Summary

  • The former CEO of ABN Amro has been awarded nearly $3m after the NSW Supreme Court found that he had a contractual entitlement to payments under an unpublished redundancy policy.
  • ABN Amro was not entitled to rely on the requirement that Mr James sign a deed of release before being entitled to the severance payment in the redundancy policy because the matters covered in the required release went beyond what was reasonable to require the executive to release.
  • Justice McDougall’s judgement creates a number of uncertainties for employers who incorporate policies into their employment agreements. These include casting doubt on whether an employer can vary policies incorporated into employment agreements, and how unpublished policies can create binding entitlements, despite employees being unaware of their terms.

Implications for employers

  • Employers should carefully consider what matters are provided for in their corporate policies including unpublished policies which are used as internal guidelines because these may, in certain circumstances, give rise to enforceable rights.
  • Employment agreements should contain express words excluding the incorporation of policies from providing contractual contract entitlement if this is intended.
  • Where contracts provide for a discretionary decision employers should be mindful to exercise their discretion in good faith and in conformance with its contractual purpose as courts are increasingly looking to review the reasonableness of employer decisions in this area.

Background

Following the merger of ABN Amro’s Australian business with the Royal Bank of Scotland in 2008, Mr James and another senior executive, Colin McKeith were made redundant. Mr James and Mr McKeith claimed that they were entitled to severance and ex gratia payments from the redundancy policy.

The ABN Amro redundancy policy was a secret ‘closed’ policy that was not disclosed to employees generally. Mr James knew of the policy because he had been involved in making decisions about other employees’ exit from the business. The redundancy policy provided the following:

  • a severance payment based on the number of years of service; and
  • an ex gratia payment being the average of the prior 2 years bonuses.

Mr James’ employment agreement said:

ABN Amro Policies

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 devise and introduce policies.

There were several issues before the court but the most relevant was whether ABN Amro’s redundancy policy was a contractual entitlement because of the above clause.

Decision

Incorporation of the redundancy policy

In relation to the incorporation of the redundancy policy, his Honour said that the redundancy policy was incorporated into Mr James’ employment agreement because:

  • reading Mr James’ employment agreement objectively, it was clear that the policy clause (above) was intended to be mutually obligatory – Mr James and ABN Amro would equally be bound by the redundancy policy’s conditions;
  • policies that impose obligations on an employer are more likely to be considered contractually binding in nature; and
  • the redundancy policy was not merely a statement of principles. It sets out a clear procedure for calculating any redundancy payments and the entitlements of employees.

Restricting ABN Amro’s ability to implement a deed of release

ABN Amro argued that even if the redundancy policy were contractually binding, the exiting employees were obligated to sign a deed of release before payment could be made, which neither Mr James or Mr McKeith had. This was because of the following statement in the redundancy policy:

…the staff member will be provided with advice on the terms of the redundancy, final payment and tax liability as per the schedule and the Deed of Release. The Deed of Release should be signed and returned to HR before the final payment is made.

However, in this case the draft deed presented to Mr James contained clauses which Justice McDougall said could not be characterised as something that ABN Amro, acting reasonably and in good faith, could require of Mr James. These clauses included a release from claims that only favoured ABN Amro, and did not include an indemnity for Mr James in his role (while employed) as a director of ABN Amro’s Employee Incentive Plan in circumstances where it was likely that litigation may result. Justice McDougall found that:

the deed of release went well beyond the parties agreeing to the ex gratia payment included in the redundancy policy; and

what ABN Amro had effectively done was attempt to tie extra-contractual provisions (the one sided release in favour of ABN Amro) to Mr James’ statutory and contractual entitlements.

Justice McDougall held that because the redundancy policy was contractually incorporated into Mr James’ employment agreement, ABN Amro had a duty to act reasonably and in good faith when preparing a deed of release as part of the redundancy procedure.

James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland [2015] NSWSC 243