The NSW Court of Appeal has overturned a finding that an employment contract with ABN Amro’s Australian business (ABN) incorporated its redundancy policy. However, the Court held that the Royal Bank of Scotland (RBS) was bound to apply ABN’s redundancy policy as it had made promissory statements that it would honour the policy to any employees retrenched following its takeover of ABN. RBS was therefore contractually obliged to make severance payments but could exercise its discretion in relation to “ex gratia” payments.

Implications for employers

  • Employers can be somewhat reassured by the finding that the employment contract did not give the redundancy policy contractual effect. However, careful drafting to exclude mutual obligations under company policies remains crucial.
  • Employers should be aware of the potential enforceability of statements made in the context of mergers and acquisitions.
  • Redundancy policies should emphasise the discretionary nature of any “ex gratia” payment.

Background

ABN’s redundancy policy provided that a redundancy payment could include a severance payment based on years of service and might also include, on an “ex gratia” basis, a discretionary amount in respect of bonus entitlements. Following RBS’s takeover of ABN, ABN’s CEO, Mr James, and its Head of Global Markets, Mr McKeith, were made redundant. ABN offered a redundancy payment to each executive in exchange for signing a widely drawn deed of release. The offer to Mr James comprised a severance payment and a $2.5 million “ex gratia” payment, while Mr McKeith was only offered a severance payment. Both refused to sign the deeds, and sued ABN and RBS for breach of contract for their failure to make severance and ex gratia payments under ABN’s redundancy policy.

Claim against ABN

Mr James asserted that, despite not being disclosed to employees generally, the redundancy policy was incorporated into his employment contract with ABN through the following term:

You agree to be bound by the policies of ABN AMRO as may exist from time to time. You acknowledge and accept that it is the prerogative of ABN AMRO to vary change or terminate existing policies as well as to devise and introduce new policies.

Mr McKeith argued that the policy was incorporated into his contract by a “course of dealing”.

Claim against RBS

During the takeover process, RBS made statements, communicated to employees by ABN, that it would honour ABN’s redundancy policy should the merger succeed. Mr James and Mr McKeith asserted that RBS was contractually bound to honour the policy by virtue of these representations.

Decision at first instance

The NSW Supreme Court held that the policies term incorporated the redundancy policy into Mr James’ employment contract with ABN. The terms of the deed of release were considered beyond what was reasonable to require of an executive. ABN was therefore held to be in breach of the policy by requiring Mr James sign the deed as a condition for the severance and redundancy payments. Justice McDougall awarded Mr James $2.9 million comprising the severance and ex gratia payments owed under the policy. ABN appealed.

Justice McDougall held that as Mr McKeith had not pleaded that his contract had been varied, he was prevented from advancing his claim of incorporation by a “course of dealing”. Further, the Court held that RBS’s statements were not contractually enforceable as Mr James and Mr McKeith had not acted in reliance on them. No award was made and Mr McKeith appealed.

Decision on appeal

Redundancy policy not incorporated into employment contracts with ABN

Justice Macfarlan and Acting Justices Tobias and Emmett held that the phrase “the policies as may exist from time to time” did not incorporate the redundancy policy and ABN was therefore not bound to apply it. The fact that the policy was undisclosed and went beyond the statutory benefit suggested that a reasonable person would not conclude that ABN intended to be contractually bound by it.

The Court also held that ABN was acting as a mere conduit when conveying RBS’s promise to continue the policy to employees. Since the representations were not made by or on behalf of ABN, they did not constitute “a course of dealing” incorporating the policy into the employment contracts. Following the same reasoning, ABN was not estopped from departing from RBS’s representations.

RBS contractually bound to apply redundancy policy

However, the Court found that RBS was contractually bound to honour ABN’s redundancy policy because its statements showed promissory intent (through words such as “guarantee” and “commitment”). Further, the representations were made in a business context with a view to inducing employees to stay in their jobs. By remaining in their employment in reliance upon these statements, the employees provided consideration for the promise. The fact that the statements were conveyed to employees by ABN, and not by RBS directly, did not ameliorate their contractual effect.

Executives entitled to severance payments but no right to “ex gratia” payments

Mr James’ and Mr McKeith’s refusal to sign the deeds of release did not remove RBS’s obligation to make the severance payments since the release terms were broader than what ABN could necessarily or legitimately require employees to give. Failure to provide a more limited deed of release in exchange for a severance payment constituted a breach of contract by RBS.

In contrast, the language used in the policy indicated that the “ex gratia” payment was a discretionary bonus. ABN was therefore entitled to require “almost whatever it wished” in exchange for the payment, and withholding payment because of refusal to sign did not constitute bad faith. The Court noted that, in the context of the global financial crisis, the company’s decision not to pay bonuses to departing employees was “entirely rational and responsible”. Applying this policy to Mr McKeith was not capricious, arbitrary nor unreasonable.

Accordingly, the Court ordered that RBS pay Mr James and Mr McKeith their severance payment entitlements of $432,692.31 and $375,961.54 respectively plus interest.

McKeith v Royal Bank of Scotland Group PLC; Royal Bank of Scotland Group PLC v James [2016] NSWCA 36