LAWWATCH. What constitutes serious misconduct sufficient to amount to a breach of an employment contract? CASE LAW. Our Comments/Analysis

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1 NOVEMBER CASE LAW What constitutes serious misconduct sufficient to amount to a breach of an employment contract? Singapore Court of Appeal overturned the High Court ruling and held that an employee s breach of his employment contract constituted serious misconduct pursuant to the terms of that contract In Phosagro Asia Pte Ltd v Piattchanine, Iouri [2016] SGCA 61, the Court of Appeal overturned the decision of the High Court Judge and held that an employee s breaches of his employment contract amounted to serious misconduct sufficient to amount to a repudiatory breach of that contract and to preclude the employee from claiming benefits following the termination of his employment. The Court looked at the common law principles relating to a repudiatory breach and held that, in the circumstances, the Respondent s conduct regarding the reimbursement of his expenses was a clear breach of a term of the contract that was so important that any breach, regardless of the actual consequences of such a breach, entitled the Appellant to terminate the contract. Our Comments/Analysis The High Court had looked only at the nature and consequences of the breach in determining whether a particular term would constitute a repudiatory breach. In contrast, the Court of Appeal considered whether the intention of the parties to the contract was to designate that term as one that is so important that any breach would result in the discharge of the contract, regardless of the actual consequences. The Court of Appeal s decision provides comfort to employers given that in many cases, while the consequence of a breach may not be serious, the term itself is one which the parties had considered to be a condition of the contract. This case further underscores the importance of drafting. If certain conduct is manifestly abhorrent to the employer, a well-drafted employment contract, which clearly provides for the consequences of an employee engaging in such conduct will remove ambiguity, and provide transparency for both employer and employee about what is expected from the employment relationship. That said, as the Court of Appeal decision illustrates, in the absence of any such express provision, it may still be possible for an employer to show that any conduct which it deems to be in breach of the employee s fiduciary or contractual duty, whether express or implied, is

2 NOVEMBER misconduct which is serious enough to result in discharge of the contract; however establishing this may involve protracted legal proceedings. This Update takes a look at the Court of Appeal s decision. Background In February 2013, Phosint Trading Limited entered into a share purchase agreement for the purchase of Asiafert Trading Pte Ltd ( Asiafert ), a company of which the Respondent was sole director and shareholder. Following the purchase, Asiafert was renamed Phosagro Asia Pte Ltd (the Appellant ) and the Respondent was employed as the Managing Director of the Appellant pursuant to an employment contract dated 1 March 2013 (the Contract ). The term of employment was for three years. The salient terms of the Contract relevant to the appeal were: Clauses 2 and 14, which provided that either party could give three months notice of termination in writing. If the Contract was terminated before the expiry of the three-year term, the Respondent would be entitled to 100% annual salary as a one-off payment; Clause 3, which provided that the Respondent must well and faithfully serve the Company in all respects and use his best endeavours to promote the interests of the Company ; and Clause 20, which provided that the Appellant could terminate the Contract without notice or payment in lieu of notice in the case of serious misconduct or wilful breach or non-observance of any terms of the Contract. When a dispute arose between the parties, the Respondent s employment was terminated with immediate effect by an dated 28 February On 18 March 2014, the Respondent received a letter from the Appellant, accompanied by a large pile of receipts, advising that, subsequent to termination of the Respondent s employment, an investigation had revealed that the Respondent had been guilty of serious misconduct and/or had not acted in the Appellant s best interest and/or had acted in breach of his fiduciary duties to the Appellant. The Appellant alleged that the Respondent had misappropriated close to S$500,000 by way of unjustified expense payments during the course of his employment. As a result of this alleged misconduct, the Appellant advised that the Respondent was not entitled to receive either payment in lieu of notice or payment of a lump sum under the Contract. The unjustified expense payment allegations arose from the process in place for handling finances, which the Respondent had carried over from his previous position as sole director and shareholder of Asiafert (the Expense Accounting Practice ). Under the Expense Accounting Practice, the respondent would, on a monthly basis, submit his credit card expenses

3 NOVEMBER together with supporting receipts to the Appellant s external accountant. This would occasionally include the Respondent s personal expenses as well. The Respondent would then sign a cheque to himself as reimbursement for his expenses. The Respondent claimed that, at the end of the financial year, the accountant would identify expenses that the Respondent was not entitled to and seek reimbursement. It should be noted that the Appellant had no regulations to govern either its accounting practices or the process by which the expense claims of directors were to be processed. The Respondent commenced proceedings seeking damages by way of payment of the salary and bonuses he would have earned if he had been employed for the full three-year term, or alternatively, one year s salary that was due to him under Clause 2 of the Contract given that the Contract was terminated before the expiry of the three-year term, together with other salary and bonuses he was contractually entitled to amounting to S$1,236,900 (the Alternative Claim ). In response, the Appellant filed a counterclaim for S$499,719.20, consisting of 867 claims of alleged unauthorised payments. High Court Decision The High Court Judge (the Judge ) rejected the Respondent s claim for damages by way of the salary and bonuses he would have earned had he been employed for the full three-year term and no appeal was brought against that decision. With regard to the Respondent s Alternative Claim, the Judge held that the Respondent had breached Clause 3 of the Contract, as the Respondent s practice of claiming for personal expenses during the year and only reimbursing the Appellant for these expenses when and if queries were raised by the Appellant s accountants at the end of the year could not be said to be in the interest of the Appellant. For the same reasons, the Judge also held that the Respondent had breached his duty to serve the Appellant with good faith and fidelity and his fiduciary duty to act in the best interests of the Appellant. However the Judge found that, despite these breaches on the part of the Respondent, he was not guilty of serious misconduct or willful breach or nonobservance of the stipulations in the Contract. The Judge held that the breaches were not so serious that they struck at the root of the Contract or destroyed the confidence underlying the Contract and therefore the Appellant was not entitled to rely on Clause 20 to terminate the Contract. The Judge held that the Respondent was entitled to one year s salary under Clause 14 of the Contract, as well as three months salary for payment in lieu of notice, together with the balance of his first year guaranteed bonus.

4 NOVEMBER Court of Appeal The two issues raised by the Appellant before the Court of Appeal were: Whether the Respondent was guilty of serious misconduct and/or willful breaches of the Contract ( Issue 1 ); and Whether the Appellant was entitled to reimbursement of the alleged personal claims ( Issue 2 ). The Court of Appeal allowed the appeal in respect of Issue 1 but dismissed the appeal in respect of Issue 2. Issue 1: Whether there had been serious misconduct In determining what guidelines should apply in deciding whether there had been serious misconduct pursuant to Clause 20 of the Contract, the Court of Appeal looked at the common law principles relating to discharge of breach, or repudiatory breach, for guidance. In particular, the Court held that the common law principles as set out by the Court of Appeal in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR (R) 413 ( RDC Concrete ) were relevant. In RDC Concrete, the Court specified four situations in which a breach of contract would amount to a repudiatory breach: Where the contract clearly and unambiguously states that, in the event of a certain event or events occurring, the innocent party will be entitled to terminate the contract ( Situation 1 ) Where a party, by his words or conduct, simply renounces his contract inasmuch as he clearly conveys to the other party to the contract that he will not perform his contractual obligations at all ( Situation 2 ). The condition/warranty approach where the focus is on the nature of the term breached and, in particular, whether the intention of the parties to the contract was to designate that term as one that is so important that any breach, regardless of the actual consequences of such a breach, would entitle the innocent party to terminate the contract ( Situation 3(a) ). Where the focus is on the nature and consequences of the breach; in particular, where the breach in question will give rise to an event which will deprive the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract ( Situation 3(b) ).

5 NOVEMBER The Court noted that serious misconduct would include the breach of important terms of the employment contract itself. Such terms would be termed conditions pursuant to Situation 3(a) in RDC Concrete, with the breach of such a term entitling the innocent party to elect to treat the contract as discharged, regardless of the nature and consequences of the breach. The Court held that the rational for this approach was the same as that for treating a breach of condition at common law as being a repudiatory breach namely, if the term concerned was intended by the parties to be of such importance that any breach of it (regardless of the consequences) would entitle the innocent party to elect to treat the contract as discharged, then there was no reason in principle why effect ought not to be given to that intention. In the present case, the Court held that it was essential to ascertain the intention of the Appellant and the Respondent by construing the actual contract itself (including the relevant clause, Clause 3) in the light of the surrounding circumstances as a whole. The Appellant company had formerly belonged to the Respondent, who was now its employee and whose duty it was to ensure that he did not take advantage of his insider knowledge to advance his own interests, but instead prioritised the welfare of the Appellant. This requirement was embodied within both the letter and the spirit of Clause 3 of the Contract. The Court emphasised that the Respondent was in a unique position of being entrusted with a significant degree of authority, responsibility and independence in the conduct of the Appellant s affairs, which was clear from the fact that the Respondent had the sole authority to reimburse himself for the expenses he had incurred. In the Court of Appeal s view, it was precisely because the Respondent had previously been the sole shareholder and director of the Appellant (as it previously was) that he was accorded such autonomy in the running of the company. With such trust being placed in the Respondent, it would be expected that Clause 3, which placed an obligation on the Respondent to well and faithfully serve the [Appellant] in all respects and use his best endeavours to promote the interest of the [Appellant] would have been intended by the parties to be of the utmost importance. The Court held that Clause 3 was a condition within the meaning of Situation 3(a) in RDC Concrete, and given that there had been a clear breach of that particular clause, the breach did constitute serious misconduct within the scope of Clause 20 of the Contract. The Court found that Situation 3(b) of RDC Concrete was, in any event, not applicable to the present case as it could not be said that the Respondent s conduct in breach of Clause 3 was such that it deprived the Appellant of substantially the whole benefit of the Contract.

6 NOVEMBER Issue 2: Whether the alleged personal claims should be reimbursed The Court of Appeal held that, the fact that the Expense Accounting Practice was improper in that it amounted to a breach of the Respondent s contractual duties to act in the best interest of the Appellant did not, in and of itself, suffice to establish a prima facie case that all of the expenses in the Appellant s counterclaim were personal in nature. The Court noted that it was significant that the Appellant had not called any representative of its external accountant to give evidence as to whether the relevant expense claims were unauthorised, as this may have been sufficient to establish a prima facie case in the Appellant s favour and shifted the burden of proof to the Respondent to show otherwise. However, as the Appellant had failed to produce such evidence, it could not be said that a prima facie case had been established. Application of principle in Boston Deep Sea Fishing In a threshold matter before the High Court, the Judge had considered whether Clause 20 could even be relied upon by the Appellant since it had only sought to rely on this clause after it had first terminated the Respondent s employment. Whilst there were no legal difficulties surrounding the applicability of Clause 20 on appeal, the Court of Appeal provided some brief views on this issue and confirmed the Judge s view that the principles set out in the seminal English Court of Appeal decision of Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 ( Boston Deep Sea Fishing ) applied to the present case. The Court noted that Boston Deep Sea Fishing stood for the proposition that if an employer did not rely on his employee s misconduct at the time of the dismissal because he did not know about it, he may subsequently invoke that misconduct as a defence to a wrongful dismissal claim brought by the employee. Although the principle in Boston Deep Sea Fishing was set out in the context of the termination of an employment contract for breach at common law, the Court of Appeal in the present case observed that it could see no reason in principle why the proposition should not apply in a situation where the termination was effected pursuant to the express terms of the employment contract itself. Whether Cavenagh (a UK case) applied in Singapore The Judge in the present case had also considered the effect of the English Court of Appeal decision of Cavenagh v William Evans Ltd [2013] 1 WLR ( Cavenagh ), which purported to modify the legal principle in Boston Deep Sea Fishing. In Cavenagh, the employer terminated the employment contract pursuant to an express term of the contract itself, but subsequently discovered wrongdoing on the part of the employee which would have entitled the employer

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