Tullett Prebon (Australia) Pty Limited v Purcell [2009] NSWSC 1079 (9 October 2009)

Last Updated: 12 October 2009

NEW SOUTH WALES SUPREME COURT

CITATION:
Tullett Prebon (Australia) Pty Limited v Purcell [2009] NSWSC 1079


JURISDICTION:
Equity Division

FILE NUMBER(S):
6304 of 2008

HEARING DATE(S):
9 September 2009

JUDGMENT DATE:
9 October 2009

PARTIES:
Tullett Prebon (Australia) Pty Limited (Plaintiff)
Simon Purcell (Defendant)

JUDGMENT OF:
Ward J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
J J E Fernon SC with him R M Foreman (Plaintiff)
S Rushton SC with him M Elliott (Defendant)

SOLICITORS:
Freehills (Plaintiff)
Horton Rhodes (Defendant)


CATCHWORDS:
EMPLOYMENT LAW - the contract of service and rights, duties and liabilities as between employer and employee - discharge and breach - contract of employment between plaintiff employer and defendant employee subsisted but employment relationship did not - defendant failed to respond to a direction by the plaintiff to attend for work - plaintiff purported to terminate contract and claim debt under liquidated damages clause - whether plaintiff entitled to terminate for breach or repudiation - whether plaintiff’s conduct in previous proceedings had waived right to issue direction or rendered present proceedings an abuse of process - held that plaintiff entitled to terminate contract - plaintiff had not waived right and present proceedings not an abuse of process
CONTRACTS - general contractual principles - construction and interpretation of contracts - penalties and liquidated damages - liquidated damages calculated by multiplying half of average monthly brokerage by number of months remaining in contract with minimum fixed term - whether clause unenforceable as a penalty - whether a genuine pre-estimate of loss - whether out of all proportion to damage likely to be suffered - held that clause not a penalty - clause was a genuine pre-estimate of loss - not out of all proportion to damage likely to be suffered

LEGISLATION CITED:


CATEGORY:
Principal judgment

CASES CITED:
Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349
Australian National Airlines Commission v Robinson [1977] VR 87
Automatic Fire Sprinklers Pty Limited v Watson [1946] HCA 25; (1946) 72 CLR 435
Bechaz v Mariah Hovercraft Australia Pty Limited [2005] AIRC 252
Byrne v Australian Airlines Limited [1995] HCA 24; (1995) 185 CLR 410
Consolidated Press Limited v Thompson (1952) 52 SR (NSW) 75
Dunlop Pneumatic Tyres Pty Limited v New Garage & Motor Co Limited [1914] UKHL 1; [1915] AC 79
Eastwood v Magnox Electric plc [2004] UKHL 35; [2005] 1 AC 503
Foran v Wight [1989] HCA 51; (1988) 168 CLR 385
Gunton v Richmond-on-Thames London Borough Council [1981] 1 Ch 448
Harrison v P & T Tube Mills Pty Limited [2009] FCA 220
Koompahtoo Local Aboriginal Council v Sanpine [2007] HCA 61; (2007) 233 CLR 115
Laws v London Chronicle (Indicator Newspapers) Limited [1959] 1 WLR 698
Murray v Leisureplay plc [2005] EWCA Civ 963
Pastrycooks v Gartrell White (No 3) (1990) 35 IR 70
Peter Turnbull & Co Limited v Mundus Trading Co (Australasia) Pty Limited [1954] HCA 25; (1954) 90 CLR 235
R v Dowling Island Stevedoring and Lighterage Co Limited
Ex parte Halliday & Sullivan [1938] HCA 44; (1938) 60 CLR 601
Rigby v Ferodo Limited [1988] ICR 29
Ringrow Pty Limited v BP Australia Pty Limited [2005] HCA 71; (2005) 224 CLR 656
Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198
Sargent v ASL Developments [1974] HCA 40; (1974) 131 CLR 634
Thomas Marshall (Exports) Limited v Guinle [1979] Ch 227
Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 437
Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 852
Turner v Australian Coal & Shale Employees’ Federation [1984] FCA 275; (1984) 6 FCR 177
Visscher v the Honourable President Justice Guidice [2009] HCA 34; (2009) 258 ALR 651

TEXTS CITED:


DECISION:
Judgment for the plaintiff



JUDGMENT:

- 44 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WARD J

FRIDAY 9 OCTOBER 2009

6304/08 TULLETT PREBON (AUSTRALIA) PTY LIMITED V SIMON PURCELL

JUDGMENT

1 Tullett Prebon (Australia) Pty Limited (“TPAust”) carries on business as a financial broking company. Simon Purcell is a broker who entered into a contract of employment with TPAust for a term of two years expiring on 31 July 2009 (the “Contract”). On 4 April 2008, in breach of the Contract, Mr Purcell tendered his resignation. He then commenced work with BGC Partners (Australia) Pty Limited (“BGC”), a competitor of TPAust.

2 TPAust did not accept Mr Purcell’s resignation. It obtained interlocutory and then final relief restraining Mr Purcell (for a six month period expiring on 4 October 2008) from breaching negative stipulations contained in the Contract, the effect of which was to preclude Mr Purcell from working for BGC. Mr Purcell was directed by TPAust to take “gardening leave” under clause 11.4 of the Contract until 4 October 2008.

3 On 2 October 2008, TPAust issued a direction to Mr Purcell to return to work on 7 October 2008. Mr Purcell did not do so. He chose, instead, to re-commence employment with BGC, with whom in May 2008 he had signed a contract of employment which was prospectively dated and to come into operation on 10 June 2008.

4 TPAust contends that the failure of Mr Purcell to comply with its 2 October 2008 direction was a fresh repudiation by Mr Purcell (or breach by him of a condition) of the Contract, entitling TPAust to terminate the Contract. TPAust did so by letter dated 7 October 2008 from its solicitors. It now seeks an order that Mr Purcell pay the sum of $503,100 by way of damages calculated in accordance with clause 10.4 of the Contract, plus interest.

5 Clause 10.4 of the Contract, a liquidated damages clause, in its terms operates only when the Contract is terminated for breach or repudiation by Mr Purcell. It would not apply if the Contract had come to an end by effluxion of time or if (as Mr Purcell has asserted) it was terminated by him following a repudiation by TPAust.

6 Mr Purcell defends the proceedings, broadly, on two bases – first, that the 2 October 2008 direction was invalid (or one which could not lawfully be made under the Contract) or was otherwise unable to be relied upon by TPAust and, secondly, that (even if the direction was valid) clause 10.4 of the Contract is unenforceable as a penalty.

7 The bases on which the direction or reliance thereon are challenged are that:

(i) the employer/employee relationship had (as Brereton J found when granting final injunctive relief) terminated in April 2008 and the Contract did not give TPAust the right or power to issue a direction to attend work at a time after the relationship of employer and employee had terminated (para 14(c) of the Defence);

(ii) TPAust had elected not to require, or had waived any right it had under the Contract to direct, Mr Purcell to attend for or return to work during the remainder of the term of the Contract by reason of its conduct in the course of the proceedings for final injunctive relief before Brereton J (para 14(d) of the Defence); and

(iii) the Contract only permitted the issue (and only obliged Mr Purcell to comply with) directions which were made sincerely and with a genuine desire that they be complied with and this was not such a direction (para 14(e) of the Defence).

8 In the alternative, Mr Purcell contends that these proceedings are an abuse of process. It is said that TPAust is now seeking the court’s aid in enforcing rights which it previously assured Brereton J it would not exercise (with a view to encouraging his Honour to exercise his discretion in TPAust’s favour in the earlier proceedings).

Issues

9 This matter raises the following issues:

(i) Whether the direction issued on 2 October 2008 was a lawful direction, failure by Mr Purcell to comply with which entitled TPAust to terminate the Contract;

(ii) Whether, by reason of its conduct, TPAust is precluded from relying on the direction or seeking the relief claimed in these proceedings;

(iii) Whether clause 10.4 is unenforceable as a penalty.

10 For the reasons set out below, my conclusions on those issues are (i) Yes; (ii) No; and (iii) No. I find for TPAust on its claim and will make orders accordingly.

Background facts

11 The circumstances in which TPAust came to seek injunctive relief from this Court in April 2008 are set out in the ex tempore judgment delivered by McDougall J on 23 April 2008 on TPAust’s interlocutory relief application (Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 437) and in the judgment of Brereton J on 21 August 2008 on its application for final injunctive relief (Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 852). I do not propose to re-visit in any detail that general background to these proceedings.

12 The Contract was entered into on 29 July 2007. The Contract was terminable by either party on three months’ notice. However, any such notice was not to expire before 31 July 2009 (otherwise than in circumstances where the termination was for breach). Absent breach, therefore, it was a contract with a minimum fixed term of two years.

13 Not surprisingly, the Contract contained clauses prohibiting Mr Purcell from working for a competitor of TPAust or soliciting its clients or employees until the expiration of the fixed term of the Contract on 31 July 2009. It also contained non-competition/non-solicitation covenants operative for a period of three months after termination of Mr Purcell’s employment.

14 Clause 10.1 of the Contract obliged Mr Purcell at all times to obey “the lawful directions of the board and comply with its prevailing rules, regulations, policies and procedures”.

15 Clause 10.4 (under which TPAust now claims) provided:

You acknowledge that TPAust is relying upon you providing your services for the full Term so TPAust is entitled to insist upon strict compliance by you with the terms of your employment during the Term. You also acknowledge

· The vital interest of TPAust in engaging and protecting its employees and that the level of your efforts, including base remuneration and bonus (if any), constitute adequate consideration for your obligations and commitments under this Agreement;

· That, given the special nature of the services you will provide, it may not be possible for TPAust to accurately estimate and/or establish the loss it will suffer if you employment is prematurely terminated as a result of you resigning or otherwise leaving your employment, in breach of the terms of this Agreement.

Accordingly, if your contract of employment is terminated for breach or repudiation on your part, including if you resign or otherwise seek to leave the employment of TPAust without serving TPAust with the required notice for the period to the Contract End Date, without prejudice to any additional rights or remedies available to TPAust, you shall on the day following termination of your employment (Date for Payment) pay to TPAust, as a debt due and owing, an amount calculated as follows:

50% x Your Average Net Brokerage x No. of whole months from the date that you cease providing services to TPAust [in the present case, 4 April 2008] to the Contract End Date [31 July 2009].

You further agree that such amount is a genuine pre-estimate of the loss that TPAust is likely to suffer as a result of premature termination of your employment, and from the Date for Payment interest at the Reserve Bank of Australia base lending rate (from time to time) plus 2% shall accrue on such amount until it is paid.

16 There is perhaps some ambiguity in the clause as between the contract of employment and the employment relationship itself (a distinction which is of importance when considering the validity or lawfulness of the direction). This can be seen in the reference in clause 10.4 to the “contract of employment” (in the phrase “if your contract of employment is terminated”, where appearing in the first paragraph following Mr Purcell’s acknowledgements, that being the circumstance triggering the operation of this clause) and the later reference to Mr Purcell’s “employment” (in the phrases “on the day following termination of your employment” and “as a result of premature termination of your employment”, each of which could refer to the employment relationship rather than the Contract). I raised this during the course of submissions but no point was taken on this issue. The only significance of this for present purposes would seem to be when determining the day on which any debt under clause 10.4 would fall due for the purposes of the interest calculation. Had it been necessary I would have construed the words “the day following termination of your employment” as referring to the day after termination of the Contract for breach or repudiation, by reference back to the opening words of the clause. However, this issue does not presently arise as there does not seem to be any dispute as to the arithmetical calculation of the debt claimed under clause 10.4 by TPAust.

17 Following Mr Purcell’s resignation on 4 April 2008, TPAust invoked the “gardening leave” provisions of the Contract (under which he was entitled to be paid his remuneration entitlements but was not required to attend the office). It expressly declined to accept what it contended (and was in due course found to be) the repudiation by Mr Purcell of the Contract. By letter dated 6 April 2008, TPAust’s solicitors advised Mr Purcell of that decision, stating that:

However, given the circumstances for the period from today until such date as you are advised on behalf of TPAust, and consistent with the terms of your agreement with TPAust, set out in clause 11.4 of the Schedule to the Letter, you will not be required to attend for work. You are required to comply with your other obligations to TPAust under the Letter and pursuant to the general law, and you will be continued to be paid your base remuneration.

18 Mr Purcell chose to disregard that direction and instead commenced work with BGC on 7 April 2008. (It was contended on behalf of Mr Purcell that TPAust had itself repudiated the contract of employment by its conduct (which was said to amount to summary dismissal) in requiring him to leave the office on the day that he tendered his resignation. Brereton J did not accept that contention.)

19 Interlocutory relief was first ordered by Brereton J on an ex parte basis on 11 April 2008. That interlocutory relief was subsequently extended by McDougall J on 23 April 2008 until the hearing of TPAust’s application for final injunctive relief, which was determined by Brereton J on 21 August 2008.

20 Brereton J held that the Contract between TPAust and Mr Purcell had not been terminated but that Mr Purcell’s resignation had the effect of terminating the employer/employee relationship (to which he referred, by way of distinction from the contract of employment, as the “actual employment”).

21 Brereton J further concluded that the contractual provisions sought to be enforced by TPAust were restraints of trade which were reasonable and valid for so long as the employment relationship (as distinct from the Contract) subsisted and for up to six months thereafter but not otherwise; that insofar as the prohibitions were valid they were enforceable in equity and their enforcement would not amount to specific performance of an obligation to render personal services; and that, to the extent that the prohibitions were valid, they ought to be enforced by injunction. His Honour did not accept that damages (even under the liquidated damages clause, had it applied) would be an adequate remedy.

22 Thus, although TPAust had sought injunctions for the balance of the fixed term of the Contract expiring on 31 July 2009, the final injunctions as granted by his Honour expired some nine months earlier on 4 October 2008. Between 11 April 2008, when the ex parte interlocutory relief was first granted, and 4 October 2008, when the injunctions expired, Mr Purcell remained on gardening leave. He was paid his base remuneration and (according to the evidence of TPAust’s managing director, Mr Neil Tullett) was also paid bonuses.

23 On 2 October 2008, TPAust issued a direction (in the form of a letter from Mr Tullett to Mr Purcell), requiring Mr Purcell to attend for work on 7 October 2008. The letter contained, among other things, a reservation by TPAust of a right to place Mr Purcell on leave without pay if he did not return to work:

I now direct you to return at 8am on 7 October 2008 and work at TPAust in accordance with the Contract. If you do not return to work as directed, you will be in breach of your obligations in the Contract. TPAust reserves its rights in that regard, including its right to terminate the contract for breach on your part and its right to place you on leave without pay (without limiting any other rights it may have) for the remainder of the Contract term.

Please let us know at your earliest convenience (and, in any event, by no later than 4pm on Friday, 3 October 2008) that you intend to return to work as directed on 7 October 2008. If I do not hear from you by then, I will assume that you are refusing to comply with a lawful direction from your employer. (original emphasis)

24 There was no response from Mr Purcell to that letter. As noted earlier, he did not return to work at TPAust. Instead, Mr Purcell commenced work with BGC on 7 October 2008. On that date, TPAust’s solicitors wrote to Mr Purcell’s solicitors notifying of termination of the Contract. In that letter, they stated:

TPAust expressly reserves all its rights, including any rights it may have to damages or reimbursement with respect to monies paid to Purcell in the period since 4 April 2008.

25 No claim for recovery for any moneys paid to Mr Purcell in the period since 4 April 2008 has been made in these proceedings.

Decision of Brereton J

26 As the abuse of process defence turns on the conduct of the injunction proceedings, I set out below the relevant findings of his Honour in those proceedings before turning to the particular issues for determination by me.

27 Brereton J found that the unilateral resignation by Mr Purcell otherwise than in accordance with the Contract amounted to a repudiation of the Contract but that this repudiation would result in termination of the Contract only if it were accepted by TPAust. His Honour accepted (at [24]) that the notion that repudiation might of itself bring a contract of employment to an end without any requirement for its acceptance (the so-called automatic termination doctrine) had been rejected in England (citing Thomas Marshall (Exports) Limited v Guinle [1979] Ch 227; Gunton v Richmond-on-Thames London Borough Council [1981] 1 Ch 448) and had never prevailed in Australia (citing Automatic Fire Sprinklers Pty Limited v Watson [1946] HCA 25; (1946) 72 CLR 435; Consolidated Press Limited v Thompson (1952) 52 SR (NSW) 75; Australian National Airlines Commission v Robinson [1977] VR 87; Turner v Australian Coal & Shale Employees’ Federation [1984] FCA 275; (1984) 6 FCR 177).

28 His Honour went on to consider (at [29]-[30]) the unique characteristic of employment contracts (that the employer/employee relationship may be brought to an end by a unilateral repudiation even though that not be accepted and the contract itself be not terminated), saying:

Rejection of the doctrine of “automatic termination” – to accommodate the application, to the idiosyncrasies of the contract of employment, of the conventional rules of contract law in respect of repudiation – had to also accommodate acceptance of the rule that, where the consideration for wages is the performance of work, and the employee is unwilling to perform or the employer refuses to permit performance of work, no claim for wages can be brought and the parties are left to remedies unliquidated damages (with concomitant obligations to mitigate), even though the innocent party elects to affirm the contract and does not accept the repudiation. ... In endeavouring to explain this anomaly, the cases have drawn a distinction between the contract of employment on the one hand, and the relationship of employer and employee on the other, so that although the contract survives repudiation unless and until accepted or otherwise terminated the relationship of employer and employee – which for convenience I shall call “actual employment” – does not, because the sub-stratum of trust and confidence inherent in that relationship no longer exists, and the obligation to render services will not be specifically performed.

29 Brereton J had no difficulty concluding (at [52]) that the restraints in question were reasonable insofar as they operated during any period of gardening leave which Mr Purcell was required to take (particularly as the period of any such gardening leave was to be credited under the Contract against his post employment restraints). The considerations which informed his Honour’s conclusion that a post-employment restraint of three months (as provided for under the Contract) would be reasonable similarly supported his conclusion that a restraint during the period of gardening leave for at least up to three months would be reasonable.

30 His Honour was also satisfied (at [68]) that a restraint for a period up to six months after the actual employment (by which his Honour was referring to the employer/employee relationship) came to an end was not unreasonable, so as to afford TPAust the benefit of the notional three month notice period and the three month post employment restraint period for finding, installing and training a replacement and allowing him or her to develop a relationship with customers and demonstrate competence. However, his Honour considered (at [113]) that an injunction extending for more than six months after Mr Purcell ceased working in the office of TPAust (ie after the employment relationship had ended) would not serve to protect any legitimate interest of TPAust but would merely sterilise Mr Purcell and prevent competition.

31 Brereton J was taken to clause 10.4 in the context of submissions as to the adequacy of damages. His Honour considered (at [100]) that a liquidated damages clause such as clause 10.4 would not preclude the court from concluding that damages were an inadequate remedy where the party sought to enforce the contract by way of injunction. His Honour observed (at [102]) that in the present case, “the relevant damage will largely pertain to TPAust’s goodwill and customer connection, and it may not be easy to quantify how many transactions TPAust would lose due to Mr Purcell’s employment by a competitor, their value, and the impact on TPAust’s market share. Such damage is not reasonably capable of precise quantification.” His Honour said (at [102]):

In these circumstances, compensation for a breach is plainly an inferior remedy to prevention of the breach. While the fact that there is a “liquidated damages” provision arguably removes one factor which would otherwise tell in favour of the inadequacy of damages – namely, difficulty of calculation – it does not make it any more just that Mr Purcell should be able to escape from his contractual obligations at the price of paying damages. Equity holds parties to their agreements, rather than allowing them to escape from them at the price of damages.

32 The upshot was that Mr Purcell was held to his Contract and the restraint clauses enforced to the extent that they were held to be valid. Having made its election to affirm the Contract it was not of course open for TPAust to rely upon the same act of repudiation later to bring the Contract to an end (Sargent v ASL Developments [1974] HCA 40; (1974) 131 CLR 634 at 641-2).

33 I turn now to the issues presently for determination.

(i) Was the direction a lawful direction, entitling TPAust on non-compliance by Mr Purcell to terminate the Contract?

34 This raises a number of issues. First, was there any subsisting obligation under the Contract for Mr Purcell to attend work at TPAust which could be the subject of a lawful direction by TPAust after the termination of the employment relationship? Secondly, if so, was the direction itself validly issued (it being a direction from Mr Tullett as managing director (not the board)) and, in particular, was it issued (assuming that is necessary as a matter of law) in good faith by TPAust?

35 Senior Counsel for Mr Purcell, Mr Rushton, relies upon the proposition that disobediance to a direction given by a master to a servant will only amount to repudiation of an employment contract if the direction was lawful and reasonable (Laws v London Chronicle (Indicator Newspapers) Limited [1959] 1 WLR 698 at 700; Pastrycooks v Gartrell White (No 3) (1990) 35 IR 70).

36 In particular, reliance was placed on what Dixon J said in R v Dowling Island Stevedoring and Lighterage Co Limited; Ex parte Halliday & Sullivan [1938] HCA 44; (1938) 60 CLR 601 at 621-622:

If a command relates to the subject matter of the employment and involves no illegality, the obligation of the servant to obey it depend at common law upon its being reasonable. In other words, the lawful commands of an employer which an employee must obey are those which fall within the scope of the contract of service and are reasonable.

37 It was said that it was neither lawful nor reasonable for TPAust to direct Mr Purcell to return to work in circumstances where the employer/employee relationship was at an end and where there was no longer a place for him within the TPAust’s business.

· Consequence of termination of the employment relationship

38 Mr Rushton submits that the consequence of the termination of the employment relationship is that the right of TPAust to issue a direction of the kind it gave in October 2008 had come to an end. This is because it is said that the effect of termination of the employment relationship is that any obligations contained in the Contract which are linked to the employment relationship (in the sense that they are obligations which are central to the concept of service) have come to an end. In this context, Mr Rushton notes that Brereton J had observed that it was not open to TPAust unilaterally to “reinstate” Mr Purcell. What his Honour said was:

The contract remains on foot. However, Mr Purcell’s resignation had the effect of terminating the employer/employee relationship, and TPAust could not unilaterally reinstate it by electing to affirm and sending him on “gardening leave”. (my emphasis)

39 Senior Counsel for TPAust, Mr Fernon, accepts that TPAust could not unilaterally reinstate the employer/employee relationship (nor, I might add, could Mr Purcell) but submits that TPAust has not sought to do so. Any reinstatement of the employment relationship, he concedes, required co-operation from Mr Purcell which was clearly not forthcoming.

40 The distinction between the contract of employment and employment relationship in a similar context was considered (though from the opposite perspective since there the wrongful conduct was on the part of the employer) most recently by the High Court in Visscher v the Honourable President Justice Guidice [2009] HCA 34; (2009) 258 ALR 651. There, the majority (Heydon, Crennan, Kiefel and Bell JJ) addressed the distinction between the concepts of termination of an employment relationship and discharge of a contract of employment, adopting the statement in Byrne v Australian Airlines Limited [1995] HCA 24; (1995) 185 CLR 410 at 427 that “a wrongful dismissal terminates the employment relationship notwithstanding that the contract of employment may continue until the employee accepts the repudiation constituted by the wrongful dismissal and puts an end to the contract”, and quoting from Automatic Fire Sprinklers at 469 per Dixon J:

... there is nothing in the general law preventing the wrongful dismissal of a servant operating to discharge him from service, notwithstanding that he declines to accept the dismissal as absolving him from further performance but keeps the contract open and remains ready and willing to serve.

41 As I read Dixon J’s comments (there in the context, unlike the present case, of a situation where the servant was the innocent party), the concept that wrongful dismissal operated to discharge the servant from service meant, in effect, that it was not necessary for the servant to tender performance of his services following the wrongful dismissal (it being sufficient that he or she remain ready and willing to serve) not that there was thereafter no subsisting obligation under the Contract on the part of the servant to perform those services if called upon to do so. The recognition that the servant could keep the contract of employment on foot as long as he or she remained ready and willing to serve suggests that the obligation of service was not discharged or extinguished but, in effect, suspended as a result of the employer’s refusal to permit the servant to perform his or her services.

42 Transposed into the situation where the employer is the innocent party, this would suggest that the repudiation by Mr Purcell of his employment contract operates to discharge TPAust from its obligation to continue to tender performance of its obligations as employer relating to service under the Contract for so long as Mr Purcell refuses to perform his part of the bargain. If TPAust elects not to accept that repudiation and to keep the Contract on foot then it must remain ready, willing and able to continue to do so. (I note that there may be scope for some debate as to the precise content of TPAust’s obligations as employer insofar as it was suggested in argument that it had an obligation to “provide work” for Mr Purcell. That may or may not be the case in the circumstances of an employment contract of this kind where, I would assume, brokers may have had a degree of responsibility to establish and maintain client relationships and might not have been entitled simply to sit back and expect clients to be “provided” or allocated to them for whom they could provide services on behalf of TPAust. However, that debate is not relevant for present purposes.)

43 On this analysis, if and when Mr Purcell were to choose to return to work (and on the assumption that the Contract had been kept on foot by TPAust in the meantime), TPAust would be in the position where it was then faced with a choice whether to accept Mr Purcell’s return to the workplace. Mr Purcell would not be able unilaterally to reinstate the employment relationship by demanding that he be allowed to return to work (any more than TPAust could reinstate it by requiring that he return to work), but surely it would be open to him to contend that TPAust had itself repudiated the Contract if (he, in effect, having withdrawn his resignation and indicated a willingness to return to work) TPAust did not in those circumstances, permit him to return to work or did not comply with its contractual obligations when he did so.

44 This seems to have been contemplated by Dixon J in Automatic Fire Sprinklers (at 465-466), his Honour saying that:

By keeping his contract open, he may be able to resume his service without a new contract, if his employer is induced to retract the discharge. (my emphasis)

45 This was expressly referred to by the majority in Visscher (at 666 [59]):

In Automatic Fire Dixon J recognised the possibility that an employer might be induced to retract a discharge, where the employee kept his contract open, thereby allowing the employee to resume his services without a new contract.

46 The conclusion that the contractual obligations subsist (though they may be unenforceable) follows from the recognition in Visscher (at 644 [54]) that:

This is not to say that in a case of dismissal there will ordinarily be anything to be gained by employees refusing to accept the repudiation. Even if they keep the contract of employment on foot, they cannot receive remuneration after the dismissal, because the right to receive it is dependent upon services having been performed [and, read with in their Honours’ earlier comments, the wrongful dismissal operates to discharge or absolve the employee from the obligation to tender those services]. Further, historically the courts would not grant specific performance of a contract of personal service, save in exceptional cases. This was largely because of perceived difficulties in supervision and because the courts were unwilling to compel employers to tolerate an individual employee whom they considered incompatible.

(footnotes omitted)

47 Their Honours noted (at 664 [55]) that in Byrne it had been said that for all practical purposes the contract of employment will be at an end upon dismissal and that in such a case the possible continuation of it will rarely be of significance. However, their Honours recognised that it remains the case that an unaccepted repudiation does not terminate a contract and that in the circumstances of any particular case that may assume importance (as it does here). Relevantly, their Honours said (at 664-665 [55]):

To view it [the contract] as automatically discharged would be to elevate a problem concerning remedies to a substantive principle concerning the termination of contracts.

48 The fact that a court would not be likely to compel specific performance of the direction to return to work issued by TPAust under that Contract is a matter which goes to the availability of a remedy for breach of the contractual obligation. For that to determine whether, under a contract of employment which has been held to remain on foot, it was open to TPAust to issue the direction it did and (if that direction not be complied with by Mr Purcell, as it was not) to elect afresh what remedy it seeks to take in relation to the new act of breach or repudiation constituted thereby, would seem to me to do what their Honours considered incorrect, namely to elevate a problem as to remedies to a substantive principle concerning the termination of contracts (and, I would add, thus to allow the availability of a specific form of relief to determine the subsistence of obligations under such contracts).

49 In Visscher, their Honours referred (at 665 [58]) to what was said by Lord Oliver of Aylmerton in Rigby v Ferodo Limited [1988] ICR 29 at 35:

I know of no principle of law that any breach which the innocent party is entitled to treat as repudiatory of the other party's obligations brings the contract to an end automatically. ... I entirely fail to see how the continuance of the primary contractual obligation can be made to depend upon the subjective desire of the contract-breaker and I do not understand what is meant by the injured party having no alternative but to accept the breach. If this means that, if the contract-breaker persists, the injured party may have to put up with the fact that he will not be able to enforce the primary obligation of performance, that is, of course, true of every contract which is not susceptible of a decree of specific performance. If it means that he has no alternative to accepting the breach as a repudiation and thus terminating the contract, it begs the question. For my part, I can see no reason in law or logic why, leaving aside for the moment the extreme case of outright dismissal or walk-out, a contract of employment should be on any different footing from any other contract as regards the principle that 'an unaccepted repudiation is a thing writ in water and of no value to anybody'.

50 Mr Visscher’s case was that he had kept the contract alive by his refusal to accept the rescission and that his employer had resiled from its threat to demote him. Their Honours recognised (at 665 [59]) that such an outcome was possible “for when a contract continues on foot it remains in force for the benefit of both parties and a party's refusal to perform may be withdrawn” (citing Peter Turnbull & Co Limited v Mundus Trading Co (Australasia) Pty Limited [1954] HCA 25; (1954) 90 CLR 235 at 250), which outcome would be inconsistent with the suggestion that contractual obligations of service were automatically terminated once and for all when the employment relationship was at an end.

51 Mr Rushton, however, placed weight on what was said by Brightman LJ in Gunton v Richmond-upon-Thames (at 475) seemingly contemplating that some contractual obligations could be extinguished once and for all when the employment relationship came to an end:

The relationship of principal and agent has been broken. I do not think it follows, however, from the rupture of the status of master and servant, or principal and agent, that the contract of service, or the contract of agency, has been terminated by the wrongful act of the master or the principal. What has been determined is only the status or relationship. So in the result the servant cannot sue in debt for his wages, which he is wrongfully deprived of the opportunity to earn; ... As the relationship of master and servant is gone, the servant cannot claim the reward for services no longer rendered. But it does not follow that every right and obligation under the contract is extinguished. An obligation which is not of necessity dependent on the existence of the relationship of master and servant may well survive; such as the right of the master in Thomas Marshall (Exports) Ltd. v. Guinle [1979] Ch. 227 that the servant should not during the term of the contract deal on his own account with customers of the plaintiff company. (my emphasis)

52 In Rigby v Ferodo (at 34) Lord Oliver of Aylmerton noted the majority view in Gunton was that there was no reason in principle why the contract of employment should not “remain on foot and enforceable so far as concerns obligations which do not of necessity depend on the existence of the relationship of master and servant”.

53 What was argued for Mr Purcell was that, although the Contract remained on foot, only those terms of the Contract which were not conditional or dependent upon the continued existence of the relationship of employer/employee could survive (and hence that the obligation to obey a direction to attend work did not survive the repudiation of the employment relationship – citing Rothman J in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198 as to the centrality to the employment relationship of an obligation of obedience).

54 By supplementary submissions in response to a query I had raised (as to whether Mr Purcell’s position meant that the Contract was no more than a mere shell), Mr Rushton submitted that what had survived the termination of the employer/employee relationship in this case were the restrictive covenants in clause 12, the restriction against using confidential information in clause 13 and the restriction against using the plaintiff’s intellectual property in clause 14, but that what did not survive (and what could not be unilaterally reinstated) was the obligation to serve. This, it was said, did not leave the Contract a mere shell (although, at least in relation to the restrictive covenants in clause 12, it was conceded that there was little likelihood of a breach of occurring because TPAust had successfully obtained injunctive relief) but that what had happened was that those surviving covenants lost their practical utililty as a ground for termination because of the manner in which TPAust had elected in this case to proceed. (I consider the election/waiver arguments later.)

55 A distinction was drawn between the direction to go on gardening leave (which it was accepted survived the termination of the master and servant relationship but was said to do so only because TPAust was not required to provide work and Mr Purcell was not liable to render service) and a direction to return from gardening leave and recommence work (which obligation it was said was “of necessity dependent on the existence of the relationship of master and servant” and thus could not survive). The concept of an employment relationship, it was said, encompassed as a bare minimum the obligation to work and the duty to pay wages for that work, which obligations ended upon the repudiatory breach.

56 It seems to me that this argument rests largely on the significance to be drawn from the conclusion implicit in the statement of Brightman LJ extracted above that the end of the employment relationship automatically extinguishes those rights and obligations under the contract of employment which can no longer be specifically enforced. Such a conclusion runs counter to the distinction recognised by the High Court in Visscher between the availability of remedies and the termination of contracts and substantive rights thereunder.

57 The consequence of accepting Mr Rushton’s submissions in this regard would be that, faced with a clear repudiation of his or her employment contract by an employee, the employer has a “once only” opportunity to bring that contract to an end, unless there is a subsequent breach of non-service related covenants of the contract of employment. That leaves the artificial prospect of the employment contract remaining on foot at a time when Mr Purcell had made it very clear (by not responding to the direction) that he had no intention of returning to work with TPAust (and indeed was by then working for its competitor).

58 It was submitted by Mr Fernon that to accept the submission that the obligation to attend at work had been discharged so that no lawful direction could thereafter be issued, would be to admit the possibility of a partial automatic termination of the contract on repudiation, the rejection of which theory was confirmed by the High Court in Visscher. I agree.

59 There is to my mind a difference between saying, as Brereton J did, that TPAust could not unilaterially reinstate the “employment relationship” by sending Mr Purcell on gardening leave (and accepting equally that it could not unilaterally later reinstate the employer/employee relationship by directing Mr Purcell to come out of the garden and return to work) and saying that TPAust could not thereafter have the right under the Contract to issue a notice requiring Mr Purcell to resume work. (Mr Purcell could, for example, have had a change of heart on receipt of the direction in which case he could have facilitated the bilateral re-establishment of the employment relationship.) Such a notice would not in all likelihood have been specifically enforceable. However, that does not of itself deprive the notice of force.

60 The prospect that TPAust might take such a step was one which had apparently been contemplated by Mr Purcell (and a matter relied upon in submissions made on his behalf) during the hearing before Brereton J. (There was no suggestion at that stage that it would have been beyond the power of TPAust to issue such a notice; indeed, the submission was to the very opposite effect.)

61 I see a difference between the employment relationship being discharged (and certain contractual obligations thereafter being unenforceable by way of specific performance) and saying that where the employment relationship is at an end those contractual obligations depending upon service automatically come to an end. The latter treats the existence of a particular remedy (of specific performance) in respect of a breach of the contractual obligation to attend work and provide services after the termination of the employment relationship as determinative of whether there is any such obligation at all at that stage. I do not think that is consistent with what was said in Visscher and if that is what was meant by Brightman LJ in Gunton, then I am bound to follow Visscher.

62 I am therefore of the view that the inability of TPAust unilaterally to reinstate the employment relationship does not have the consequence that there was no right thereafter on the part of TPAust to require Mr Purcell, in effect, to make a final decision (at the end of the period of “gardening leave” or earlier) as to whether he wished to resume the employer/employee relationship. If he did not (and chose not to comply with a direction to return to work) then it seems to me that that would constitute a fresh repudiation of the Contract (which had remained on foot up until that time) and, subject to TPAust being in a position to perform its obligations under the Contract at that time, would entitle TPAust to accept the repudiation so as to bring the Contract itself to an end (something it had chosen not to do when Mr Purcell first repudiated the Contract).

63 In that regard, it was submitted that TPAust’s evidence fell short of establishing that it was ready, willing or able to perform the Contract had Mr Purcell complied with the request and returned to work on 7 October 2008, something necessary for it to establish in order to rely upon Mr Purcell’s breach or repudiation to bring an end to the Contract (Foran v Wight [1989] HCA 51; (1988) 168 CLR 385). Following Mr Purcell’s resignation, TPAust had taken immediate steps to ensure that other employees take over the responsibilities of Mr Purcell. Mr Tullett, who was cross-examined as to the steps taken within the company when Mr Purcell left on 4 April 2008, agreed that the telephone lines dedicated to Mr Purcell’s clients were immediately passed over to other employees (T 6.46) (something hardly surprising if TPAust was to continue to provide services to those clients in Mr Purcell’s absence). There was evidence that there were already arrangements in place to cover situations where the primary or principal broker for client was not available (there being a second broker to pick up that client line) (T 7.8).

64 Mr Tullett conceded that steps had not been taken prior to 7 October 2008 to reinstate dedicated telephone lines for Mr Purcell or to re-allocate clients to him. This does not suggest to me that TPAust was unable to accommodate Mr Purcell’s return, had he wished to put TPAust to the test. Indeed, there is nothing to suggest that the speed with which steps were apparently taken to cover Mr Purcell’s unforeseen absence from April 2008 could not have been mirrored on his return. Therefore, I consider that TPAust was in a position to accept a fresh repudiation by Mr Purcell as at 7 October 2008.

· Reasonableness of direction

65 Whether the direction was otherwise a lawful direction with which Mr Purcell was bound to comply is relevant in determining whether Mr Purcell’s non-compliance entitled TPAust to terminate the Contract.

Direction by Mr Tullett not the board

66 An issue was raised by Mr Purcell as to the fact that the direction, as such, was issued by letter signed by Mr Tullett as managing director.

67 There was no formal board of directors meeting to consider and approve the issue of the direction to Mr Purcell. Mr Tullett said the issue of the direction was discussed in general ongoing conversation with the company’s Asia legal manager, Mr Paul Kelly (T 16.11) (who is not a board member) and the question whether Mr Purcell should return to work was discussed with the Asia CEO, Mr Barry Dennahy and perhaps also with Mr Gordon Buchan, another board member, as part of general matters relating to the Sydney office (T 18.26-49). It was submitted by Mr Fernon that clause 11 permitted the company to assign duties and that it was an implied term of the contract that the managing director could issue such a direction as a matter of business efficacy.

68 I would have been inclined to the view that whether or not this was a formal direction of the board is not the issue; rather the issue is whether, by his conduct on receipt of the direction, Mr Purcell had unequivocally evinced an intention not to honour or be bound by the Contract. The question whether refusal to comply with a direction constitutes a repudiation needs to be judged having regard to all of the relevant factual circumstances. Whether or not the reasonableness or lawfulness of the direction is legitimately in dispute at the time of non-compliance may well be relevant to determining whether failure to comply with that direction evinces an intention no longer to be bound by the terms of the employment contract. (See, for example, Harrison v P & T Tube Mills Pty Limited [2009] FCA 220 at [309]- [312], where Dowsett J found no basis for asserting that the plaintiff “refused to comply with the direction because he considered it to be unlawful, or that he asserted a construction of his contract of employment which was inconsistent with that impliedly advanced ... in giving the direction”; cf. Bechaz v Mariah Hovercraft Australia Pty Limited [2005] AIRC 252 where there was a live and contemporaneous dispute as to whether the defendant hovercraft company could direct the plaintiff to do cleaning and clearing tasks when he had been employed primarily as a boat builder or shipwright.)

69 Here, as a matter of commonsense, the direction issued by Mr Tullett can be seen as very clearly requiring Mr Purcell to indicate as at that stage whether he was prepared to return and resume an employment relationship with TPAust. His conduct in not responding to that direction, and in not returning to work, must have amounted to an unequivocal repudiation of the Contract which still remained on foot at the time. There was no suggestion at that stage that Mr Purcell was not complying with the direction on the basis of a legitimate dispute as to the direction but nevertheless intended to honour the Contract as it might be properly construed.

70 On that basis, I do not see that there would be any relevant difference between failure to comply with a formal direction by the board (or by Mr Tullett) for Mr Purcell to return to work and an outright rejection of an “invitation” extended to Mr Purcell to return to work, if in each case Mr Purcell manifested an intention not to honour any contractual obligation he had or might have had to do so. Both, it seems to me, would involve repudiatory conduct on the test indicated in Koompahtoo Local Aboriginal Council v Sanpine [2007] HCA 61; (2007) 233 CLR 115.

71 Viewed in that light, the question whether the direction was formally issued on behalf of the board, or was authorised by the board, seems to me to be somewhat of a red herring.

72 Even leaving that aside, the issue of a direction such as this would surely fall within the scope of Mr Tullett’s ordinary authority as managing director of the company and I would infer that the issue of such direction, after discussion with board members, was one made on behalf of the board. I therefore consider the direction to have been a valid direction from a procedural point of view.

Bona fides of direction

73 Reliance was placed by Mr Ruston on Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 at 369 for the proposition that a duty of good faith, both in performing obligations and in exercising rights, may by implication be imposed on parties as a part of a contract of employment in making the further submission that the direction was not lawful or reasonable as the direction was not given bona fide or in good faith. While it was conceded by Mr Rushton that employers could exercise their rights in their own interests, it was said that they must act reasonably, honestly and in good faith in so doing (Eastwood v Magnox Electric plc [2004] UKHL 35; [2005] 1 AC 503; Russell).

74 Conversely, it was submitted by Mr Fernon that there was no such duty of good faith automatically to be implied into the Contract (and that Alcatel, if it did suggest that there was, could be distinguished as it related to the performance of obligations not exercise of rights).

75 Rather, it was said that the high point of the cases which refer to an implied requirement of good faith in this area, such as Alcatel, do so in the context of the performance of obligations (not the exercise of rights). Further, Mr Fernon submitted that if there be an implied duty to exercise rights, such as the right to give a direction, reasonably or in good faith, this must be measured by the terms of the Contract.

76 As it is, I am not convinced that a duty of good faith would be implied in this context. It is not necessary for me to determine this issue because, in any event, I do not find a lack of good faith in this case.

77 Furthermore, had it been necessary I would have considered that any duty of good faith would be heavily qualified by the fact that the company, in exercising its rights, was entitled to have regard to its own commercial interests.

78 The direction, Mr Rushton submitted, was not bona fide in that the employment relationship had well and truly broken down. Reference was made to the scepticism shown by Brereton J, when the matter was before him, as to the then asserted willingness of Mr Tullett to accept Mr Purcell back to the firm. It was said to be significant that the direction was given on 2 October 2008 without any prior communication or discussion concerning a return to work (there having been no personal communications between Mr Tullett and Mr Purcell between 5 April 2008 and 2 October 2008 and the only communications in that time from TPAust being the letter from TPAust’s lawyers of 6 April 2008 and an invitation to a work conference in the Hunter Valley in July 2008).

79 It was said that, had TPAust genuinely wished Mr Purcell to return, it would have issued a direction (or invitation) to do so at an earlier stage. It was submitted that it was fanciful to suggest that a mere two days prior to the expiration of the injunctions there was a genuine desire to have Mr Purcell back. (It might, of course, be thought that had any direction (as opposed to an invitation) been issued at a time while the gardening leave was in force this would itself have been contrary to what was said to Brereton J at the time the injunction was sought, so I think little can be taken from the fact that no direction was issued. However, that does not deprive the submission of force insofar as it relates to the lack of any invitation to return.)

80 Mr Tullett maintained in cross-examination that an open invitation to return to work had been made to Mr Purcell at the hearing before Brereton J (T 9.16), by which he referred to an answer he had given in cross-examination in the proceedings before Brereton J to this effect that he would be more than happy for Mr Purcell to come back (T 9.37 – 45). I doubt that any weight can be placed on this so-called invitation. The submissions made to Brereton J seemed to contemplate, rather, the prospective making of an invitation to return (ie not one already made by reference to an assertion that Mr Tullett would be happy to have Mr Purcell back).

81 However, the fact that TPAust chose to wait until 2 October 2008 to issue any direction (or invitation) to return to work may well have been a decision made purely for business purposes (it only being at that stage that the artificiality of the inconsistency between the subsistence of the Contract and the cessation of the employment relationship would be so starkly apparent).

82 It was submitted by Mr Rushton that it would have made no business sense for Mr Tullett to have wanted Mr Purcell back in the office for what would (in the absence of any continuation beyond the minimum fixed term or any new agreement) be for no more than nine months, during which time Mr Purcell would potentially be privy to further confidential information and would be in a position to re-build client relationships which might further damage TPAust’s business when he again left in July 2009.

83 Mr Tullett was, however, adamant that he would have been very happy for Mr Purcell to return (T 13.18, T 13.40) even for that limited time. Mr Tullett expressed the view (with remarkable optimism given Mr Purcell’s actions up to that point) that had Mr Purcell returned an extension of the Contract might have been agreed (T 16.34).

84 Mr Tullett was cross-examined as to this issue when the matter was before me. He made it very clear, I thought, that his (and TPAust’s) principal concern was in maximising the profits of the company. It seemed to me that the most likely position was not that Mr Tullett personally wanted Mr urcell himself back but rather that he wanted the revenue he expected Mr Purcell would derive for the company. (His focus on profits was, I note, mirrored by Mr Purcell’s apparent willingness to breach his contractual obligations for a more lucrative contract.) Mr Tullett said:

I wanted him to come back to work. I thought it was unlikely come 2 October. I was very keen for him to come back. We had lost probably $400,000 in the six months he was off (T 17.13). (my emphasis)

85 There was a suggestion that there had been some form of altercation between the two gentlemen, during the course of the gardening leave, when Mr Tullett had bumped into Mr Purcell as Mr Purcell was leaving a bar in a condition Mr Tullett described as being somewhat the worse for wear. Mr Tullett said he did not recall what had been said by Mr Purcell. He intimated that he had paid no attention to it because of Mr Purcell’s state of insobriety at the time. (Mr Purcell gave no evidence in these proceedings so his version of the conversation was not before the court.) Whatever be the case as to this exchange (which I cannot determine on the evidence as it is before me) and whatever the personal feelings Mr Purcell and Mr Tullett held in respect of each other, Mr Fernon submits that I should infer that the broking industry is not one for choir boys but one which is relatively robust. (Having regard to the comments made by McDougall J in his judgment on the interlocutory injunction application, I note that his Honour there seems to have formed the view that, notwithstanding that brokers might form and express in derogatory terms a dim view of one another personally, it was by no means the case that they could not continue to work together.) The invitation to a TPAust conference (at which golf seems to have featured on the agenda) is consistent with Mr Purcell being treated as part of the company (and his presence being welcome at least to some of his fellow brokers) even while he was on gardening leave.

86 Brereton J was clearly sceptical that Mr Tullett really wanted Mr Purcell to return to the office. I share that scepticism. However, balanced against Mr Tullett’s personal feelings about Mr Purcell (whatever they might truly have been) is the impression which I gained from Mr Tullett’s evidence that what Mr Tullett was primarily focussed on was the impact to his business’ bottom line profits if Mr Purcell were to return (compared with the position if he did not). Mr Tullett seems to have been looking at a short term, rather than long term, view. I cannot dismiss that as improbable. Mr Purcell, for his part, seems also to have focussed on the “here and now” when choosing to disregard the fixed term of his Coontract.

87 While I certainly have my doubts that Mr Tullett would have welcomed Mr Purcell back with open arms, like the prodigal son, nevertheless it is not inconceivable to me that Mr Tullett could have weighed up the advantage of nine months’ increased revenues from Mr Purcell’s dealings with his particular clients once more against the potential downside of having disharmony in the employer/employee relationship and/or a further period of losses down the track, and chosen the former.

88 Working on the “bird in the hand” principle, therefore, I consider there may well have been a logical business reason for TPAust to want Mr Purcell to return to work and hence do not dismiss Mr Tullett’s protestations to that effect.

89 I nevertheless place little weight on the revenue budgets adduced in evidence by Mr Tullett (showing that the company’s business plan including Mr Purcell’s contribution) (Exhibit NDT9 p 116 bundle). Those budgets seem to have been prepared prior to Mr Purcell’s resignation and I cannot accept that thereafter Mr Tullett would seriously have been budgeting on a return to work (and generation of revenue) by Mr Purcell.

90 The motivation for the issue of the direction in my view emerged quite clearly from Mr Tullett’s statement, put with some force by him in the witness box:

We had to do something. We had to do something come the end of the injunction, to finalise the contract. I think the words are “on foot”. Something definitive had to happen, one way or the other. (T 12.39)

91 Mr Tullett said that TPAust “had to do something that would give an answer one way or the other” (T 13.28) even though he quite candidly accepted that he thought it highly unlikely that Mr Purcell would come back to TPAust (T 13.37; T 13.50; T 14.02).

92 Mr Tullett may well have been not displeased that Mr Purcell chose not to return to work (thus giving TPAust a basis to terminate the Contract rather than wait for it to expire). However, I do not consider that this means the direction was not issued in good faith. I consider that it was reasonable for TPAust to want to have the status of the Contract brought to a head one way or the other at the end of the period of gardening leave.

93 It was said that this was simply a ruse in order to invoke the liquidated damages clause. It was submitted by Mr Rushton that TPAust had “manufactured” a breach by issuing a direction that Mr Purcell return to work. It may well have been the case that TPAust had in mind that if Mr Purcell committed a fresh act of repudiation this would afford TPAust an easier route to quantification of its damages. However, it does not seem to me to have been a “ruse”, or a “manufactured” breach inasmuch as it was manifest on the face of the direction that what it was requiring of Mr Purcell was a decision whether, in effect, to let bygones be bygones and return to the fold at TPAust or to adhere to his stated intention to leave and to commence work with a competitor (with whatever contractual or other consequences might flow therefrom). It was open to Mr Purcell to make a decision either way. No one seems to have forced him to dishonour his contractual obligations. Whatever he may have thought when he first tendered his resignation, by the time he chose not to comply with the direction to return to work he had had ample opportunity to obtain legal advice as to his rights and obligations under the Contract and I can only assume he made a conscious and informed decised not to return to work. I think there is force in the submission (though denied by Mr Tullett) that there may well have been a calculated decision not to invite Mr Purcell back while the injunctive relief was on foot (T 17.40), but I do not think this establishes a lack of good faith. (Nor do I think it at all likely that Mr Purcell would have accepted such an invitation.)

94 It cannot have been thought to be in the interests of TPAust for there to be a contract of employment remaining on foot (as was the case in light of his Honour’s judgment) at a time when the employee under that contract of employment was working with a competitor. It presumably would have put Mr Purcell himself in a difficult position insofar as it is conceded he would have continued to have been bound by various of his contractual covenants to TPAust (such as the confidentiality obligations) and potentially, therefore, exposed to allegations of breach of those covenants when acting in the course of his services for the new employer.

95 I do not consider that the evidence establishes that the direction was not issued in good faith. I accept that it was issued by Mr Tullett with a view to bringing to finality the question whether or not Mr Purcell would return to work with TPAust.

(ii) Waiver/Abuse of Process

96 The next issue is whether or not, by its conduct in seeking injunctive relief for the unexpired term of the contract (in the context of which there was what is said to have amounted to an assurance that Mr Purcell would be invited but not required to return to work), TPAust has waived its right to direct Mr Purcell to attend at work, (or whether it is an abuse of process for TPAust now to seek this relief).

97 First, it is said by Mr Ruston that the effect of the direction issued on 2 October requiring the resumption of employment on 7 October would be to extend the contractual prohibitions restricting Mr Purcell from working for BGC (rather than for TPAust) beyond the period of six months since termination of the employment relationship. It was also submitted that this would, in effect, operate to extend the contractual post termination restraints for an additional three months in such a fashion as to extend the restraints beyond the period for which Brereton J had held they were reasonable. It was said that, to the extent that the contractual prohibitions might extend beyond the period of six months following the end of actual employment, any such prohibition was contrary to public policy and void in accordance with his Honour’s judgment.

98 The effect of Brereton J’s judgment in this regard is that TPAust could not seek to restrain Mr Purcell working for a competitor beyond 4 October 2008 as that prohibition was seen to be void as an unreasonable restraint of trade by that time.

99 Therefore, the fact of working for a competitor which might ordinarily amount to repudiation of one’s contract of employment (unless the contracted permitted the employee to work for competitiors when and if he or she chose) cannot be relied upon as repudiatory conduct in this case.

100 As a practical matter, if Mr Purcell had complied with the direction to return to work at TPAust on 7 October 2008, then this would surely have interfered or restricted his ability at the same time to work for BGC. However, that was a matter within Mr Purcell’s control in the first instance and as TPAust has not sought to enforce those contractual prohibitions, the issue does not arise.

101 There would be force in the second part of this submission (as to the extension of the contractual post-termination restraints) again only if Mr Purcell had in fact complied with the direction, since only then could a new post termination three month period possibly arise. Again, no attempt has been made by TPAust to invoke those restraints.

102 The suggestion arising out of the statement contained at the end of the direction (which sought to reserve a right to place Mr Purcell on leave without pay for the remainder of the Contract term), that TPAust could in some way extend the non-competition covenants, is in my view utterly at odds with the judgment of Brereton J. Insofar as his Honour accepted that enforcement of the gardening leave provision would operate to “sterilise” Mr Purcell, the suggestion that TPAust might seek to invoke a further period of gardening leave seems to me to be inconsistent with the findings made by Brereton J in relation to the reasonableness of the restraint of trade provisions in the Contract.

103 Had TPAust sought to compel compliance with a new “gardening leave” direction this would fly in the face of his Honour’s rulings. His Honour was of the view that the restraint constituted by the gardening leave could not be enforced beyond the extent to which had it was found to be reasonable (see at [56]-[58]) and that any further attempt to place Mr Purcell on gardening leave would sterilise Mr Purcell (and not be necessary for reasonable protection of the company) and thus contrary to public policy and void.

104 That said, TPAust (whatever rights it purported to reserve) has not in fact sought to exercise them in relation to gardening leave and the fact that it misguidedly made that assertion does not lead me to conclude that the direction itself was not issued in good faith. Therefore, whatever was in the mind of TPAust at the time the direction was issued (and Mr Tullett was not clear about that), the inappropriateness of the reservation of rights does not in my view arise. (This may be no more than an example of an unfortunate tendency of parties expressly reserving rights whenever the opportunity arises lest anyone should later argue that by not doing so they have in some way given up a right which otherwise would have operated for their benefit, but I digress.)

105 Secondly, it is said that these proceedings are themselves an abuse of process. This is put on two grounds – first, that TPAust is attempting to relitigate matters which were disposed of in the proceedings before Brereton J (as to whether there could be a unilateral reinstatement of the employer/employee relationship and as to the validity of the restriction on taking up work with competitors either as a consequence of gardening leave or the other provisions in the employment agreement beyond the operation of the six month period) and, next, that injunctive relief was obtained on the basis that TPAust would not require Mr Purcell to return to work, which it has now done.

106 As to the first, it does not seem to me that what is being sought in the present proceedings is to relitigate the question whether it is possible unilaterally to reinstate the employment relationship, which is all that ever came to an end. Mr Fernon accepts that TPAust cannot do so. Nor could it have obtained an order for specific performance of an obligation to comply with a direction to return to work. What it is said it was entitled to do (and what is now being litigated for the first time between these parties) was to issue a direction under the Contract requiring Mr Purcell to return to work, with an issue arising as to the consequence of failure to comply with that direction (which TPAust contends is a fresh repudiation of the Contract open to be accepted by the company as bringing the Contract to an end).

107 By the 2 October 2008 direction, TPAust was seeking a final determination of the question whether Mr Purcell was prepared to co-operate with it in reinstating the employer/employee relationship and in so doing to comply with his contractual obligations. I do not accept that this involves re-litigating any issue determined by Brereton J.

108 As to the second basis on which this submission was put, I was taken to part of the closing submissions put to Brereton J in support of the application for the court to exercise its discretion to grant injunctive relief, where Mr Fernon had said:

In any event, the defendant is unlikely to suffer any material injury from the granting of relief. And the plaintiff will continue to pay the defendant his contractual entitlement of $325,000 per annum and he will be invited (but not required) to recommence work in the plaintiff’s offices on the same basis as before he purported to resign. To the extent that his future career prospects depend upon participating as a broker in the marketplace, he therefore enjoys that opportunity.

and, further:

Secondly, as McDougall J recognised at the interlocutory hearing (at [52]), this is not a case where the grant of the injunction would compel the defendant ... specifically [to] perform the Contract. The plaintiff would invite (but not require) the defendant to attend for work but will nevertheless continue to pay him his contractual entitlements for the remainder of the Term. This combination of facts means that the defendant does not have to choose between working for the plaintiff and severe financial hardship: Curro at 348.

109 I was also taken to the following exchange in the transcript of Mr Tullett’s cross-examination in the hearing before Brereton J (at T 55.35):

Q: What you have in mind I suggest is that if you get your injunction in these proceeding then you will indeed issue a direction for him to go back to work?

A: Yeah, to be honest, I am not aware of Australia law whether we can – if he turns around and says that he is not going back to work, I am staying on garden leave, I imagine I can’t physically bring him to the office.

Q: And what you would do I suggest is issue a direction and if he doesn’t abide by it you would then terminate the contract?

A: Absolutely wrong.

110 It would appear that what had been postulated at that time was a concern that TPAust, if it were to obtain final injunctive relief, would then precipitate a situation in which it could move at once lawfully to terminate the Contract (with the benefit that it would not before that time have had of Mr Purcell being enjoined from working for a competitor but to be relieved of the obligation to pay him any further remuneration). It is not clear, from the submissions, that what was raised before his Honour was any concern that TPAust might also invoke the liquidated damages clause at that time.

111 Mr Fernon contends that the statements made as to the intention of TPAust to invite (but not require) Mr Purcell to return to work until the end of the term of his Contract were statements which were made in the context of an application for an injunction for the balance of the fixed term of the Contract and in response to concerns which had been raised in the course of cross-examination of Mr Tullett that if an injunction were granted then it would be open to TPAust immediately thereafter to issue a direction and terminate the Contract while also sterilising Mr Purcell for a period of the balance of the term of the Contract.

112 It was argued for TPAust that there was no reliance placed by his Honour in his Honour’s judgment on that asserted position and that it was not a condition of any grant of injunctive relief. It seems to me from his Honour’s judgment that that is the case and that this answers the abuse of process allegation. Nor do I consider that it can be said that TPAust has waived any right to require the defendant to resume service pursuant to the Contract after the expiry of the injunctive relief.

113 Really, at the heart of these submissions is the proposition that what TPAust should have done, if it wanted to rely on clause 10.4, was to bring the Contract to an end when it was repudiated by Mr Purcell back in April 2008. Of course, at that stage Mr Purcell was denying that he had repudiated the Contract and asserting the very opposite – namely, that TPAust had done so. In any event, the question arises whether TPAust, in electing to keep the Contract on foot, has waived its right later to rely on the liquidated damages clause if and when that clause was subsequently triggered in accordance with its terms. I cannot see how such a waiver can be said to have arisen. By affirming the Contract, TPAust lost its opportunity there and then to sue for liquidated damages under clause 10.4, for the very simple reason that the Contract was not terminated. It had no right at that stage to sue for liquidated damages, the clause not having become operative at that stage. It surely cannot, therefore, be said to have waived (or elected not to exercise) a right which had not by then arisen.

114 Did such an election necessarily following from the decision not to terminate the Contract in April 2008? I think not. TPAust could have elected at that stage to terminate the Contract and not chosen to rely on the liquidated damages clause at all. Nor was the right to seek liquidated damages a right which was inconsistent with the right to enforce the non-solicitation/restraint of trade clauses. TPAust could have done both in April 2008 (although in those circumstances the contractual restraint period would have been for no more than three months).

115 Accordingly, I find that it was open to TPAust to invoke the right to liquidated damages under clause 10.4 as it has done.

(iii) Is clause 10.4 unenforceable as a penalty?

116 In Ringrow Pty Limited v BP Australia Pty Limited [2005] HCA 71; (2005) 224 CLR 656 at 662-663, the High Court affirmed the position in relation to the law of penalties, namely that in its standard application Lord Dunedin’s speech in Dunlop Pneumatic Tyres Pty Limited v New Garage & Motor Co Limited [1914] UKHL 1; [1915] AC 79 at 86-87 remains the applicable formulation in Australia law. There, Lord Dunedin said that the essence of liquidated damages was a “genuine covenanted pre-estimate of damage”; that the question “is a question of construction to be decided upon the terms and inherent circumstances of each particular contract”, judged at the time of making of the contract and not as at the time of breach; and set out tests which may be helpful or even conclusive when construing a clause asserted to be a penalty clause. In particular, Lord Dunedin said:

It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

117 In Ringrow the High Court concluded that there was no support for the proportionality doctrine which had been advocated in that case, stating (at 669 [31]-[32]):

The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. As Mason and Wilson JJ observed in AMEV-UDC Finance Ltd v Austin:

[T]here is much to be said for the view that the courts should return to ... allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach.

Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged "extravagant and unconscionable in amount". It is not enough that it should be lacking in proportion. It must be "out of all proportion". It would therefore be a reversal of longstanding authority to substitute a test expressed in terms of mere disproportionality. (my emphasis) (footnotes omitted)

118 It was said that here, as recognised by Brereton J, it is likely to be difficult to quantify and prove the loss suffered as a result of breach (a matter which ordinarily makes the clause less likely to be seen as a penalty).

119 There was some evidence to the effect that the standard practice in the broking industry that brokers are expected to generate revenue at double their salary calculation. A broker is commonly expected to bring in double his or her remuneration, the balance going to overheads/profits (para 20 of Mr Tullett’s affidavit). Mr Tullett’s affidavit set out the difficulties in attempting to quantify the damages to the business when a broker leaves employment prior to the expiry of the minimum term. At Exhibit C tab 7 is a copy of the contract dated 10 June 2008 between BGC and Mr Purcell, which seems similarly to recognise the business imperatives of Mr Purcell generating commission revenue to such a level (by enabling BGC unilaterally to vary his remuneration to 50% of average monthly commission if certain levels of revenue are not met). Therefore, an equivalent of 50% of the average monthly revenue generated over a specified period can readily be seen to represent a genuine pre-estimate of damage likely to be caused by the breach by reference to the general expectations of revenue in this industry.

120 For Mr Purcell, it was submitted that, as at the date of the Contract, clause 10.4 was penal in nature because the formula is designed to produce a figure which represents the profit TPAust would expect to derive from Mr Purcell if he worked to the end of the Contract term and pays no regard to the likelihood that Mr Purcell would be replaced by another employee long before (and in some cases over a year before) the end of the term of the terminated Contract. As a result, it was said that in any scenario the amount payable under the formula would be out of all proportion to TPAust’s likely losses.

121 It was noted by Mr Rushton that the application of the formula will produce very different outcomes depending on the time at which the Contract is terminated and hence it was submitted that the formula can be seen to operate in an arbitrary fashion (said to be inconsistent with an attempt to arrive at a genuine pre-estimate of loss).

122 Mr Purcell has, however, expressly acknowledged in the Contract that clause 10.4 is a genuine pre-estimate of loss. It seems to me that the clause clearly attempts to set (by reference presumably to the profit component to the employer of what would be the revenue generated if Mr Purcell were to remain employed for the balance of the term) the measure of loss likely to be suffered by TPAust (it apparently operating on an industry expectation of revenue being two times salary). It is difficult to see that this is not a genuine pre-estimate of loss or that, at the time of entry into the Contract, it would be out of all proportion to or extravagantly unconscionable compared with the loss which it might be thought would be suffered from a breach.

123 It may well be the case that the potential variety of outcomes depending on the circumstances in which or time at which the Contract is terminated could be seen as consistent with the level of loss likely to be suffered at that point. The formula in clause 10.4 appears to have been designed to estimate the profit which TPAust would have received had Mr Purcell not breached the Contract by estimating the profit he would have generated over the period of time from the point at which he ceased providing services until the point in time at which he could lawfully have terminated the contract by notice. Under clause 10.4, the liquidated damages would be considerably greater had Mr Purcell ceased to provide services after, say, 6 months than if he had ceased to provide services after 21 months. It seems to me that this is a genuine pre-estimate of, and not wildly disproportionate to, the loss which might be suffered as, in the former scenario, TPAust would have been deprived of the profits Mr Purcell would have generated over a period of 18 months whereas, in the latter scenario, it would only have been deprived of the profits he would have generated over a period of 3 months.

124 Looked at with hindsight the pre-estimate seems to have proved relatively close if Mr Tullett’s estimation of the loss TPAust has incurred is accurate. Mr Tullett estimated that the losses that had in fact been suffered as a result of the breach were in the order of $400,000. Mr Tullett’s evidence was that the level of business transacted on behalf of clients for which Mr Purcell was the broker in the six months after Mr Purcell left was significantly reduced, with revenues down approximately $250,000 over the period by comparison with the earlier six month period (T 8.39), and that, as transactions were usually brokered on both sides, the loss suffered by reason of Mr Purcell’s absence was closer to $400,000.

125 The question of construction of the contract is to be determined at the date of the contract and not at the date of breach. However, looking at the position in hindsight does give some comfort in testing whether or not there might have been a reasonable basis at the time of entry into the Contract for the parties to determine that there was a genuine likelihood that damages of this kind might be suffered as a result of the early termination of the Contract.

126 Insofar as it was suggested that the clause takes into account no potential mitigation of loss, it was submitted by Mr Fernon, and I accept, that the question of mitigation is not of relevance when assessing the greatest loss that might be suffered. In Murray v Leisureplay plc [2005] EWCA Civ 963 the finding that a clause was a penalty (in respect of which the trial judge had attached importance to the fact that the clause did not make provision for mitigation) was reversed on appeal. Buxton LJ commented as to the absence of any requirement of mitigation in the clause (there, unlike here, in circumstances where the so-called penalty was imposed on the employer), first, that it must have been difficult to say with confidence at the time of entry into the contract what might happen if the employee were to be dismissed and (at [115]):

Second, in order to meet this criticism a pre-estimate of damages clause would have to be drafted to encompass not only the fact of mitigation in terms of income from other sources but also the duty to seek such mitigation. Such a clause would directly invite disputes about the reasonableness of [the employer’s] behaviour after termination, of the kind that clauses stipulating the amount of compensation are precisely designed to avoid.

127 In the present case there was some evidence that the steps taken in mitigation were not seemingly very effective, Mr Purcell obviously having the benefit of a degree of loyalty from his clients, which illustrates the difficulty of assessing at the outset the range of loss which might be suffered from a breach, whether or not the innocent party acted to mitigated his or its loss.

128 Where the parties at the commencement of the contract have directly addressed their minds to the question of loss, and have agreed what is a genuine pre-estimate of loss, then the fact that the loss may not ultimately have been as great as they have estimated does not make the clause penal in nature. Presumably, the greatest loss that might be suffered would be in circumstances where (irrespective of whether there was an obligation to mitigate) TPAust was in fact unable to replace Mr Purcell with a broker who would be able to generate profits of the kind which Mr Purcell would have done had he remained in employment. Faced with that comparison, the sum provided for under clause 10.4 cannot in my view be said to be so extravagantly out of proportion to the loss as to attract the doctrine relating to penalty.

129 I find that the clause is not a penalty.

Orders

130 I find for the plaintiff and order the defendant to pay the sum of $503,100 plus interest and costs. I assume that interest, in accordance with clause 10.4, will run from 8 October 2008 (the day after the Contract was terminated).

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LAST UPDATED:
9 October 2009