of $48,165.13 bears sufficient connection, both temporally and with respect to subject, to the claim on which the respondent has succeeded, that it is to be characterised as discharging, in part, the appellant’s liability to the respondent. Not to take it into account would result in the respondent recovering more than she has lost.

THE COSTS BELOW

75 The appellant submitted to the primary judge that the respondent should not have all of her costs because the Trade Practices count had been abandoned at the beginning of the trial. Although he agreed that some aspects of preparation would have been different, the trial judge expressed an expectation that the factual matrix would have been substantially similar. In my view, it is undoubtedly the case that there were matters which were relevant only to the Trade Practices count and allowance should have been made for this in favour of the appellant upon its abandonment.

CONCLUSION

76 The respondent is entitled to a verdict, before taking account of interest – including that saved as a consequence of the ex gratia payment to be deducted – of $31,834.87, which is the product of deducting $48,165.13 from $80,000.

77 The appellant has been partially successful. The respondent has, however, retained a significant proportion of the verdict she obtained in the court below. My provisional view is that:

a there should be no order for costs of the appeal; and
b the appellant should pay the respondent’s costs in the court below, excluding costs referable exclusively to the Trade Practices claim, which was abandoned.

78 I would uphold the appeal in part so as to result in this outcome.

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