Regretful repudiation ruins restraints
WR&S Bulletin - 5 December 2017
Is it possible to have your cake and eat it too? No, as it turns out — but that won't stop us from buying more cakes to continue experimental verification of this hypothesis. Similarly, is it possible to breach an employment agreement in such a fundamental way that the agreement comes to an end, but then to subsequently rely on the benefits and protections that the agreement previously provided to you?
- Tasmanian Looney Tunes
- We'll see you in court!
- No dice as the Crowe flies
- Regretful repercussions regarding restraints
- Hurting the hip pocket
- Lessons for employers
Surprisingly, the answer to this question was not made clear until the Supreme Court of Victoria's Court of Appeal was recently asked to decide whether an employer, Crowe Horwath, could rely upon the post-employment restraints provided in one of its employment agreements after the employer had itself repudiated the contract.
The case is a useful illustration of the potentially significant consequences which an employer might face if it fails to comply with the terms of its own employment agreements.
Anthony Loone had been Crowe Horwath's most senior executive in its Launceston office for many years. A qualified accountant, Loone had been appointed as "Managing Principal" from November 2012, and had developed very close relationships with Crowe Horwath's clients over time.
In January 2015, Crowe Horwath was acquired by Findex Group Ltd. Following the acquisition, Findex introduced various changes, such as the appointment of a Manager with overall responsibility for all Crowe Horwath offices throughout Australia and New Zealand, with a view to streamlining Crowe Horwath's operations.
Between late 2015 and June 2016, Loone's management responsibilities were largely stripped from his role, such that he no longer enjoyed autonomy in making decisions about the running of the Launceston office.
In June 2016, Loone was informed by Crowe Horwath's senior management that it intended to introduce a new incentive model, under which bonus payments would be divided into two components — a cash payment and a deferred incentive. Under the new model, 20% of the annual bonus would be deferred and distributed over three years.
Further, on 1 July 2016, Loone was informed by senior management that a major acquisition on which Loone had worked hundreds of hours, and which contributed $440,000 net profit to Crowe Horwath's Launceston office for the financial year ending June 2016, would be excluded from the bonus pool, and that that there would be no adjustment to reflect Loone’s involvement in the acquisition.
Unhappy with these changes, Loone left Crowe Horwath on 12 July 2016, arguing that his loss of managerial autonomy and the exclusion of the acquisition from the bonus pool were repudiatory breaches of his employment contract, allowing him to lawfully end his contract of employment with Crowe Horwath without working out any notice period.
Crowe Horwath immediately commenced proceedings in the Supreme Court of Victoria, seeking the imposition of temporary injunction in reliance upon the post-employment restraints present in Loone's contract. On 26 September 2016, the court granted an interlocutory injunction in favour of Crowe Horwath, restraining Loone from offering accounting services to 89 Crowe Horwath clients with whom he had direct dealings in the previous 12 months.
On 4 April 2017, following a further five day hearing in February 2017, the court made further orders, which overturned the previous injunction granted to Crowe Horwath. It found that the employment contracted was terminated by Loone's acceptance of repudiatory conduct by Crowe Horwath and that, as a consequence, the restraint of trade clause under the employment contract was of no legal effect.
Crowe Horwath subsequently appealed the decision on two major grounds: that the court had erred in finding that Crowe Horwath had engaged in repudiatory conduct, and had erred in finding that the post-employment restraints were of no legal effect.
Unfortunately for Crowe Horwath, the Court of Appeal unanimously agreed with the findings that it had engaged in the following behaviour, which was considered serious enough to amount to repudiatory conduct.
- Change of duties: a major change following the acquisition of Crowe Horwath by Findex was the implementation by senior management of a "family office initiative" across Crowe Horwath's offices. This initiative greatly reduced Loone's managerial responsibilities and, when considered in a realistic way, demonstrated that Crowe Horwath was requiring Loone to occupy a position other than his contracted one of Managing Principal.
- Deferred incentive bonus arrangements: the Court of Appeal agreed with Loone's submission that his employment agreement, properly construed, conferred no right on Crowe Horwath to withhold any part of a bonus once it determined that a bonus should be awarded for a particular year. Crowe Horwath's decision to implement deferred incentive bonus arrangements was therefore in breach of the contract.
- Exclusion of major acquisition from bonus calculations: the Court of Appeal also agreed with Loone's argument that by excluding Loone's work on the major acquisition from his bonus calculations, Crowe Horwath was not acting in accordance with the employment agreement, which required it to take his personal performance into account when determining his annual bonus.
Crowe Horwath also asked the Court of Appeal to find that, despite its repudiatory conduct, it could still enforce its contractual post-employment restraints against Loone. Crowe Horwath maintained that it was the parties' intention that the post-employment restraints survive the termination of the employment in all circumstances and for any reason, including repudiation by the employer.
To answer the question of whether contractual restraints might be enforceable following an employer's repudiation, the Court considered a series of High Court decisions, as well as cases from courts of high authority in England and Canada. It found that there was no reported case in a court of superior jurisdiction in Australia or England which had decided that a restraint clause was enforceable against a former employee in circumstances where an employer had engaged in repudiatory conduct and the repudiation had been accepted by the employee (i.e. the employee had chosen to end the contract because of the repudiation).
On this basis, the Court found that Crowe Horwath could not enforce the post-employment restraints in the employment agreement, due its repudiatory conduct.
Loone's case was referred back to the court for the purpose of determining Loone's entitlement to damages arising from Crowe Horwath's repudiatory conduct. Crowe Horwath submitted that, regardless of any of its repudiatory conduct, Loone would have been unlikely to work for it for more than a six-month period following the actual end of his employment, due to the many changes in the workplace. In contrast, Loone argued that he would have continued in employment for another 12 months.
The court found in favour of Loone's position, on the basis that Crowe Horwath's argument was essentially trying to benefit from its own repudiatory conduct (i.e. the changes in the workplace). Loone was therefore awarded over $423,445, being his salary for a twelve month period in addition to a sum of over $142,000 for his full bonus entitlement for the 2015/2016 financial year.
Courts are unlikely to enforce a restraint of trade clause in circumstances where an employer has engaged in repudiatory conduct.
Therefore, employers should be mindful to ensure that that they do not breach employment contracts with staff by seeking to unilaterally impose changes, particularly where they wish to hold the employee to any post-employment restrictions in the contract.
Luke Scandrett | Lawyer
+61 2 8020 7686
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