Repudiation can be an expensive mistake for employers
Repudiating a contract of employment can cost a company dearly
The Supreme Court of Victoria has ordered an employer to pay damages in excess of $420,000 for repudiating a senior employee's contract of employment.
The case serves as an important reminder for employers that on top of the practical consequences of repudiation (e.g. the inability to enforce any post-employment restraint), repudiation can also have costly financial consequences.
In a recent Victorian Court of Appeal decision, the Court held that Crowe Horwath (Aust) Pty Ltd (CHA) could not enforce post-employment restraints in its contract of employment with Mr Loone (the Managing Principal of CHA's Launceston office) after it engaged in conduct which amounted to repudiation of Mr Loone's contract of employment. The Court found that CHA had repudiated the contract in deciding to:
- exclude Mr Loone's performance on a transaction from the calculation of his bonus
- introduce a new incentive model resulting in a component of Mr Loone's bonus being deferred
- implement organisational changes resulting in a significant reduction in Mr Loone's responsibilities and status.
How did the Court assess damages?
In assessing damages, the Court compared the financial position of Mr Loone if CHA had not engaged in repudiatory conduct with his financial position as a result of the termination of his employment. The Court said that had it not been for CHA's repudiatory conduct, Mr Loone would have remained employed for a further 12 months.
CHA contended that it was unlikely that Mr Loone would have remained employed for 12 months given the impending organisational restructure which would have resulted in the termination of his employment on six months' notice (or pay in lieu of notice) in accordance with his employment contract.
CHA sought to invoke the 'least burdensome' principle which meant that it was entitled to perform its contract with Mr Loone in the manner 'least burdensome' to it (i.e. to lawfully terminate Mr Loone's employment on six months' notice (or pay in lieu)).
The Court rejected CHA's argument and held that the 'least burdensome' principle did not operate automatically simply because it would reduce the quantum of damages. Bearing in mind that one of the reasons the Court said CHA repudiated the contract was by implementing organisational change, it said that if it reduced the quantum of damages on the basis that CHA would have exercised its right to terminate Mr Loone's employment in connection with the organisational restructure, it would lead to a reduction of CHA's liability to pay damages "by reason of the very same conduct held to be repudiatory". This was inconsistent with the principle that Mr Loone should be awarded damages that fairly and adequately compensated him for the loss or injury suffered by reason of CHA's wrongful conduct.
Mr Loone was awarded more than $420,000 in damages comprising his salary, superannuation and bonus entitlements for 12 months.
Lessons for employers
- Aside from the consequence that employers may not be able to adequately protect their business from competition and solicitation through enforceable post-employment restraints, an employer who repudiates an employment contract could also be liable for substantial damages.
- While the principle that an employer would have performed a contract in the manner 'least burdensome' to it applies to the assessment of damages, the principle will not automatically operate to reduce the quantum of damages, particularly where performing a contract in a manner 'least burdensome' would mean relying on conduct which is the same as, or an extension of, the conduct that constitutes repudiation.
- To avoid engaging in repudiatory conduct, employers should take care when proposing changes to an employee's duties and responsibilities and, where possible, seek to discuss any changes where they are likely to be material.
- Conversely, where employees have engaged in repudiatory conduct, employers should be careful to respond appropriately so as not to inadvertently accept the repudiation (and bring the contract to an end) or elect to keep the contract on foot. There are also ways to characterise damages in an employment contract that can assist employers faced with this issue.
 Crowe Horwath (Aust) Pty Ltd v Loone (No 3)  VSC 548.
 Crowe Horwath (Aust) Pty Ltd v Loone  VSCA 181.
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