Repudiation occurs through progressive downgrading of status and responsibility

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In the case of Earney v Australian Property Investment Strategic Pty Ltd [2010] VSC 621, the Supreme Court of Victoria has recently awarded a former Chief Financial Officer $250,000 in damages after finding that his former employer had repudiated his contract of employment.

Background

As a result of an acquisition of his employer, Mr Earney was one of two CFO’s in the group company.  In recognition of the fact that there was no need for two CFO’s, Mr Earney made repeated attempts to create an alternative role for himself and raised his concerns about the effect of the takeover on his responsibilities and status with senior management on a number of occasions.  Mr Earney was subsequently removed as CFO without being provided proper notice and informed that he was to focus on “special projects”. 

Accordingly, Mr Earney advised the CEO that the company’s conduct amounted to constructive dismissal and that he accepted its repudiatory breach of his employment contract.  In the absence of any formal response from the CEO in respect of an offer for a defined future role in the company, Mr Earney ceased work 10 days later.

Mr Earney subsequently made a claim for a 12 month termination payment pursuant to a “Change of Control” term in his contract of employment, on the basis that he had been dismissed as a result of his employer’s repudiation. His employer denied the repudiation and argued that he had breached his contract by failing to attend for work. The defendant subsequently terminated Mr Earney’s employment for cause.

Decision

Justice Hargrave adopted the legal principles governing the repudiation of an employment contract as set out in the case of Whittaker v Unisys Australia Pty Ltd (2010) 192 IR 311, namely that:

•  repudiation is conduct of a party which evinces an intention to no longer be bound by a contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations;
• whether there has been a repudiation is an objective test and is a question of fact.  It will not be inferred lightly;
• repudiation may be evidenced by a single act or by an accumulation of conduct;
•  the innocent party must elect to accept the repudiation to bring an end to the contract;
•  repudiation may be ‘cured’ by the party in breach but only prior to acceptance by the innocent party; and
• a significant diminution in remuneration, status or responsibility may constitute a repudiation but is a question of fact.  There may be a significant diminution in status or responsibility, even where the employee retains the same remuneration and title; and
•  a considerable change in the nature of an employee’s duties may not amount to repudiation in some circumstances.  Whilst an employer cannot force changes of status and responsibility on an employee, the circumstances may permit a degree of flexibility where each party must provide “some reasonable give and take”.  Therefore, repudiation may not be inferred in the absence of serious non-consensual intrusions upon the employee’s status and responsibilities.

Justice Hargrave found, when viewing the facts objectively, the defendant’s conduct amounted to a repudiation of Mr Earney’s contract of employment because the “defendant’s conduct was such as to convey to a reasonable person in Mr Earney’s position that it did not intend to perform its obligation to employ him as either CFO or in an acceptable alternative position of equivalent status and responsibility”. 

In making this finding, Hargrave J relied on the defendant’s conduct in the four months following the takeover including but not limited to: substantial reduction of Mr Earney’s authority for expenditure; removal of his accounting functions; hindering and excluding his participation in Board meetings, exclusion from discussions and meetings about a proposal which he was in charge of; transferring his responsibility of managing a key relationship to the other CFO and removing him as a signatory of accounts, culminating in his removal as CFO.  Hargrave J stated that during this 4 month period, Mr Earney’s status and responsibility was “progressively downgraded” to the point where his future was in doubt because the defendant had not created a definite position for him, despite having discussed possible roles. 

Hargrave J rejected the defendant’s argument that Mr Earney “jumped and was not pushed” and that he acted precipitously, finding that Mr Earney adopted a flexible approach by proposing a series of potential alternative roles and that the defendant did no more than acknowledge the existence of possible roles. He also rejected the defendant’s assertion that it allocated “extremely meaningful roles” to Mr Earney while it made a final decision in relation to his future, finding instead that he was simply given a list of tasks to attend to. 

Hargrave J concluded that as a result of the defendant’s conduct, the “Change of Control” provision in his contract applied to the termination of Mr Earney’s employment and he was therefore entitled to be paid a 12 month termination payment, amounting to $250,000.  Hargrave J found that Mr Earney was not entitled to an additional payment in lieu of reasonable notice of termination, as the termination payment was intended to record all of Mr Earney’s rights to compensation for termination in circumstances where the “Change of Control” provision was engaged. However, Mr Earney was not required to bring his later earnings of approximately $80,000 into account because the termination payment was an agreed liquidated sum and therefore not subject to the principles of mitigation of loss.

Lessons for employers

This case is a reminder for employers to be wary of diminishing an employee’s status and responsibility, potentially where over a period of time the changes become substantial.  On the other hand, this case also confirms that when an employer needs to make some changes to a position there is required to be some “give and take” by the employee.  This means that employees cannot be intransigent in the face of requested changes by the employer.  This latter requirement forms the basis for how employers should approach required changes in roles.

Contact details

Melbourne
Charles Power, Partner
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Sydney
Stephen Trew, Partner
T: +61 (0)2 8083 0439
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Michael Selinger, Partner
T: +61 (0)2 8083 0430
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Brisbane
Paul Hardman, Partner
T: +61 (0)7 3135 0675
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