The ongoing ambiguity in interpreting a contract: what is admissible?

5 December, 2018

A recent New South Wales Court of Appeal decision highlights the importance of the wording of an employer’s contractual power to summarily dismiss an employee, and of the employer following a rational decision-making process in exercising such a power.

A confidential internal email was sent to ten recipients within a Bank. A short time later a doctored version of the email was posted anonymously to a journalist. The Bank retained a handwriting expert who reported that it is “highly probable” that the handwriting on the envelope belongs to one of the ten recipients of the email, a Mr Bartlett. Mr Bartlett was interviewed. He denied doctoring the email and sending it to the journalist. He also requested, but was denied, a copy of the handwriting expert’s report and the opportunity to obtain a response.

The Bank then instantly terminated Mr Bartlett’s employment. The employment contract stated that the Bank was entitled to exercise that power if, in the Bank’s opinion, the employee has engaged in serious misconduct. Was the dismissal lawful or not?

Those are the facts and circumstances broadly expressed which were before the New South Wales Court of Appeal in Bartlett v Australia & New Zealand Banking Group Limited [2016] NSWCA (7 March 2016).

Mr Bartlett’s contract with the Bank

The terms of Mr Bartlett’s contract of employment with the Bank relevantly included:

“13. Disciplinary Action

If you fail to comply with the provisions of your employment agreement or any other ANZ performance requirements, ANZ may take disciplinary action which may include suspension with or without pay and, in certain circumstances, termination of your employment with ANZ (see clause 14).

…

14.3 Termination by ANZ

a) Termination with Notice

ANZ may terminate your employment for any reason by giving you 4 months’ written notice. ….

b) Immediate Termination Without Notice

ANZ may terminate your employment at any time, without notice, if, in the opinion of ANZ, you engage in serious misconduct, serious neglect of duty, or serious breach of any of the terms of this employment agreement. ….”

Scope of contractual power to immediately terminate

Mr Bartlett argued that the Bank was only entitled to exercise its power under Clause 14.3(b) and terminate his employment summarily if it could prove as a matter of objective fact that he was guilty of serious misconduct. He adduced expert handwriting evidence at the hearing that contradicted the report relied upon by the Bank.

Conversely, the Bank contended that the question was simply whether, when the Bank terminated Mr Bartlett’s employment, it believed in good faith that Mr Bartlett had been guilty of serious misconduct.

The primary judge, Adamson J, had found in favour of the Bank on this construction issue and dismissed Mr Bartlett’s claim against the Bank for wrongful dismissal.

On appeal, the NSW Court of Appeal (Macfarlan JA; Meagher JA and Simpson JA relevantly agreeing) accepted an argument made in behalf of Mr Bartlett which had not been put to the primary judge; namely, that Clause 13 is an important part of the context of Clause 14.3(b) and, when regard is had to it, the conclusion should be drawn that termination by the Bank under Clause 14.3(b) requires the objective existence of “misconduct”, not simply the opinion of the Bank that that has occurred.

In reaching this conclusion the Court of Appeal essentially reasoned as follows (see at [30] and following):

the precondition to the Bank taking disciplinary action under Clause 13 is stated to be an actual breach of the employment agreement (or performance requirements); and even then, the right of termination is said to be available only “in certain circumstances”. Accordingly, to construe Clause 14.3(b) as permitting termination dependent only upon the Bank’s opinion as to whether misconduct or other breach had occurred “would be to render the two provisions in conflict”.
An available construction that avoids such conflict is to treat the “opinion of ANZ” referred to in Clause 14.3(b) as applicable to the seriousness of the misconduct or other breach, not to its existence.
Adopting that construction would be consistent with Clause 13, which states that where there is a breach termination can occur only in “certain circumstances”. It would also be consistent with the position at common law that an employer’s right to dismiss an employee is a narrow one.

Was the Bank also required to act reasonably?

The Court of Appeal also addressed Mr Bartlett’s fall back argument that the Bank was required to act reasonably in exercising its power under Clause 14.3(b), and had failed to do so.

After reviewing relevant authorities the Court of Appeal concluded that in forming an opinion under Clause 14.3(b) of Mr Bartlett’s employment agreement the Bank was not only obliged to act honestly, it was also obliged to act reasonably “at least in the Wednesbury sense and at least so far as its process, as distinct from the result, was concerned” (at [49]).

The case of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 is the classic authority for the principle of administrative law it is an essential condition to the exercise of a decision-making power that it not be exercised in a way that no reasonable person could exercise it.

The Court of Appeal found that in the present case the Bank acted unreasonably in the Wednesbury sense because it had departed significantly from “the standard of conduct which could be expected from a reasonable corporate employer” in at least two significant aspects.

First, the Bank’s limitation of its investigation to the ten recipients of the email was found, in the circumstances, to be unwarranted.

And secondly, it was unreasonable for the Bank not to provide Mr Bartlett with a copy of its handwriting expert’s report and the opportunity to obtain advice about it and to respond to it (the Bank had also failed to apply its internal policy and procedure in this regard, which mandated an employee’s right to respond).

The Court of Appeal ultimately awarded Mr Bartlett damages in a sum equivalent to the payment he would have received during a four month notice period. It also ordered the Bank to pay Mr Bartlett’s costs of the trial and 50% of his costs of the appeal.

Take home points

It is possible for parties to, by contract, alter the position and derogate from rights and protections that would otherwise apply at general law. However, it will generally require clear wording for the Courts to infer that this is what the parties intended, particularly in a context such as summary dismissal where the consequences for the employee concerned are likely to be severe.
In considering the proper construction of any particular term in a contract, it will be necessary to consider the totality of the contract to ensure consistency with all other terms.
Where the pre-condition to exercising a power under a contract is the formation of a specified opinion, it does not follow that the power is free and unfettered. The party making the decision must not only be seen to be acting in good faith, it must also act reasonably in the sense of following a rational (as opposed to arbitrary or capricious) decision-making process.

published by

Andrew Lacey

Managing Principal

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Canadian Court elevates thumbs-up emoji to signature status

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