Repudiatory Conduct and its Effect on Damages
Case Report by Eve Lynch.
Crowe Howarth (Aust) Pty Ltd v Loone (No 3) [2017] VSC 548 continues an employment law situation sure to convey warnings to employers nationwide.
In a case where the Courts had already examined legal principles relating to post-employment restraint clauses and repudiation, they have now turned to further examine the correct approach to calculating damages where an employee accepted his employer’s repudiation of his employment contract.
Let us focus mainly on the assessment of common law damages. The case of Robinson v Harman[1] sets out a rule that is still followed today:
“The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”
Facts of the case
Mr Loone was the managing principal at the Launceston branch of Crowe Horwath (Aust) Pty Ltd (Crowe Horwath). His employment contract (dated 1 November 2012) expressly stated that Crowe Horwath would run a discretionary bonus scheme whereby bonuses would be paid to employees on an annual basis. It did not set out that the bonus would only be applied to selected projects.
Mr Loone played a pivotal role in the acquisition of Davey Financial Group in 2015. In June 2016 Crowe Horwath’s new senior management team implemented a discretionary bonus scheme for staff. Under the new bonus scheme, 20% of the employees’ bonus would be deferred for 3 years. In Mr Loone’s case, he was informed that his bonus for the 2015/2016 year would exclude the acquisition of Davey Financial Group. This would have formed a large part of his bonus for that year. Further, his management responsibilities were to change significantly given that the Family Office Initiative (a concept of Crowe Horwath’s new management team, which altered the reporting systems and effectively the principals would no longer have a role, no longer need to manage staff[2]) was about to be implemented in the Launceston office.
Mr Loone’s contract was terminated in July 2016 by reason of his acceptance of the repudiation by Crowe Horwath. He immediately set up his own accountancy practice in Launceston. Consequently, Crowe Horwath commenced proceedings against Mr Loone in respect of his ostensible breach of the restraint of trade clauses in his employment contract. Mr Loone counter-claimed on the basis that Crowe Horwath had repudiated his contract on account of:
their failing to pay him 100% of bonus annually and inclusive of the Davey Financial Group acquisition; and
the major changes to his managerial role in the practice.
In the first instance the Supreme Court of Victoria found in favour of Mr Loone in relation to both the restraint clause and repudiation of contract[3], a position that was challenged by Crowe Horwath but reaffirmed by the Court of Appeal.[4] The parties returned to Court in order to argue the level of damages to which Mr Loone should be entitled.
Findings in No 3
The parties agreed that Mr Loone should be paid damages corresponding to 100% of his bonus for the 2015/2016 period[5] together with the sum of $50,000 relating to the acquisition of Davey Financial Group – together totalling $142,778 (less $1,000 for monies earned in that period by Mr Loone).
The issue in contention here was in relation to post-employment entitlement to damages. Specifically, His Honour Justice McDonald stated “The principal issue which falls for determination is whether, in assessing damages, the Court should do so by reference to a hypothetical fact scenario which excludes CHA’s repudiatory conduct?”[6]
The Supreme Court assessed damages by comparing two positions. Counsel for Mr Loone contended that damages should be assessed by assuming a scenario where Crowe Horwath had not engaged in repudiatory conduct and Mr Loone had continued in his employment for a further 12 months up to July 2017. This would have amounted to $281,667 in income and superannuation. Conversely, Counsel for Crowe Horwath argued that in reality the Family Office Initiative was implemented in August 2016 and that if Mr Loone was an employee at that time the implementation would have resulted in a breakdown of the employment relationship. Mr Loone’s employment contract included a provision for six months’ notice or payment in lieu of notice and his damages should reflect that. So essentially, Crowe Horwath wanted the Court to award damages that recognised Mr Loone’s financial position upon termination of his employment contract.
Crowe Howarth relied on the ‘least burdensome’ principle, whereby it was entitled to perform the employment contract in the least burdensome manner to the employer.
The Court held that an assessment of these damages as proposed by counsel for Mr Loone was consistent with the “well-established principle that a court should look to the facts rather than proceeding upon an improbable factual hypothesis.”[7]
The Court applied several authorities in reaching its conclusion[8]. The authorities agreed that damages payable to the employee should be assessed on the basis that they would have continued in employment but for the employer’s breach of contract. Further, the Court held that the ‘improbable factual hypothesis’ stopped the party in breach of the employment contract from being able to rely on its contractual right to reduce the quantum of damages.[9]
Mr Loone was awarded $423,445 in damages, which included 12 months’ salary and superannuation together with his bonus scheme entitlements.
Where to from here for Mr Loone? The parties returned to Court in October 2017 and it was ordered Crowe Horwath pay Mr Loone’s costs up to 15 September 2017 on a standard basis.[10] And of course, Mr Loone has an unfettered right to continue in his own accountancy practice.
Practicalities for Employers
In order to avoid a similar scenario to the one Crowe Horwath faced with Mr Loone, employers should be aware that it is likely an employment contract will be considered by the Courts to be repudiated if an employer breaches its terms. This will in turn render any restraint of trade clause void. This could potentially result in major expense and loss of client base to an employer.
Contracts ought to properly reflect both the current and future intentions of an employer.
In dealing with employees in future, employers should minimise risk and be mindful not to wander outside the terms of the employment contract without first obtaining the employee’s written consent. The damages the employer is liable to pay the former employee could be significant.
If an employer is interested in purchasing a business and transferring over existing employees, it should carefully examine their contracts prior to purchase negotiations (as it may need to factor in prospective claims) and prior to the implementation of new policies for employees.
If you require employment law assistance, please contact Eve Lynch.
[1] Robinson v Harman (1848) 154 ER 363 at 365.
[2] Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 [113] to [128].
[3] Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.
[4] Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181.
[5] Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 548 at [3].
[6] Ibid [6].
[7] Ibid [12].
[8] Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Van Efferen v CMA Corp Ltd (2009) 183 IR 319; Bartlett v Australia & New Zealand Banking Group Ltd (2016) 92 NSWLR 639.
[9] TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130; Walker v Citigroup Global Markets Australia Pty Ltd (2006) 233 ALR 687.
[10] Crowe Horwath (Aust) Pty Ltd v Loone (No 4) [2017] VSC 656