30 Nov 2010

Employment contracts not terminated by an employee's breach

by Joe Catanzariti

The recent New South Wales Court of Appeal decision in Purcell v Tullett Prebon (Australia) Pty Limited [2010] NSWCA 150 has highlighted the continuing importance of the contract of employment. The case also demonstrates that a repudiation by an employee does not automatically terminate their employment contract and can have significant ramifications for the employee.

The employment contract and claim for damages by the employer

Mr Purcell, a successful finance broker, entered into a contract of employment with Tullett Prebon (Australia) Pty Limited for a two-year term. Some months later, in breach of his employment contract, Mr Purcell commenced work for a competitor of his employer.

The employer successfully obtained an injunction restraining Mr Purcell from working for that company and subsequently placed him on paid garden leave. The employer in doing so elected to continue Mr Purcell's employment in accordance with the terms of his employment contract.

Shortly before the expiration of the injunction, the employer directed Mr Purcell to return to work, but he failed to comply. The employer treated this as a final repudiation of the employment contract and sued Mr Purcell for liquidated damages in accordance with a clause of the contract.

At first instance, Justice Ward upheld the employer's claim for liquidated damages of $503,100 payable under the contract of employment. Mr Purcell appealed this decision to the New South Wales Court of Appeal.

There were two main issues to be determined on appeal:

  • was the employment contract still on foot, entitling the employer to direct Mr Purcell to return to work?; and
  • was the employer ready, willing and able to perform its obligations under the contract, therefore entitling it to terminate the contract and recover damages for breach?

Was the employment contract still on foot?

The New South Wales Court of Appeal began by noting that an employee is bound to obey the lawful and reasonable directions of his or her employer. Justice Ward held at first instance that the employer's direction to Mr Purcell to return to work was lawful and reasonable because the employment contract was still on foot.

Mr Purcell's principal argument was that the employment relationship had ceased following the employer obtaining the injunction and placing him on garden leave, and it could not be reinstated unilaterally by the employer. He also argued that an employer confronted with a recalcitrant employee could not give binding directions for the performance of work as the employment relationship was gone, and those rights had gone with it.

The Court of Appeal held that if Mr Purcell's argument was accepted, it would lead to an unsatisfactory situation where a guilty party would be able to take advantage of their own wrong to achieve the desired result of terminating part of the contract. It further held that, considering the law has not yet recognised the right of an innocent party to terminate part of a contract for breach, it could hardly allow a guilty party to rely on their own breach to achieve that result.

The Court of Appeal referred to the High Court decisions in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 and Visscher v Giudice (2009) 239 CLR 361 which establish that contracts of service are not in a special position and like other contracts they are not terminated by a repudiatory breach, even if further performance is suspended. It held that the contract of employment was still in force when the employer gave the employee the direction on 2 October 2010. The contract entitled the employer to terminate the appellant's garden leave and require him to report for work.

The Court of Appeal noted that the employer had kept the employment contract alive for the benefit of both parties and the direction was an offer to reinstate Mr Purcell in his employment under the contract. If he had reported for work as directed, the relationship of employee and employer would have been reinstated under the existing contract. It further held that Mr Purcell's failure to comply with the notice to return to work was a further repudiatory breach which entitled the employer to terminate the contract.

Was the employer ready, willing and able to perform its obligations under the contract?

Having found that the contract of employment was still on foot, the Court had to determine if the employer was ready, willing and able to perform its obligations under the contract. Mr Purcell argued that the direction to return to work was essentially a device for terminating the contract and the employer did not really want him to return to work.

At first instance, Justice Ward found that the employer was ready to re-employ the appellant, a finding that was not seriously challenged. Mr Tullett, the managing director of the employer, was adamant in his evidence before Justice Ward that he would have been happy for Mr Purcell to return. Justice Ward held that there were financial reasons that the employer would have welcomed Mr Purcell back as he had been a very successful broker who earned substantial profits for the employer.

The Court of Appeal upheld this finding, holding that "the employer wished to bring matters to a head so the relationship would either be re-established or the contract would be terminated for breach" and that this was not unreasonable. Given that Mr Purcell's continuing repudiation entitled the employer to terminate the contract without further notice, in these circumstances it was open to the employer to give Mr Purcell a final opportunity, by its notice to report for work, to retract his repudiation.

It further held that the employer's readiness to perform its obligations was not just a question of fact; it applied the principle enunciated by Chief Justice Dixon in Rawson v Hobbs (1961) 107 CLR 466 that "nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires" is sufficient to indicate an absence of readiness and willingness.

Liquidated damages

Mr Purcell's contract of employment contained a clause which provided a method for calculating liquidated damages if the contract was terminated for repudiation on his part. The Court of Appeal noted that the employer was only entitled to recover substantial damages for breach if it was ready, willing and able to perform the contract. Based on the findings which had been made earlier, the employer was entitled to terminate the contract for repudiatory breach and recover damages for its loss of bargain. Accordingly, the appeal was dismissed with costs.

Implications for employers and employees of the Purcell case

This decision has reinforced the fact that contracts of employment are the same as other forms of contract and cannot simply be terminated by an employee's repudiation. Employees will not be able to rely on their own repudiation to avoid their obligations under their contract of employment. The fact that the Court upheld the liquidated damages clause might lead employers to reflect upon whether such a clause is appropriate in their employment contracts.

This article was written when Joe Catanzariti was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

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