University of New South Wales Faculty of Law Research Series
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Last Updated: 5 May 2008
Damages in Executive Employment Litigation
Dr Joellen Riley
Associate
Professor
Law Faculty, University of New South Wales
New South Wales Young Lawyers
Annual Employment & Industrial Relations
One Day Seminar
24 February 2007, Four Seasons Hotel, Sydney
Abstract
I have been invited to speak today on developments in executive employment contract law, and particularly on the issue of damages awards in litigation. I will cover the very important Nikolich litigation, but I would also like to reflect on Walker v Citigroup Global Markets Australia Pty Limited (formerly known as Salomon Smith Barney Australia Securities Pty Limited) and some of the implications of that litigation for claims by executives against their employers.
Both of these cases demonstrate important developments in executive litigation in recent years. The developments I would like to highlight in this paper are: First – that the Trade Practice Act 1974 (Cth) is proving particularly important in executive contract litigation. Second – the courts are taking a flexible (and, with respect, entirely sensible) approach to the construction of employment contracts when there is a difference between the wording of a standard form service contract and specific terms agreed during negotiations. Construction of terms concerning the duration of contracts has a significant impact on the size of damages claims. Thirdly – damages are being awarded for loss of chance, according to the principles in Commonwealth of Australia v Amann Aviation Pty Ltd. This development also has the potential to inflate damages claims. Finally – damages are being awarded for what we might describe as personal distress, so long as that distress results in some significant disturbance to the claimant’s health or lifestyle.
The cumulative effect of these developments is that we are seeing executive level employees receiving damages awards considerably higher than they would receive if they were limited to a simple payout for a notice period, and certainly higher than the statutory compensation allowed under unfair dismissal laws. The executive cases are proving that contract-based claims and claims under the Trade Practices Act can produce considerably more generous awards than statutory claims under industrial laws.
Lessons from the Federal Court
I have been invited to speak today on developments in executive employment contract law, and particularly on the issue of damages awards in litigation. While preparing this paper, I was conscious that I would be following Ron Baragry, speaking on the implications of the very important Nikolich litigation.[1] I, too, will consider some aspects of that case, although I will assume Ron has covered the very interesting issues surrounding the incorporation of human resources policies into employment contracts. I would also like to reflect on Walker v Citigroup Global Markets Australia Pty Limited (formerly known as Salomon Smith Barney Australia Securities Pty Limited),[2] and some of the implications of that litigation for claims by executives against their employers.
Both of these cases demonstrate some particularly important developments in executive litigation in recent years. The developments I would like to highlight in this paper are:
The cumulative effect of these developments is that we are seeing executive level employees receiving damages awards considerably higher than they would receive if they were limited to a simple payout for a notice period, and certainly higher than the statutory compensation allowed under unfair dismissal laws. The average employee claiming unfair dismissal under the Workplace Relations Act 1996 (Cth) is limited to compensation of up to six months salary – and that is assuming that the employee retains any entitlement to bring a statutory claim at all, following the changes wrought by the Workplace Relations Amendment (Work Choices) Act 2005 (Cth). The executive cases are proving that contract-based claims and claims under the Trade Practices Act can produce considerably more generous awards than statutory claims under industrial laws.
1. Trade Practices claims
In both Nikolich and Walker, it was a
claim under section 52 of the Trade Practices Act (TPA) which initially
brought the matter to the Federal Court (although in Nikolich, a claim of
unlawful dismissal for absence on the basis of temporary illness, in breach of
the Workplace Relations Act, was also raised – unsuccessfully).
Mr Nikolich’s claim under the TPA was unsuccessful because he was
unable to demonstrate that he suffered any loss or damage
by relying on the
misleading and deceptive conduct of his employer. Mr Nikolich was an existing
employee of Goldman Sachs, and he
was aggrieved because he had relied on a
representation concerning the reallocation of client accounts when other team
members left.
Justice Wilcox referred to the fundamental principle established
by a majority of the High Court of Australia in Gates v City Mutual Life
Assurance Society
Limited[6] that
damages under s 82 of the TPA are to be assessed on a tort-like basis. Mr
Nikolich brought no evidence that he “would have embarked on a more
profitable
course”[7] had he
not been mislead, so he was unable to establish an award of damages for breach
of s 52.
At first instance, Mr Walker’s TPA claim was highly
successful, and he was awarded damages of more than $700,000 in respect
of the
employer’s breach of section 52. (On appeal, his contract claim was more
successful, so the TPA claim was overreached.) At first instance, Kenny J held
that Mr Walker
was entitled to damages under sections 87(2)(d) and 82 of the
TPA. Section 87(2)(d) empowers the court to make an order “directing the
person who engaged in the conduct or a person who was involved in the
contravention
constituted by the conduct to pay to the person who suffered the
loss or damage the amount of the loss or damage”. Unlike
Mr Nikolich, who
was an existing employee, Mr Walker never actually started work with the firm
who agreed to employ him. Between
accepting the offer of employment, and
commencement, various corporate reorganisations and other decisions caused the
employer to
change its mind about employing him. In the meantime, however, he
had volunteered for redundancy from his existing employment instead
of electing
to take a position with ABN AMRO, the firm that had taken over the business of
his former employer.
Justice Kenny assessed damages on the basis that his
reliance on the misleading conduct of the new employer caused him to lose an
opportunity to earn an income employed by ABN AMRO for a number of years. This
finding is consistent with other decisions under
the TPA involving offers of
employment. In O’Neill v Medical Benefits Fund of Australia
Ltd,[8] the
plaintiff was held to be entitled to damages under the TPA on the basis of what
he would have earned had he stayed in his relatively
secure former employment,
rather than accept a misleading offer of what was claimed (falsely) to be a
secure and long term position
with MBF. Likewise, in Magro v Fremantle
Football Club
Ltd,[9] a football
coach who was poached from a Victorian to a Western Australian AFL club on the
misleading promise of a five year contract
was awarded damages under the TPA to
put him in the position he could reasonably have expected to be in had he
remained in Victoria
and continued his coaching career there.
There is a peculiar thing about damages awarded under the TPA in what is essentially a contract law matter. Because damages for breach of s 52 are assessed on a tort-like basis, the court must engage in an elaborate “what if . . .” exercise. What if the parties had not entered into this relationship at all? Where would the plaintiff now be? What financial position would he or she presently enjoy, in that alternative world? The answer to that question does not necessarily produce the same result as a contract claim. Take Magro’s case for instance. The half a million dollars or so he obtained for TPA damages exceeded the amount he would have been entitled to claim if he really did have a five year contract, and was paid out to its end. There is something counter-intuitive in this result. It seems odd that the employer who makes a mere representation should be held to pay a greater sum in damages than if the representation was an actual term of a binding contract.
2. Contract construction
In last year’s NSW Young Lawyers Annual
Employment and Industrial Law One Day Seminar, I expressed some criticism of the
tendency
of common law judges to prefer the terms of a written contract in
standard form, over terms agreed during the negotiations between
parties to an
employment
relationship.[10] It
now appears that this criticism was unfounded. The full bench in Walker
had to deal with precisely such a problem.
Mr Walker had been given
assurances that he would be employed until at least the end of 1998 – a
period of close to 12 months
from his initially proposed starting date. However
the standard form “Conditions of Employment” which were attached
to
his offer of employment contained a clause stipulating that the employment could
be terminated on one month’s notice. At
first instance, Kenny J held that
the termination clause in the standard Conditions applied, and that the employer
should be taken
to be entitled to exercise its rights under that clause. This
is why the contract claim produced a damages award of only $22,917
at first
instance. The full bench disagreed, finding that on its true construction, the
proposed contract was to continue until
at least 31 December 1998.
The
express offer to Mr Walker – arrived at after considerable negotiation
– had stipulated a guaranteed minimum bonus
of $250,000 for the 1998 year,
and a promise that he would take on the title of Director of Research at the
completion of the 1998
year. These elements in the express terms of his offer
of employment were clearly inconsistent with the standard form conditions
allowing termination upon one month’s notice.
The full bench resolved
this conflict between terms by applying the principle that “[w]here there
are clauses of a contract
specially framed with the individual circumstances in
mind, together with standard form clauses, it will normally be appropriate
to
give greater weight to the specially negotiated
clauses”.[11]
The court solved the problem created by the inconsistent clauses by a process of
construction. The termination clause was construed
to take effect “only
after the completion of the 1998 calendar
year”.[12]
The circumstances of the recruitment assisted the court to this solution.
The court held that the “purpose and object of the
transaction, namely the
recruiting of a high level and high profile employee then in other
employment” made it a “practical
absurdity” that the parties
would have agreed to a clause allowing termination on only one month’s
notice, and a consequent
avoidance of any obligation to pay the promised
guaranteed
bonus.[13]
Certainly,
in this case the court had some express terms to work with. The negotiated deal
was noted in letters between the parties.
Employees relying on nothing more
than verbal assurances may continue to have difficulty in holding a reneging
employer to orally
agreed terms, in the face of a contradictory written
contract. Nevertheless, the court’s reasoning in Walker –
drawing on the “purpose and object” of the transaction, and
considerations of what “business people active
in the financial
world”[14] would
have agreed – offers some prospect that future courts will not hold that
contradictory clauses in a standard form contract
must necessarily trump
negotiated oral terms of an employment contract.
3. Loss of chance
The finding at first instance that the contract could
be terminated on one month’s notice also defeated Mr Walker’s claim
that contract damages should be assessed taking into account his loss of the
chance to remain in employment for a longer period.
This claim, based on
Commonwealth of Australia v Amann Aviation Pty
Ltd,[15] was
rejected by Kenny J on the basis that the employer did have a right to terminate
the contract if it chose to do so for any reason,
and had in fact exercised that
right by deciding it did not want to continue with plans to engage Mr Walker at
all. According to
Kenny J, the facts of the case left no room to speculate on
what might have eventuated if there had been no breach of contract.
The
appeal bench finding that it would have been a breach of contract for the
employer to terminate the employment before the end
of December 1998 also
changed the result of the loss of chance claim. It was held that Mr Walker,
having already held a position
of considerable prominence in the firm for almost
12 months, and most probably performing his duties well, would be very unlikely
to have been terminated. The court held: “That NatWest would have sacked
a skilled and competent employee holding a high profile
position within the
company without cause is not a natural inference to be drawn without direct
evidence.”[16]
NatWest brought no such evidence, so the court awarded damages on the basis that
Mr Walker had a 75% chance of remaining employed
until at least 30 June 2003.
The figure awarded for loss of chance (after taking into account a deduction for
actual earnings from
other sources during that period) was $1,867,386. Added to
the $479,167 awarded for the ten months salary owed until the end of
1998, Mr
Walker received $2,346,553 in respect of lost earnings.
The fact that the
court was prepared to award considerable damages based on the loss of a chance
to remain employed opens up the scope
for very considerable damages in executive
contract cases.
4. Personal distress
One of the particularly notable aspects of the
Nikolich case was that Wilcox J awarded Mr Nikolich general damages of
$80,000, in respect of psychological harm. In Nikolich, the orthodox
argument that damages for breach of an employment contract cannot include any
sum for humiliation and
distress[17] was
defeated on the basis that this particular contract included a commitment by the
employer to provide “peace of
mind”.[18] That
was held to bring the claim for general damages within the principles allowed in
Baltic Shipping Company v
Dillon.[19] If it
is an object of a contract to provide enjoyment, relaxation, or (in this case)
“peace of mind”, then it is a breach
of contract to cause distress,
and so the distress will sound in an award of damages. The obligation to
provide peace of mind was
found by the incorporation of the firm’s
policies against workplace harassment.
In Naidu v Group 4 Securitas Pty
Ltd,[20] a more
humble employee (a security officer) was awarded general damages of $100,000 for
psychiatric illness induced by breach of
his employer’s obligation (under
the employment contract) “that he would not be intimidated by physical or
verbal abuse
by persons with whom he was required to work nor was he to be
subjected to personal or racial
vilification”.[21]
Mr Naidu was subjected to very serious harassment at work and suffered
significant psychiatric harm. The court in Naidu also relied on the
principle in Baltic
Shipping.[22]
In
Walker, Kenny J at first instance rejected a claim that contractual
damages for distress on the Baltic Shipping principle should be available
in this case. Mr Walker was however awarded $5,000 for distress and vexation,
consequent upon the misleading
and deceptive conduct
claim.[23] Kenny J
held that the evidence of distress and vexation in this case was “very
slight”.[24]
On
appeal, Mr Walker appealed the adequacy of these damages (although not the basis
on which they were awarded, so the appeal court
considered them in the context
of the TPA claim alone). In a crisp summary of its findings, the appeal bench
stated that, although
not much evidence was brought that Mr Walker’s
personal situation was caused by the distress and vexation of his treatment
by
NatWest, the “consequential effect of the loss of his job on
Walker’s business reputation and personal life”
were drastic, and
were not “out of the ordinary course of events”. The court held
that $5,000 was a significant underestimate,
and substituted an award of
$100,000.
Here we might draw another comparison with the plight of the
ordinary employee who is bringing an unfair or even unlawful dismissal
claim
under statute, rather than a claim under contract or the TPA. The WR Act, s
654(9) now expressly limits compensation awards,
so that no sum may be awarded
in respect of “shock, distress or humiliation or any analogous hurt”
caused by the manner
of dismissal. As far as statutory claims are concerned,
Burazin[25] no
longer has any force, post Work Choices. Nevertheless, a claim brought in
contract, or for breach of the TPA, may sound in damages
of this type, where a
claimant can show that harm to personal well-being has been an ordinary or
foreseeable consequence of either
a breach of contract, or misleading and
deceptive conduct.
Where is “good faith” in all this?
I have deliberately avoided any discussion of the
potential for the employer’s duty not to destroy mutual trust and
confidence
to sound in damages in executive employment contract cases. Although
I am convinced that the concept of a reciprocal obligation
to cooperate in good
faith is indeed informing contemporary construction and interpretation of
executive employment contracts (and
I do believe Nikolich is an example),
many are still sceptical. Kenny J, in Walker, stated categorically that
“the Court should not imply a duty of good faith” into the
employment contract between an
employer and an upper-level
employee.[26]
The
full bench resolved the questions on appeal without needing to consider at all
whether any implied obligation of good faith constrained
the employer to
exercise its power to terminate the contract only “reasonably and in good
faith”. So there is still
(to my knowledge) no appellate level decision
which squarely tests the proposition that employment contracts are to be
performed
“in good faith”. But then, if future cases follow the
developments apparent in Walker, it may not be necessary or useful to
pursue such an argument. If courts are prepared to give weight to all of the
commitments made
by parties during their negotiations, ahead of the
“escape clauses” hidden in standard form contract documents for the
employer’s benefit, and if they are prepared to consider the full extent
of the losses suffered as a consequence of an employer
ultimately reneging on
those commitments, then the same result has been reached as might be reached
were a “good faith’
obligation to be implied. It has long been my
view that the general reluctance of courts to imply a good faith obligations in
employment
relationships can be blamed on a fear that good faith performance of
contracts allows a rewriting of contractual obligations I believe
this is a
misunderstanding of what good faith means. Good faith performance requires only
that parties to a contract cooperate in
performance, so that both parties are
able to enjoy the mutually intended benefits of the
relationship.[27] The
good faith obligation precludes opportunistic conduct, such as taking advantage
of a one month’s notice of termination
clause in some standard conditions
tacked to a letter of appointment, after negotiating a long term engagement.
The approach to
construction taken by the full bench in Walker was
consistent with an obligation upon parties to cooperate in good faith to perform
the terms of their real agreement.
Conclusion
If the Walker case is a reliable example, employment contract disputes (or at least, disputes over executive service contracts), are being resolved according to the same principles applying in other commercial contract cases. Principles of contract construction, and the award of damages for loss of chance and consequential loss, mean that it is no longer sufficient for employing enterprises to slip a termination on notice clause into a standard form contract. These are important developments in employment contract law – especially if employee advocates can find a way to ensure that the benefits of these developments also flow through to the less highly remunerated employees who can rarely afford to litigate their claims.
[1] Nikolich
v Goldman Sachs J B Were Services Pty Ltd [2006] FCA 784. When I last
checked the Federal Court of Australia website of decisions on appeal (on 14
February), I saw that the appeal from this
decision was part heard, and listed
again for hearing on 15 February. So it may be some time before a decision is
handed down in
this
matter.
[2] [2006]
FCAFC 101 (23 June 2006). The first case in this series, in which the primary
judge determined liability, was Walker v Salomon Smith Barney Australia
Securities Pty Ltd [2003] FCA 1099. Damages were assessed in Walker v
Citigroup Global markets Pty Ltd [2005] FCA
1678.
[3] Riley, J
“Arguing the Trade Practices Act in Employment Matters”, paper
presented at the 11th Annual Labour Law Conference,
Rethinking the Law of Work: Perspectives on the Future Shape of Employment
Regulation, Sydney, 4 April 2003. The essence of this paper has subsequently
been published in Riley, J Employee Protection at Common Law, Federation
Press, Sydney, 2005, Chapter 7. Ron Baragry also addressed this issue early in
2003: See “Actions under the Trade
Practices Act”, paper presented
at the UNSW CLE Conference Avoiding Litigation with Senior Executives,
Sydney 28 March 2003.
[4] [1991] HCA 54; (1991) 174 CLR
64.
[5] [2006] FCAFC
101 at [91].
[6]
(1986) 160 CLR 1, at
6.
[7] [2006] FCA 784
at [306].
[8] (2002)
122 FCR 455; [2002] FCAFC
188.
[9] [2005] WASC
163.
[10] See
Riley, Joellen “Alternative Actions in the light of Work Choices: Implied
Terms”, NSW Young Lawyers Continuing Legal Education Seminar
Papers, 25 February 2006 at pp
2-4.
[11] [2006]
FCAFC 101 at
[77].
[12] At
[77].
[13] At
[76].
[14] At
[76].
[15] [1991] HCA 54; (1991)
174 CLR 64.
[16] At
[83].
[17] See
Addis v Gramaphone Co Ltd [1909] UKHL 1; [1909] AC
488.
[18] [2006]
FCA 784 at
[330].
[19] [1993] HCA 4; (1993)
176 CLR 344 at 365; 371-2, 382, 387 and
394.
[20] [2006]
NSWSC 144 (15 March
2006).
[21] Ibid at
[18].
[22] At
[21].
[23] See
[2005] FCA 1678 at [135] –
[138].
[24] Ibid at
[137].
[25]
Burazin v Blacktown City Guardian Pty Ltd [1996] IRCA 371; (1996) 142 ALR
144.
[26] {2005]
FCA 1678 at
[205].
[27] For
fuller argument of this position, see Riley, Joellen Employee Protection at
Common Law, Federation Press, Sydney, 2005, Chapter 3
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