In the recent case of Russell v RCR Tomlinson Ltd WASC 405, the Supreme Court of Western Australia employed the little used equitable doctrine of rectification to “put right” the contract of a terminated employee that did not reflect the terms agreed during pre-employment discussions and enabled him to claim a significant retirement benefit.
Notwithstanding a term in the contract of employment that said the plaintiff had to have 5 years’ service before being eligible for a retirement benefit, the plaintiff claimed he was entitled to nearly A$300,000 as a retirement benefit even though he was employed for less than a year before being terminated without cause by the defendant.
The Court’s decision
The court found that the plaintiff, prior to accepting the position of Executive General Manager with the defendant, had two discussions with the defendant’s outgoing chief executive officer. During those discussions the plaintiff raised a number of concerns about the security of the employment being offered given:
- the contract provided for a 5 year restraint period;
- the contract only required the defendant to provide him with a minimum one month’s notice of termination without cause; and
- there was likely to be a restructure of the defendant at the initiative of the incoming chief executive officer.
According to the plaintiff, the defendant’s former chief executive officer (who was not called to give evidence) reassured the plaintiff had during both discussions that if his employment was terminated by the incoming chief executive officer, he would be entitled to the retirement benefit regardless of whether he had been employed for 5 years.
Having accepted the plaintiff’s evidence the court found that it was the plaintiff’s intention that the contract he signed would include a term making it clear that he would be entitled to payment of the retirement benefit irrespective of his length of service if he was terminated other than for cause. The plaintiff thought that the terms of the contract he signed had that meaning. The court also found that the defendant’s outgoing chief executive officer had intended the contract to include such a term. That is, the parties had the common intention and the only reason the contract did not include the intended term was because of a “common mistake”. Having made these findings, the court could use the equitable doctrine of rectification as “a device by which the contract is made to conform to the true nature of the agreement between the parties” to uphold the plaintiff’s claim for the retirement benefit.
Implications for employers
The case highlights for employers the importance of:
- ensuring contemporaneous notes of important discussions (such as negotiations relating to terms and conditions of employment negotiations) are made;
- ensuring (where possible) that a representative from HR participates in any pre-employment discussions or negotiations relating to contractual terms;
- ensuring that when template or pro forma contracts are used that they are appropriately amended to accurately reflect negotiated terms; and
- carefully reading the contract before it is executed to ensure it reflects the agreed terms.