In this In Brief, we discuss the Western Australian Supreme Court decision in Heugh v Central Petroleum Limited [2014] WASC 311 (5 September 2014).

In this case, the former Managing Director (Heugh) of an oil and gas exploration company was awarded over $1.59 million for unlawful termination of his contract of employment.

THE FACTS

Heugh was the Managing Director of Central Petroleum Limited (Central Petroleum). His role included the responsibility for investigating and negotiating farmout agreements.

In February 2012, contrary to Heugh’s recommendation, the Central Petroleum Board resolved that his farm-out agreement duties were to be re-assigned to another employee (Shortt). The following day, Heugh sent Shortt two letters:

  • The first alleged that Shortt lacked an adequate level of professionalism.
  • The second informed Shortt of the Board's resolution and asked whether he would like to take on these additional responsibilities or if he thought some alternative arrangement might be more suitable.

The Board wrote to Heugh informing him that in attempting to circumvent the Board’s decision to re-assign the farmout responsibilities to Shortt, Heugh had placed unacceptable pressure on Shortt. Heugh had thereby breached his employment contract and the company’s Code of Conduct.

The letter from the Board required Heugh to remedy the alleged breaches within 14 days. The remedy would be considered complete if the Board received written assurance that Heugh would comply with his duties including public support of any direction of the Board in the future, and if he proffered a written apology to Shortt in the form attached to the letter.

Heugh signed the written assurance, and withdrew the written warning to Shortt. However, he provided Shortt with an apology in a different form to the one proposed by the Board.

One month later, the Board took measures to remove Heugh as an employee, director and Managing Director of Central Petroleum, by seeking his voluntary resignation. Heugh refused to resign.

Central then terminated Heugh’s employment under clause 14 of his employment contract, which was in the following terms (emphasis added):

The Company may at its reasonable discretion terminate the Employment: (a) if at any time the Executive ... (iii) commits any serious or persistent breach of any of the provisions contained in this Agreement and the breach is not remedied within 14 days of the receipt of written notice specifying the breach from the Company to the Executive to do so.

Some time prior to his termination, Heugh had engaged a private investigator to investigate Shortt, using Central Petroleum’s funds but without the permission of the Board. He had not disclosed this matter to the Board. However, this matter was not relied upon by Central Petroleum as a ground for terminating Heugh’s contract.

THE ARGUMENTS

At trial, it was accepted that Central Petroleum had terminated the contract of employment. Heugh argued that the company was not entitled to terminate his employment and in doing so breached and repudiated his contract because:

  • Heugh did not breach his contract;
  • if he did, the misconduct was not sufficiently serious or persistent to give rise to termination;
  • he had remedied the alleged breaches to Central Petroleum’s reasonable satisfaction;
  • Central Peteroleum failed to exercise its discretion to terminate the contract reasonably, as required by the express terms of clause 14.1.

In its defence, Central Petroleum argued that it was entitled to terminate Heugh’s employment because of:

  • his misconduct in circumventing the Board’s farmout decision and placing unacceptable pressure on Shortt;
  • Heugh’s further misconduct in hiring the private investigator to investigate Shortt at Central Petroleum’s expense without disclosing this to the Board (the company sought to rely on this alleged misconduct at trial, notwithstanding that it was not relied upon at the time of terminating Heugh’s employment).

THE DECISION

Le Miere J held that Heugh committed a serious breach of the contract when he sought to put pressure on Shortt to not accept responsibility for farmouts in future, and thereby undermined the Board’s resolution. His Honour dismissed Heugh’s argument that the Board was pursuing a pre-determined plan to marginalise Heugh and ultimately remove him from his position.

However, Le Miere J went on to hold that Central Petroleum wrongfully terminated Mr Heugh’s employment because Heugh had remedied his serious breach of the contract; alternatively, termination of the contract was not a reasonable exercise of discretion by the company.

SERIOUS BREACH WAS REMEDIED

Le Miere J observed that:

  • Clause 14.1(a)(iii) of the contract provided that Heugh could ‘remedy’ the breach within 14 days which, as a matter of construction, meant to put matters right for the future - not to obviate or to nullify the effect of a breach so that any damage done already was made good.[1]
  • The contract did not specify any particular method for remedying a breach.[2] Whether or not a breach has been remedied is a question of fact. Central Petroleum could not limit what could be done by specifying the steps to be taken to remedy the breach[3] (such as when it specified the form of the apology it required Heugh to make to Shortt).
  • The purpose of apologising in this situation was to heal any hurt to Shortt and repair their working relationship.[4] The apology proposed by Central Petroleum was inappropriate.[5]
  • Heugh remedied the serious breach when he acted as he did and, therefore, the termination was not supported by clause 14(a)(iii) of the employment contract.[6]

COMMON LAW RIGHT OF SUMMARY DISMISSAL DISPLACED BY CONTRACT

In the alternative, Le Miere J observed that the contract specified grounds for termination, and the steps required to effect termination, and no others. Therefore, it displaced the common law right to summarily dismiss. One ground for termination under the contract was ‘gross misconduct’, which was a narrower concept than misconduct at common law.[7]

NO REASONABLE EXERCISE OF DISCRETION TO DISMISS UNDER THE CONTRACT

Central Petroleum did not have an unrestrained discretion to terminate the contract. The purpose of qualifying the company’s decision to terminate by the requirement that it be ‘reasonable’ was to ensure that the company did not do so without giving proper consideration of all relevant matters.[8]

The requirement of reasonableness has both a subjective and objective element: the subjective element focused on the Board’s reasons for terminating, while the objective facts to be taken into account included Heugh’s position, history and the circumstances of his breaches of the contract.[9]

The apology proposed by Central was grovelling and it was unreasonable to expect Heugh to sign it.[10] The decision to terminate the contract was not the exercise of a ‘reasonable’ discretion.[11]

NO RELIANCE ON OTHER MISCONDUCT

Heugh’s failure to disclose the engagement of the Private Investigator was held not to be a further ground for dismissal because an employee is not under a duty to disclose their own breaches of contract.[12]

In any event, on the evidence, Central was aware of that matter before the dismissal and elected not to raise it. Central thereby waived its right to rely upon this reason in a post-termination context.[13] Central Petroleum was also obliged under the contract to notify Heugh of any proposed breaches and give him an opportunity to rectify them, which it did not do.

DAMAGES

Le Miere J ordered Central Petroleum to pay Mr Heugh $1,598,298 in damages, which included:[14]

  • $1,176,238 – loss of remuneration for the remaining period of his fixed-term contract;
  • $45,000 – loss of opportunity to earn higher remuneration from salary reviews;
  • $53,127 – unpaid long service leave entitlements;
  • $245,883 – loss of opportunity to renew the contract;
  • $78,050 – interest.

According to a recent media release Central Petroleum, in consultation with its insurers, is considering whether to bring an appeal against Le Miere J’s decision.

LESSONS FOR EMPLOYERS

The drafting of executive contracts presents employers with a number of challenges. The significance of an executive’s role in the organisation and their high levels of remuneration are important reasons for ensuring that these contracts are carefully drafted to protect the employer’s interests.

The decision in Heugh v Central Petroleum illustrates that:

  1. Without a contractual provision about the manner and form for remedying breaches, an employer may be found to have repudiated the contract if it dismisses an employee - relying on a term permitting termination of the contract if a breach is not remedied - just because the employer is not satisfied with how the employee has tried to remedy the breach. If the employee makes the tactical decision to “accept” the repudiation, the employer will be exposed to damages for unlawful termination of the contract.
  2. Contracts that are prescriptive about the grounds, and the steps that must be taken, to terminate them may displace the common law right to summarily dismiss the employee for misconduct. Contractual definitions of ‘gross’ or ‘serious’ misconduct may be narrower than the common law notion of misconduct justifying summary dismissal. Employers should be wary that this may make it more difficult to dismiss an employee for misconduct.
  3. If an employer becomes aware of misconduct and does not act upon it, the employer may be held to have waived its right subsequently to rely on the misconduct as justifying a dismissal. To try and avoid this outcome, employers should have systems to identify any misconduct by employees and expressly reserve all rights in respect of any misconduct at the time that it is discovered.