Full Federal Court on principles relating to termination of contract by reference to reasons not given at the time of termination

By 16/03/2015Contract
termination of contract

The Full Federal Court has examined the scope and applicability of Shepherd v Felt and Textiles of Australia (1931) 45 CLR 359 (Shepherd), regarding the justification of a termination of contract by reference to reasons not given at the time of termination.  The case is Melbourne Stadiums Ltd v Sautner [2015] FCAFC 20 (26 February 2015) (MSL).

The controversy

In Downer EDI Ltd v Gillies (2012) 229 IR 314 Allsop P (as he then was) referred to Shepherd as the:

well-known feature of the common law … that a contracting party who gives a reason for a contractual position being taken (such as termination) does not by the giving of that reason (which may be wrong) deprive itself of a justification which existed, whether known of or not at the time” (at [131])

Allsop P went on to say (at [136] – [138]) that there was no reason in principle why Shepherd should not be extended to cases where termination was lawfully justified on the ground that was relied upon at the time of termination, but could also be justified on another ground that existed whether or not known at the time.

In MSL Mr Sautner contended that this extension did not reflect the ratio in Shepherd.

Mr Sautner contended that Shepherd should be confined to cases where termination cannot be lawfully justified on the ground that was relied upon at the time of termination, but can be justified on a ground which then existed whether or not known at the time.

As will be seen below, the distinction can lead to different results in terms of liability.

Background

There was a contract of employment between Melbourne Stadiums Limited (MSL) and Mr Sautner.  MSL employed Mr Sautner in a senior management position as its Director, Commercial Business.

On 3 June 2013 MSL purported to terminate the contract under clause 7.1 which entitled it, in its absolute discretion, to terminate the contract by providing 6 months’ pay in lieu of notice.

Then, on 20 June 2013, after it had discovered certain alleged misconduct, MSL purported to terminate the contract for cause under clause 7.2, which entitled it to summarily terminate the contract by notice in writing without any payment in lieu of notice.

MSL asserted, in reliance on the Shepherd principle, that its termination for cause took effect under clause 7.2, rather than under clause 7.1.  If MSL was correct it would avoid paying Mr Sautner 6 months’ pay in lieu of notice.

The undisputed facts concerning one aspect of alleged misconduct (“the bartering misconduct”) were that Mr Sautner, who was responsible for ticketing at Etihad stadium, had traded tickets to the Medallion Club area of the stadium “like currency” for such personal benefits as:

  • work by a locksmith on his house;
  • the installation of a new car battery;
  • “mates rates” for repair work to his house;
  • “family and friends” rates for a gym membership;
  • passes to the Qantas club;
  • vouchers for Bunnings Warehouse;
  • vouchers for supermarket shopping; and
  • flowers in exchange for tickets (at [24]).

For reasons that are not necessary to elaborate, in a joint judgment the plurality (Tracey, Gilmore, Jagot and Beach JJ) held that the primary judged erred in concluding that Mr Sautner’s conduct did not justify summary dismissal.

Accordingly it became necessary to deal with Mr Sautner’s notice of contention in which he contended that even if the grounds of serious misconduct had been made out, the Shepherd principle did not permit MSL to rely upon termination for cause under clause 7.2, when it had earlier terminated the contract without cause under clause 7.1. Mr Sautner sought payment of 6 months’ pay in lieu of notice under clause 7.1.

Outcome

The plurality held that the Shepherd principle could not be used to justify termination of the contract under clause 7.2 if termination had already occurred at an earlier time under clause 7.1.

We do not consider that Shepherd supports MSL’s contention that a lawfully terminated agreement, in effect, may be resuscitated and then re-terminated upon some ground not known at the time of the termination.  An agreement may be terminated lawfully for any number of reasons: resignation of the employee; redundancy; effluxion of the contractual term of employment or some other contractual basis.  A contract cannot be terminated twice” (at [112]).

The plurality expressly departed from Allsop P’s reasons in Downer at [144] “which would permit, following a (lawful) termination of an agreement, an entitlement to rely upon a different type of termination based upon a serious misconduct provision to sustain that very termination” (at [113]).

It should be noted that the plurality’s views were obiter as they held that the contract had not been validly terminated under clause 7.1, because that clause required payment of remuneration in lieu of notice, and payment had not occurred.  Accordingly the contract was still on foot when MSL validly terminated it under clause 7.2, and Mr Sautner was not entitled to remuneration in lieu of notice or other benefits (at [133]).  However the plurality’s views are at the least highly persuasive, coming from 4 members of a Full bench of the Federal Court.

In a separate judgment White J considered it unnecessary and undesirable to consider Allsop P’s reasons in Downer or whether the Shepherd principle could be invoked to justify termination of a contract of employment by reference to subsequently ascertained misconduct of an employee if the contract had already been terminated in accordance with its terms (at [203]).

On the view White J took of the facts, MSL’s purported termination of the contract other than in accordance with its terms was repudiatory of the contract, which repudiation was accepted by Mr Sautner on or about 3 June 2013 and thereby brought the contract to an end (at [188] – [189]).  It followed that in a conventional application of Shepherd, MSL was entitled to rely on the later ascertained misconduct of Mr Sautner to resist his claim for payment in lieu of notice (which ought properly have been a claim for damages by reason of MSL’s breach of contract) (at [191]).

Comment

Whilst obiter the plurality’s judgment has consequences for those cases where a contract is lawfully terminated on one basis (for example, without cause), giving rise to a financial liability (debt), but later it is found that the contract could have been terminated on another basis (for example, for cause) which would have avoided such debt.

The plurality made the following practical suggestions in the context of employment contracts:

The risk that misconduct may and often will not be discovered until after the employment agreement has, by some means, been lawfully terminated and payment in lieu of notice made could be addressed by a contractual term entitling the employer to repayment of those monies.  In an employment agreement it may be that, by reason of the combined natures of the after discovered pre-termination breaches and the particular contract, payments in lieu of notice made may be recoverable as damages.  Such too may be the case where the employee is under a fiduciary duty to his employer to report facts that may provide a foundation for any breach of his fiduciary duties and has failed to do so.  Additionally, such payments may be recovered where the termination was induced by fraud or caused by proscribed statutory conduct.” (at [116]).

It may be that analogous “claw-back” provisions could be written into commercial contracts.  If no such provisions exist, to reduce the risk of non-recovery a termination notice might include a condition as to recovery of payments made, if it is later discovered that termination could have been effected for cause, without making any such payment.