The Supreme Court of Western Australia has awarded a Managing Director in excess of AUD$1.5 million in damages for wrongful dismissal. The decision serves as a helpful reminder of the importance of carefully drafted termination clauses in senior executive contracts.

Background

Mr Heugh was employed as the Managing Director of Central Petroleum Ltd. In February 2012, the Board of Directors of Central voted to assign certain authorities away from Mr Heugh and to another employee of the company, Mr Shortt.

Following this decision, Mr Heugh attempted to circumvent the Board’s actions, including subjecting pressure on Mr Shortt to do the same. The Board took this to be a breach of Mr Heugh’s employment contract. However, the relevant termination clause of the employment contract provided that the company may terminate “at its reasonable discretion” and only if the alleged breach “is not remedied within 14 days of the receipt of written notice specifying the breach”.

The Board issued Mr Heugh with a letter requiring him to remedy the actions within 14 days. The Board asked Mr Heugh to provide written assurance that he would publicly support any direction of the Board, withdraw the letter of warning he had issued to Mr Shortt, and provide Mr Shortt with a written apology in a form prepared by the Board.

In response, Mr Heugh provided the Board with the written assurance requested, and withdrew the letter of warning to Mr Shortt. Although he also provided Mr Shortt with a written apology, it was in a different form to that specified by the Board. The Board took this as a failure to remedy the breach and proceeded to terminate Mr Heugh’s employment.

Findings

The Court accepted that Mr Heugh had committed a serious breach of his contract and considered what the contract required in order to “remedy” the breach. It was held that Mr Heugh’s obligation was to put matters right for the future rather than obviate or nullify the effect of the breach so that any damage already done was in some way made good.

The Court found that it was not within the Board’s power to limit what might be done by Mr Heugh to remedy the breach by specifying the relevant steps to be taken (or in this case the specific wording of the apology provided). As a matter of fact, the Court held that Mr Heugh had remedied the breach and accordingly the employer did not have a right to terminate under the relevant clause in the contract.

Furthermore, the Court found that the termination clause in the contract constrained the circumstances in which the company could terminate it, and displaced the right that the company would otherwise have to summarily dismiss at common law. As the company did not have a right to terminate the contract, Mr Heugh’s claim for wrongful dismissal was made out. Damages were assessed at AUD$1,520,248.

Implications for employers

This case is an interesting example of a situation where the drafting of the contract has curtailed the employer’s common law right to terminate employment summarily for serious misconduct. It serves as a reminder to employers to review their executive contract templates to ensure that the wording of termination clauses does not unduly restrict the employer’s right to terminate summarily or on notice, by confining the circumstances in which termination may occur or prescribing a specific procedure that must be followed in order to effect termination.