Downer EDI Limited v Gillies

1. [1]

   ALLSOP P: The controversy between the appellant, Downer EDI Ltd ("Downer") and the respondent, Mr Gillies, concerns the circumstances of the cessation of Mr Gillies' employment with Downer in August 2007. Mr Gillies was Downer's Managing Director and Chief Executive Officer, and had been so for 10 years. Before that Mr Gillies had been a senior employee for 9 years (from June 1988). Downer is, and was during the relevant events, a public company listed on the Australian Stock Exchange.

2. [2]

   Mr Gillies sued Downer in the Supreme Court for breach of his contract of employment and for payment of sums due to him under the contract. Mr Gillies was successful, the Court entering judgment for $7,341,711.27 plus costs (including a partial indemnity costs order). See Gillies v Downer EDI Ltd [2011] NSWSC 1055.

3. [3]

   For the reasons that follow the appeal should be allowed in part in accordance with the disposition of issues summarised in [9]-[10] below.

4. [4]

   Analysis commences with the terms of Mr Gillies' contract which was contained in a letter dated 31 May 1997. Relevantly it stated as follows:

5. [5]

   Clause 2.1 identified remuneration as $400,000 per year. This was increased from time to time.

6. [6]

   There was no issue on the appeal about the relationship between cll 2.2 and 9. The primary judge dealt with this at [16]-[19] of his reasons. Subject to the contract Mr Gillies was entitled to the bonus in cl 9.1.

7. [7]

   There was also no issue that the Executive Share Option Plan referred to in cl 2.2 did not operate. In its place there came to be a so-called "Phantom Option Scheme" ("POS"). This was the payment of a bonus calculated on a basis equivalent to the benefit under the option plan. It was contained in an addendum to a letter dated 23 October 2001, signed by Mr Lau, the then Chairman of the Board. The letter contained the following:

8. [8]

   It is unnecessary to refer to most of the addendum. There was no issue on appeal as to how much Mr Gillies was entitled to under the POS, if he was entitled to payment. The two issues concerning the POS were: first, whether the POS had come into effect; and, secondly, if it had, whether Mr Gillies was employed when he exercised his rights. In respect of this second issue cl 2(g) of the addendum was relevant:

9. [9]

   There were five groups of issues on appeal:

10. [10]

    The primary judge found favourably to Mr Gillies on all these issues. For the reasons expressed below, the issues in (a), (b), (c) and (e) should be resolved in Mr Gillies' favour and those in (d) in Downer's favour.

The ratification of the POS

1. [11]

   The background to the POS was set out by the primary judge at [68]-[69] of his reasons:

2. [12]

   The live contention between the parties was whether the addendum had been ratified by the remuneration committee. The primary judge's findings are set out at [71]-[79] of his reasons, as follows:

3. [13]

   The challenge was to the factual finding of ratification.

4. [14]

   Mr Lau (who as Chairman was a member of the Remuneration Committee) could not recall (one way or another) any resolution. Mr Kent, who had primary conduct of the task, was not called. Mr Gillies, however, stated in an affidavit sworn 15 March 2010 at paragraph 34:

5. [15]

   In the absence of controverting evidence, the finding by the primary judge of the conversation at [76] of his reasons is not open to challenge.

6. [16]

   There was documentary substantiation providing the basis for a clear inference that ratification occurred.

7. [17]

   Against that, it is said that when asked in July 2003 by the Remuneration Committee for a copy of Mr Gillies' terms of employment, Mr Bruce did not disclose the addendum. He explained this in his evidence. He considered the POS as a "stand alone arrangement".

8. [18]

   There was no specific entry in Downer's books of the POS obligation. That is as may be, but it would only reflect on the understanding of those responsible for that, Mr Bruce particularly. The evidence was clear and accepted (see the primary judge's reasons at [76]) that Messrs Lau, Gillies and Bruce thought that ratification had occurred. Of course, their view is not decisive, but it is some evidence that matters had occurred that were necessary for that view to be held: Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at [298]-[300].

9. [19]

   It was submitted that if the advice that was sought concerned disclosure to the market, such advice had already been received. In January 2001, Corrs had advised by letter as follows:

10. [20]

    This ground of appeal fails.

What occurred in early August 2007?

1. [21]

   It is first necessary to appreciate that the events of early August 2007 and the central issue arising from them - the date of Mr Gillies' termination - do not depend upon the question as to whether Mr Gillies had misconducted himself in years past. The facts that gave rise to the assertion that he had done so were learnt about by Downer after August 2007. Those matters will in due course be important to consider in relation to the legal effect of what occurred in early August. For the present, focus will be upon what happened in early August concerning termination of Mr Gillies' employment.

2. [22]

   The primary judge dealt with the termination of employment at [119]-[148]. He concluded that Mr Gillies' employment was not terminated until 9 August 2007, after he had made his election for the purpose of the POS. The facts are not substantially in dispute; rather, the dispute concerns what flows from their assessment and characterisation.

3. [23]

   In August 2006, Downer announced a profit downgrade for the year ending 30 June 2006. In late July 2007, further downgrading of profits occurred.

4. [24]

   On the morning of 1 August 2007, a meeting of non-executive directors took place. At that meeting there was a clear expression of lack of confidence in Mr Gillies. The primary judge described this meeting at [126]-[127] of his reasons, as follows:

5. [25]

   In the evening of the same day (1 August), the full board met. The primary judge described what happened at [120]-[125]:

6. [26]

   What is clear is that Mr Gillies did not resign. Downer submitted that the objective effect of the events described by the primary judge was termination of employment. It was submitted that "stepped down", being the phrase in the press release, was a euphemism for dismissal. Mr Gillies asked to stay in order to make the announcements, but this was refused. He was to obtain permission to come on to the premises. Mr Gillies' contract of employment was as Managing Director and Chief Executive Officer. Thus, it was submitted that to tell him that he ceased to be such was to terminate his employment.

7. [27]

   It is undoubted that the Chairman and Deputy Chairman wanted Mr Gillies gone from the board and gone from the position of Managing Director. The relevant consideration to tell the market was that Mr Gillies was leaving, that he was no longer acting as Managing Director and Chief Executive Officer and that someone else was fulfilling those duties. The usual euphemisms and platitudes were used. Mr Gillies recognised he had to go, but he expressly did not resign. It is critical that there was no express statement that his employment was terminated from that instant.

8. [28]

   It can be accepted that what was occurring was the ending, in a practical sense, of the role of Mr Gillies as Managing Director and Chief Executive Officer. That is what was crucial to have the market appreciate. That Mr Gillies no longer fulfilled the role or duties of Managing Director and Chief Executive Officer was the reality and was what the market was told. Nevertheless, a relationship of employment had existed. I see no act or statement that terminated that employment relationship. None of the events contemplated by cl 4.1(a), (b) or (c) occurred on 1 August. The primary judge so found at [145]. Mr Gillies' evidence of what occurred was that Mr O'Callaghan asked him to "step down": see the primary judge's reasons at [120]. At paragraphs 65, 66 and 68 of his affidavit, Mr Gillies gave the following evidence:

9. [29]

   The effect of what was said, including how it was said, can be seen in the attitude and appreciation of those present at the conversation. Mr O'Callaghan and Mr Jollie had recorded in the minutes that Mr Gillies "had agreed to resign immediately as a director of the company" (emphasis added). That was the reality. Mr Gillies knew that he no longer had any authority as managing director; but he said he was not resigning. That can be taken as his attitude to his employment. He was aware of his rights under the POS. He recognised, nevertheless, that henceforth he would not be the managing director and chief executive. In that sense the minute was accurate. He agreed to stand down as such. His note read: "clearly you want me to stand aside". He did not demur to this. Given his awareness of his rights under the POS, his reference on the day to relying on his contract would have been quite different if he thought his contract of employment had been terminated instanter.

10. [30]

    Further, both the media release and the board minute refer to a consultancy for a further three months. There was no suggestion, at the time, of the need for further documentation of a new contract. What was said and what was not said and done in this respect is consistent with employment with the company continuing with altered capacities from managing director to consultant.

11. [31]

    The evidence of what occurred on 1 August 2007 does not reveal a termination of Mr Gillies' employment.

12. [32]

    As the primary judge found at [133] of his reasons:

13. [33]

    Correspondence ensued. The primary judge described the relevant communications and events at [137]-[142] of his reasons:

14. [34]

    No challenge was made to the primary findings therein. I agree with the conclusions drawn by the primary judge from these facts.

15. [35]

    Thus, I reject the appellant's contention that Mr Gillies could not exercise his rights under the POS when he did.

The car loan

1. [36]

   Clause 11 of Mr Gillies' contract entitled him to a vehicle provided by Downer for his sole use, together with all running expenses. The vehicle, or its standard, was identified as a BMW 5 Series. The vehicle was not provided. Mr Gillies did not consider provision of the vehicle appropriate and he did not seek a vehicle until 2004. In 2004, Downer paid $342,000 for a Series 7 BMW for Mr Gillies. Downer claims that this was a loan to Mr Gillies and reclaims the money together with interest. Mr Gillies' case was that the loan was on a non-recourse basis and, having returned the car in August 2007, he was not personally liable on the loan.

2. [37]

   The primary judge set out at [110] and [112]-[114] of his reasons the evidence of Mr Gillies, of Mr Bruce and of documents as follows:

3. [38]

   No witness gave evidence to the contrary. Mr Gillies and Mr Bruce were accepted by the primary judge as honest witnesses. That finding was not challenged on appeal.

4. [39]

   The primary judge accepted the structure of the arrangement as deposed to by Mr Gillies and Mr Bruce.

5. [40]

   Downer relies on a letter of Mr Gillies of 4 May 2004 (referred to by the primary judge at [114] of his reasons), which relevantly contained the following:

6. [41]

   The argument was that the letter does not refer to any non-recourse nature and, appearing complete on its face, should be taken to be the contractual arrangement, making the surrounding conversations irrelevant. Reference was made to State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 191-192 and Branir at 505-509 [280]-[293]. Alternatively, if the agreement were said to be partly oral and partly written, the oral part would contradict this writing and should be ignored: Hoyt's Pty Ltd v Spencer [1919] HCA 64; 27 CLR 133 at 143-144.

7. [42]

   The flaw in these submissions is that the document does not on its face purport to be a binding agreement or part of a binding agreement. The letter is to be understood as a brief record of what was discussed and approved with the remuneration committee. Mr Gillies' evidence was that the phrase "secured against my assets" embodied the arrangement of the non-recourse loan. In the context of Mr Gillies' and Mr Bruce's uncontested evidence, the letter is an ambiguous and incomplete recording of an agreement that was made between Mr Gillies and the company. Given that Mr O'Callaghan was party to the conversation there could be no doubt that he understood the cryptic reference to security in the letter.

8. [43]

   This ground of appeal fails.

The conduct complained of

1. [44]

   The following analysis is predicated on the assumption that misconduct under cl 4.1(c) is serious misconduct equivalent to that justifying summary dismissal at common law.

2. [45]

   Each year a bonus would be declared in favour of Mr Gillies. No money was at that time paid to him; no tax was deducted. The sum, together with accumulated bonuses, stood as a credit to Mr Gillies in a so-called "retained bonus account", although there was no separate account. The sums involved, totalling $2,355,875, were:

3. [46]

   The board was informed of the practice of retention and payment at the request of Mr Gillies. No complaint on appeal was made of this practice, though at the trial it had formed part of the criticism of Mr Gillies. Complaint on appeal was made, however, of the payment of large sums of money to Mr Gillies in the following circumstances.

4. [47]

   As at 12 August 2005, there stood to the credit of Mr Gillies in the retained bonus account $999,998 being the above amounts less an amount of $8,419 that had been paid to him by June 1999 or 2000 and less $4,083 tax thereon.

5. [48]

   On 12 August 2002, Mr Gillies requested the Chief Financial Officer, Mr Bruce, to pay him $450,000 which Mr Gillies used to pay the deposit on a Riviera boat.

6. [49]

   A month later, on 12 September 2002, Mr Gillies repaid that same amount to Downer.

7. [50]

   Four days later, on 16 September 2002, Mr Gillies requested Mr Bruce to pay him $1,200,000 which he used to pay the balance of the purchase price of the boat.

8. [51]

   Downer's case was that these payments, if referable to the retained bonus account left Downer in this position: first, Mr Gillies owing Downer $200,002, being the exceeding of the nominal amount in the account (after the replenishment of $450,000); and, secondly, Downer having an unfunded taxation liability for both the sums of $450,000 and $1,200,000 at Mr Gillies' marginal rate of taxation.

9. [52]

   In October 2002, November 2002 and January 2003, Mr Gillies made payments totalling $800,000 to Downer, in amounts of $250,000, $450,000 and $100,000, respectively.

10. [53]

    In November 2003, Mr Gillies caused Downer through Mr Bruce to pay him $20,000.

11. [54]

    It will be necessary to return to the detail and characterisation of these payments in due course, but Mr Gillies characterised these payments as "drawings" or an "advance" on the retained bonus account, and not loans. Mr Bruce's characterisation appeared to be that they were loans.

12. [55]

    A second course of conduct that was complained of was that on four occasions between 13 December 2006 and 17 July 2007, Mr Gillies caused Downer, through Mr Bruce, to make short term unsecured interest free loans to him totalling $758,437 to facilitate the purchase of an investment property in New Zealand. The payments were made on 13 December 2006 ($175,439), 31 January 2007 ($494,019), 7 February 2007 ($43,783) and 17 July 2007 ($45,196).

13. [56]

    The sums were repaid on 15 December 2006 (after two days), 5 February 2007 (after 5 days), 7 February 2007 (on the same day) and 18 July 2007 (after one day). Each of the repayments were by cheque drawn on the account of Mr and Mrs Gillies.

14. [57]

    During the period 1999 to 2007, there were other "withdrawals" made by Mr Gillies. They are identified in part of a joint expert's report extracted by the primary judge at [36] of his reasons. None of the other withdrawals are the subject of complaint. Each had tax withheld from the payment.

15. [58]

    At [34] of his reasons, the primary judge described the net effect of all transactions as follows:

The findings of the primary judge

1. [59]

   Mr Gillies, Mr Bruce and Mr Lau gave evidence. Mr Gillies and Mr Bruce were cross-examined as to their credit. The primary judge, however, rejected Downer's attack on their credit and reliability, finding at [42]-[43] of his reasons:

2. [60]

   The primary judge recognised, however, at [44] of his reasons that the resolution of the controversy did not depend wholly on the acceptance of the oral evidence:

3. [61]

   At [45]-[47] of his reasons, the primary judge elaborated upon his findings concerning their credit, as follows:

4. [62]

   At [48]-[54] of his reasons, the primary judge referred to a number of factors to support his finding that Mr Gillies' background as an accountant did not make it glaringly improbable that he failed to appreciate any failure to comply with Australian tax law and the balance from time to time of his retained or accrued bonus pool: he had been a senior executive and CEO for over 20 years and had not worked as an accountant in that time; when he had been an accountant he had worked in New Zealand, not Australia; he was entitled to assume that his employer (Downer) would attend to any tax implications and to rely on Mr Bruce to tell him of such matters and of the balance of his account; and he displayed an attitude as not concerned with precise aspects of his financial affairs.

5. [63]

   At [55] of his reasons the primary judge concluded that the utilisation of Downer's credit facilities (in respect of the purchase of the New Zealand property) was not inappropriate or improper. His Honour said at [55]-[56]:

6. [64]

   In relation to Mr Bruce's credibility, the primary judge dealt at [57]-[58] with the lack of disclosure to the Board of the advances, saying:

7. [65]

   The primary judge also found at [65]-[67] that in the circumstances the inference was that if the Board had been aware of the transactions concerning the retained bonus account and the New Zealand property it would not have objected to them.

8. [66]

   At [80]-[85] of his reasons, the primary judge made a number of more precise findings about the operation of the "bonus pool". The terms of the arrangement concerning the bonus pool or retained bonus pool were found at [82] by the primary judge to be as follows:

9. [67]

   As to disclosure, the primary judge found at [83] that Mr Lau knew from a short discussion with Mr Gillies that Mr Gillies would delay payment of his bonuses. There was no finding, however, of any disclosure to the board as to the operation of the arrangements; but his Honour did find (at [57], see above) that the operation of the arrangement was disclosed to the auditors by the making available of Mr Bruce's spreadsheet and ("it seems") to the audit committee of the board of Downer. His Honour said that there was no attempt to conceal the arrangements that were made.

10. [68]

    As to the recording of the arrangements concerning the bonus pool, his Honour found at [84] that they should have been recorded, but found:

11. [69]

    The primary judge also made particular findings about the advance of the $1.2m in September 2002. This was seen by his Honour as an exception to the arrangement because of the overdrawing (by $200,002) of what stood to Mr Gillies' account. The primary judge found implicitly this to have been an error by Mr Bruce, saying at [85] of his reasons:

12. [70]

    At [86]-[94] of his reasons, the primary judge considered the tax implications of what he had found. His Honour concluded, though not on a final basis, that no tax liability by way of PAYG deduction accrued by the advances or loans to Mr Gillies. This, his Honour said, was in accordance with the views of the expert witnesses, if the arrangement was a loan arrangement as found by his Honour. Nor was such a loan arrangement a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Cth) applied. With the possible exception of the overdrawing by the advance of $1.2m in September 2002, the primary judge concluded that fringe benefits tax did not arise, as there was a commercial basis for the lending: the lack of interest charged to Mr Gillies was in exchange for the utilisation by Downer without cost of funds standing to his bonus account. To the extent that Mr Gillies received a benefit from the overdrawing until a repayment occurred, this was for one month only and arose from a misunderstanding of the balance accrued. If this was a breach, his Honour found that it was neither carelessly nor deliberately occasioned.

13. [71]

    At [95]-[107] of his reasons the primary judge considered whether Mr Gillies had engaged in any misconduct or breached his duties to Downer. The essential elements or considerations informing his Honour's conclusion that there was no misconduct or fraudulent activity entitling Downer to dismiss him under cl 4.1(c) were as follows:

14. [72]

    In reaching the above conclusions, the primary judge recognised that Mr Gillies' conduct had to be assessed by reference to his obligations under the Corporations Act and that a failure to notify a company's board of management or its chairman of dealing with the company's assets would or may be misconduct or inappropriate. His Honour made reference in this context to the Corporations Act, s 180; Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 466; Vines v Australian Securities and Investments Commission [2007] NSWCA 75; 62 ACSR 1; Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [7178] et seq; Australian Securities and Investments Commission v Nealey [2011] FCA 717; and Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287.

The nature of serious misconduct and the relevant factual and legal context

1. [73]

   It was not in dispute that the assessment and characterisation of Mr Gillies' conduct was to be undertaken in the legal and factual context of his employment as the Managing Director and Chief Executive Officer of a listed public company. In particular, in this respect, what Mr Gillies personally believed was honest and appropriate is not determinative of the case. The primary judge concluded that Mr Gillies acted honestly; he also found him to be an honest witness. The same can be said of Mr Bruce.

2. [74]

   Whilst the honesty and credit of both Mr Gillies and Mr Bruce were challenged, strongly, at the trial, on appeal no challenge was made to the subjective personal honesty or honesty of the evidence of both Mr Gillies and Mr Bruce. Challenge was made, however, to the characterisation of the conduct, relevantly of Mr Gillies, as proper and objectively honest.

3. [75]

   The legal framework in which Mr Gillies' conduct is to be judged is that provided for in the Corporations Act, in particular ss 180 (care and diligence), 181 (good faith) and 182 (use of position) and chapter 2E (related party transactions). Without setting out those provisions in detail, Mr Gillies was obliged to exercise his powers and discharge his duties with a reasonable degree of care and diligence in Downer's circumstances (s 180), in good faith (including honestly) in the best interests of Downer and for a proper purpose (s 181), and he was obliged not to use his position improperly to gain an advantage for himself or to cause detriment to Downer (s 182). Further, by his position as a director of a public company, Mr Gillies was a related party of Downer (s 228). As such, for Downer to give Mr Gillies a financial benefit (as described in s 229), unless the benefit was remuneration (s 211) or the amount was below that prescribed by regulation, being $5,000 (s 213), the approval of Downer's members was required. By s 229, one example of giving a financial benefit was giving the related party (Mr Gillies) finance or property.

4. [76]

   Section 180, in its terms, is to be analysed objectively. Both ss 181 and 182 are also to be determined objectively: R v Byrnes [1995] HCA 1; 183 CLR 501 at 514-515 and Doyle v Australian Securities and Investments Commission [2005] HCA 78; 227 CLR 18 at 28-29 [35]-[37]. By "objectively" is meant the standards of conduct that would be expected of a person in the position by reasonable persons with knowledge of the duties, power and authority of the position, and the circumstances of the case, including the commercial context: Doyle at 28 [35].

5. [77]

   Fiduciary duties in equity also applied to Mr Gillies and the conduct of his work as Managing Director and Chief Executive Officer.

6. [78]

   The ultimate issue is, of course, misconduct of sufficient seriousness to warrant summary dismissal. As Downer accepted in its submissions, not every breach of a director's duties will warrant summary dismissal. Nevertheless, in a contract of employment of a Managing Director and Chief Executive Officer, the performance of such obligations owed under statute and equity can be seen as germane, indeed central, to the assessment and characterisation of the conduct and of the seriousness of any misconduct. No one submitted to the contrary.

7. [79]

   The circumstances of Mr Gillies with Downer included the matters that shareholders were told by the annual reports. The Concise Annual Report of 2002 dealt with corporate governance at page 38 in a manner reflected in annual reports of other years. Under the heading "Stewardship, accountability, control", there appeared:

8. [80]

   Brief cross-examination occurred by reference to such entries in the annual reports. Mr Gillies accepted the principles in the annual report. These entries exemplify the standard required by statute and equity.

9. [81]

   Mr D L Williams SC, who, with Mr R S Beasley, appeared for Mr Gillies, sought to emphasise a number of matters against which the assessment of Mr Gillies' conduct should be judged. Mr Gillies had been employed for 20 years. Under his stewardship as Managing Director and Chief Executive Officer, the turnover of Downer had grown from $145m in 1997 to $5.4b in 2007. Downer had grown into a multinational company. Mr Gillies was a diligent and hardworking executive who was not one to claim financial advantage. In the late 1990s, he had not sought to dispute a sizeable underpayment of his salary. He agreed in 2000 to the board's request of him not to exercise options, but to enter the POS. From 1997 to 2004, he did not take advantage of his right to a car provided for under cl 11 of his contract. He often did not take annual leave. In 2004, he had accrued untaken annual leave amounting to 100 days or $386,300 (before tax). These were matters, it was submitted, which showed that Mr Gillies over a long period placed Downer ahead of his own financial interests.

10. [82]

    It can be accepted that these matters assist in assessing the likely personal honesty of Mr Gillies. Downer, however, abandoned fraud and actual dishonesty on appeal. These matters do not, however, take the matter very far to the extent that the conduct itself is to be characterised objectively.

11. [83]

    With the exception of one aspect, the parties were not in dispute as to the proper test for the assessment of whether conduct was sufficiently serious to warrant summary dismissal. In Concut Pty Ltd v Worrell [2000] HCA 64; 176 ALR 693 at [25], the plurality referred to, amongst other cases, Pearce v Foster (1886) 17 QBD 536 at 539, Blyth Chemicals Ltd v Bushnell [1933] HCA 8; 49 CLR 66 at 72-73 and 81-82 and Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 at 34-35 and 45-46. From these cases, it can be taken that the conduct must be incompatible with the due or faithful discharge of the employee's duty or inconsistent with the relationship of trust and confidence between employer and employee. Repugnance between the conduct and the relationship must be found. As the plurality noted at [26], referring to Prof. Finn's work Fiduciary Obligations (Sydney: Law Book Co, 1977) at 267, these formulations of the contractual duty are a re-expression of equitable obligations. The expression of the matter thus recognises that, to a significant degree, the assessment or characterisation of the conduct is to be made objectively: see especially Malik v BCCI at 35 and 47.

12. [84]

    The dispute between the parties was as to the weight to be given to the subjective honesty of Mr Gillies. Some of Mr Gillies' submissions appeared to place it as a determinative factor. To the extent that the submissions went that far they should not be accepted. Subjective honesty and motive may, no doubt, be relevant. Downer's submissions recognised that. The relevance of subjective belief and motivation will depend, however, upon the nature and character of the acts in question. If, for instance, as in Blyth Chemicals, conduct was capable of an innocent construction compatible with the relationship, as well as being capable of a construction that was incompatible with the relationship, the "motives and intentions" of the employee may become "all-important": Blyth Chemicals at 82. On the other hand, where the conduct is not capable of an innocent construction, such as an employee taking a secret commission, the Court may be of the view that evidence of the belief of the employee that he saw nothing wrong with this would not be taken as relevant: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 at 369. As in the assessment of impropriety for the purposes of ss 181 and 182, the standard of conduct is imposed by the courts as that which would be reasonably expected in the relationship in all the circumstances. The place of subjective honesty will depend upon the nature of the conduct and all the circumstances. But there is no haven for the morally obtuse: Doyle at 29 [37].

13. [85]

    The impugned conduct is constituted by the payments for the boat and the New Zealand foreign currency transactions. They will be dealt with in turn.

14. [86]

    The primary judge identified the arrangement having the effect set out in [82] of his reasons. The difficulty with limiting the characterisation of Mr Gillies' conduct to the arrangement so neatly encapsulated is the evidence of Mr Gillies.

15. [87]

    The genesis and foundation of the arrangement was the retention of the bonuses by Downer. That was not the subject of criticism on appeal. It was not, and cannot be construed as, the payment of the bonus and the lending back of moneys. Such would have required PAYG tax to be deducted. The bonus was accrued as of right in some fashion short of being vested in possession, and Downer was relieved of the cost of paying the bonus and the associated PAYG tax. It is unnecessary to discuss further the true nature and character of these mutual rights and obligations.

16. [88]

    In 2002 and 2003, Mr Gillies received sums set out above from Downer. He did not view these as loans; he viewed them as "advances"; he relied on his subordinate to attend to any tax questions, of which he was ignorant. He treated his accrued, but unpaid, bonuses as entitling him to advances up to the gross amount of the bonuses, notwithstanding what must have been the obvious fact that he was entitled only to receive the bonuses net of tax (at the highest marginal rate of taxation).

17. [89]

    If, as Mr Bruce treated them and as the primary judge found, the advances were loans, they were related party transactions under s 229(3)(a) and required disclosure and shareholder approval, unless they could be characterised as remuneration for s 211.

18. [90]

    If, as Mr Gillies seemed to think (though less than precisely, since he just relied on Mr Bruce to deal with the details) these were not loans, but advances on the bonus, which only had to be paid back at his discretion, it is difficult to understand how a person of Mr Gillies' background and experience could not have appreciated that he was taking the bonuses such that tax was or was likely to be payable. It is also difficult to understand how he could think in those circumstances that he was entitled to the gross amount of the accrued bonus. Yet, that is what he honestly believed as found by his Honour.

19. [91]

    Further, in taking the $1.2m he overdrew even the gross amount by $200,000. He says he did not know this, and relied on his subordinate.

20. [92]

    Acceptance of all this evidence reveals a Managing Director and Chief Executive Officer who takes very large sums of money from the company under his stewardship under arrangements with his subordinate, not understanding the legal and tax implications of what he is doing and relying on that subordinate to document it appropriately (which is done in a manner inconsistent with his understanding) and to tell him that his request was greater than any possible entitlement (either as a loan or as an advance against the gross amount).

21. [93]

    Further, though the evidence is that over the whole period 2002 to 2007, Downer suffered no detriment, for a considerable period after September 2002 Mr Gillies had a borrowing or advance significantly greater than his net entitlement to bonuses.

22. [94]

    This was justified contemporaneously by Mr Gillies, and by the primary judge, by the so-called commerciality of the lack of interest on the advance and the lack of interest on the retained bonuses. At one level of commercial abstraction that can be justified, but the bonus deferral was at Mr Gillies' request, apparently for his own imprecisely formulated taxation reasons. No interest was payable by Downer to Mr Gillies because no loan had been made by Mr Gillies.

23. [95]

    Mr Gillies was unable to give any satisfactory explanation as to how he thought he was entitled to the gross amount and how he thought he was entitled to be in receipt of funds (that were not a loan) without Downer incurring a tax liability. He relied on Mr Bruce to tell him when some aspect of the arrangement had taxation consequences.

24. [96]

    Some of the difficulties with any clear coherent characterisation of the relationship can be seen in the following evidence of Mr Gillies at black appeal book pp 68, 69, 70, 71, 74, 75, 77 and 78:

25. [97]

    From the above, it is tolerably clear that after the $1.2m payment, Mr Gillies did appreciate that tax was payable on the exhausted bonus pool. He did not regard it as a loan arrangement. His consideration was largely restricted to relying upon Mr Bruce, but he paid money back into the pool in 2002, 2003 and 2004 to bring the account back into what he thought was regularity, taking into account tax payable by Downer on these sums.

26. [98]

    Mr Bruce regarded the starting point of the arrangement as being akin to an interest free loan from Mr Gillies to Downer. This provided the foundation in his view for moneys to be lent to Mr Gillies at no interest. Mr Bruce was aware that if Mr Gillies had received his bonus advances and then lent them back, tax would have to be remitted at that point. Mr Bruce's evidence was that the moneys paid to Mr Gillies were loans, secured over his entitlement to call on the bonus account. There was no separate record of such a loan, other than the running account on an Excel spreadsheet that was viewed by the auditors on at least two occasions.

27. [99]

    Mr Bruce did not attempt to keep the arrangement secret from the auditors, but his disclosure was reactive to their questions. At black appeal book pp 187, 188, 189 and 190, his evidence was:

28. [100]

    The primary judge found at [57] that "it seems" that the arrangements for payment were disclosed to the audit committee of the board. This finding was challenged in argument. Mr Williams SC accepted that it could only be an inference. There is no foundation for any such inference. It cannot be concluded that there was any disclosure of the arrangement to any board member.

29. [101]

    Mr Bruce's explanation of the $1.2m payment and the $200,000 shortfall was that when the payment was made he thought (from his memory) that there were sufficient (gross) funds to "cover the draw-down", but that when he prepared the reconciliation in preparatory work for the annual accounts he noticed the shortfall. Whether or not this should be taken into account in the characterisation of Mr Gillies' conduct is discussed below. It is sufficient to note at this point that the management of large sums of money and their payment to the Managing Director and Chief Executive Officer was carried on by Mr Bruce without any precision and exactitude, indeed laxly (accepting, at all times, his honesty).

30. [102]

    Mr Bruce's evidence about the value of the "security" of the retained bonuses (recognising that Mr Gillies was only entitled to the bonus net of tax) was also less than satisfactory at black appeal book pp 193, 194, 196 and 197:

31. [103]

    Full account should be taken of the findings of subjective honesty of both Mr Gillies and Mr Bruce in the analysis as to whether there was serious misconduct on Mr Gillies' behalf. That said, the facts should be looked at objectively in order to assess how a reasonable employer of a managing director and chief executive officer, in the circumstances, would have viewed them. In those circumstances, it is not essential, or even appropriate, to choose one precise legal characterisation of the transactions, as the primary judge did at [82] of his reasons. Neither the approach to the matter by Mr Bruce, nor the findings of the primary judge accorded with Mr Gillies' understanding, nor did they accord with any clear factual foundation in conversation or writing. What they did accord with was the only available coherent arrangement that would not involve a crystallisation of Downer's responsibility to remit tax to the Australian Taxation Office referable to the bonuses. It was an available construction placed on facts which had occurred that may have avoided the taxation consequences just referred to, but made the transaction a related party financial benefit (unless it could be construed as remuneration) and apparently only justified by an inadequate and undocumented practical security and an interest set off not based in any definite arrangement.

32. [104]

    Mr Gillies' understanding of his justification for being paid large sums of money by the company of which he was the Managing Director and Chief Executive Officer was entirely lacking in proper justification. He asked for money; was paid it; and relied on Mr Bruce. He took no step to acquaint himself with the basis of his entitlement to draw money at will and in what amount he was entitled. He did not make it his business to appreciate how his subordinate, Mr Bruce, viewed the matter (as a loan) and did not make it his business to ensure that all appropriate steps were taken either to seek approval for the moneys as a loan or to see tax paid if it was the taking of the bonus or to satisfy himself of the appropriateness of some innominate, intermediate concept of an "advance".

33. [105]

    The above does not involve the attribution directly to Mr Gillies of the inadequacies of Mr Bruce's own handling of the arrangements. Rather, as Managing Director and Chief Executive Officer of a listed public company, Mr Gillies took large sums of money from the company paying scant attention to the legalities and legal consequences of the payments either through properly acquainting himself with those matters or satisfying himself of the basis of his subordinate's satisfaction with the arrangements.

34. [106]

    This led to the consequence that the company's money was advanced to him in amounts for a time beyond his gross entitlement to bonuses, and for a longer period of time beyond his net entitlement to bonuses, without any documentation other than a running sheet kept by the Chief Financial Officer, pursuant to an oral arrangement not disclosed to the board, between the Chief Executive Officer and his immediate subordinate, the Chief Financial Officer, whereby as and when moneys were desired by the Chief Executive Officer for private purposes he would be supplied with them, by the company. In due course, and from time to time, the Chief Executive Officer would, at his discretion, pay money to the company to replenish the bonus account, recognising, as he did, that the company would, at some point, be responsible for payment of tax on the bonuses. The Chief Executive Officer and the Chief Financial Officer had diametrically opposed (honest) beliefs as to the character of the transactions. Both, however, recognised in 2002 that the exhaustion of the bonus pool by the $1.2m payment raised questions of the tax responsibility of the company, which were not reconciled or addressed (albeit inadequately) for over a year.

35. [107]

    Looking at the matter thus, and even taking into account notions of setting off interest and the cashing in of moneys for untaken annual leave, the position of Downer has been compromised and subjected to the risk of loss and criticism. If Mr Gillies' attitude to the arrangement was to govern its legal characterisation, it would have been difficult to resist the conclusion that taxation returns for tax from the bonuses should have been made. At least for a period of over a year, Downer was left unfunded for such liability absent further bonuses or the arrogation to Downer of annual leave payments accrued to Mr Gillies. There was also the risk, on this hypothesis, of the damage to Downer's reputation by any assertion of tax irregularity by the Australian Taxation Office. Also, Downer was subjected to a degree of financial risk from the arrangement whether it was the taking of the bonus or a loan. Further, if it was a loan, no attendance was paid to the nature of the arrangement as a related party transaction. The risk of the damage to Downer's reputation for corporate governance so clearly trumpeted in the annual report was clear. These risks of financial harm and reputational damage in the eyes of the regulator and the market by questionable taxation treatment of money taken by the Chief Executive Officer were self evident. Further, the example it set to lower employees about lax governance could only damage Downer and increase the risk of poor governance throughout the organisation.

36. [108]

    The board of Downer could properly have taken the view that the conduct could not be tolerated and was incompatible with due and faithful discharge of Mr Gillies' duties and was seriously inconsistent and incompatible with his duties as the most senior executive in the company. This would be particularly so because Downer could have taken the view that in all the circumstances a serious lack of care had been revealed in respect of transactions that were improper or not for a proper purpose, that detriment had been caused to Downer and that Mr Gillies had breached at least ss 180 and 181 and arguably s 182 of the Corporations Act. These views could have been taken because, looked at objectively, the conduct was to be so characterised and there had been breaches of ss 180 and 181 and arguably of s 182. Without repeating what is in [103]-[107] above, there was a failure by Mr Gillies to discharge his duties with a reasonable degree of care and diligence (s 180), or for a proper purpose (s 181). The question of breach of s 182 is, of course, to be assessed objectively and recognising the found subjective honesty of Mr Gillies. The use he made of his position was objectively improper in that there was an improper purpose of the use of Downer's funds (albeit under some honestly assumed claim of right) for his personal use, without any appropriate or clear foundation, exposing Downer to risk of damage and contravention of tax and corporations statutes. This is to be characterised as improper use of position to gain an advantage (the use of Downer's funds), though perhaps not to cause detriment (even though detriment can be seen to have been caused in the nature of risk to the corporation). Findings as to ss 180 and 181 and the underlying conduct are ample to found the conclusion that there was serious misconduct for the purpose of "misconduct" in cl 4.1(c).

37. [109]

    Mr Gillies argued that the following particular considerations militated against such conclusions. I have already dealt with the finding that Mr Gillies was honest in a subjective sense in what he did. I have also already referred to his history of service to Downer. It was submitted that the net effect of the transactions was not to cause any loss to Downer. That can be accepted if one restricts loss to actual financial loss to Downer. If notional interest is charged to Downer for Mr Gillies leaving his bonuses with Downer, Downer is said to have received a benefit. That, however, is not to the point. First, there was no arrangement for interest. Secondly, the arrangement was at the request of Mr Gillies. Thirdly, the risk of damage both financial and reputational from the entering of such arrangements was real. Fourthly, the character of the transactions and the lack of regularity are not outweighed by the fact that actual financial loss was not caused.

38. [110]

    It was submitted that there was an honest error with one transaction (the overdrawing of the $200,000), and that this can be excused because Mr Gillies relied on Mr Bruce. What I have already said at [92], [95], [101], [104], [105] and [106] above is an answer to this.

39. [111]

    It was submitted that if the board had been told about the arrangements it would have approved them. That is a conclusion that is open to serious doubt. How could any board have approved an arrangement of such an indeterminate character the terms of which were both unclear (vide the different understandings of Mr Gillies and Mr Bruce) and either liable to have raised irregularities in the company's taxation affairs or the requirement for related party disclosure. It may well be that the board would have approved a properly documented related party loan with disclosure to shareholders or the re-ordering of Mr Gillies' remuneration arrangements to include a loan facility, but that is quite different from the board approving the ill-defined and objectively inappropriate arrangements. Further, what this particular board would do is not necessarily to the point. The relevant question is whether the Downer board could, in all the circumstances, have regarded the conduct as inconsistent and incompatible with his duty as the managing director and chief executive officer. The answer to that question is, yes, because it was of that character. If this particular board had viewed the conduct as satisfactory that might reflect on the board, rather than ameliorating the quality of Mr Gillies' conduct.

40. [112]

    It was submitted (and found by the primary judge) that Mr Gillies was only relying on Downer's own conduct, through Mr Bruce. Thus, it was said his conduct was reasonable. Mr Bruce was Mr Gillies' immediate subordinate. Mr Bruce had no authority to make personal loans to Mr Gillies. It is a misconception to analyse Mr Gillies' conduct by saying he was dealing with Downer and Mr Bruce was there to look after Downer's interests. Such only emphasises the personal interest of Mr Gillies in his own dealings with Downer. In any event, the characterisation of Mr Gillies' conduct commences with the recognition that he was Downer - its managing director and chief executive officer. His conduct was not reasonable, though he was subjectively honest.

41. [113]

    The entry into and participation in these arrangements was serious misconduct on the part of Mr Gillies for the purposes of cl 4 of his employment agreement.

The New Zealand foreign currency transactions

1. [114]

   The nature of the conduct is set out at [63]-[64] above. It was common ground that these were short term interest free loans made by Downer, through Mr Bruce engaging the foreign currency desk, for the personal and private benefit of Mr Gillies.

2. [115]

   The facts were not in dispute. On 13 December 2006, Mr Gillies was in New Zealand and telephoned Mr Bruce saying that he had just bought a property at auction, that he needed to pay a deposit immediately, and that he had inadequate funds in his New Zealand bank account. He asked for NZ$200,000 to be sent to him, saying "I will give you a cheque for the Australian dollar equivalent as soon as I am back in Australia." The request was effected through Downer's Treasury Department, the transaction being authorised by Mr Reichler who was at the time the CFO, Mr Bruce having taken up a position as "Finance Director". Mr Reichler reported to Mr Bruce. Mr Gillies paid the equivalent sum in Australian dollars two days later.

3. [116]

   In the following month (on 31 January 2007), Mr Gillies was to pay for the property that he had contracted to buy at auction. Once again Mr Gillies rang Mr Bruce from New Zealand, this time asking for NZ$548,163.69, saying "I will give you a cheque for the Australian dollar equivalent once I am back in Australia." Mr Bruce authorised the payment. On 5 February a cheque for the equivalent sum in Australian dollars was given to Downer by Mr Gillies.

4. [117]

   The following month (on 7 February 2007) Mr Gillies requested Mr Bruce to effect a payment of NZ$50,000 to his New Zealand bank account. Mr Bruce did so and on the same day Mr Gillies provided Downer with a cheque for the equivalent sum in Australian dollars.

5. [118]

   On 17 July 2007, Mr Gillies asked either Mr Bruce or two officers in the Treasury Department to transfer NZ$50,000 to his New Zealand bank account. Mr Bruce authorised the payment. On the following day, 18 July 2007, Mr Gillies provided Downer with a cheque for the equivalent sum in Australian dollars.

6. [119]

   In paragraph 48 of his affidavit sworn 12 March 2010, Mr Bruce explained these transactions as part of a "practice of Downer to allow its senior employees in certain circumstances to utilise, for personal purposes, the treasury function from time to time on the basis that the employee bore all of the costs associated with the treasury transaction." He gave two examples in paragraphs 49 and 50. The first was a senior employee residing in New Zealand who was relocating to Australia as Deputy Chief Executive Officer, who sold his residence in New Zealand and was allowed to use the treasury function "to hedge his exposure to currency fluctuations". Mr Bruce gave no details. It does not appear that this would have been any more than buying Australian dollars. The second was a New Zealand senior employee. Mr Bruce's evidence was that she "made use of Downer's treasury function in the middle of 2007." No other detail was given. Neither example illustrated a short term unsecured loan in foreign currency.

7. [120]

   In cross-examination, Mr Bruce was unable to recall any other examples of the "practice". Mr Bruce accepted, however, that he could offer no other example where senior employees were allowed to take Downer's money in foreign currency for short term loans. Mr Bruce accepted that they were short term interest free loans, but at the time he did not see them as such.

8. [121]

   The primary judge dealt with this at [55]-[56] of his reasons (see [63] above).

9. [122]

   The findings in [55] were erroneous. There was no practice proved of permitting employees to take interest free loans. Utilisation of a treasury function is one thing, in particular if related (as the two examples were) to employment; taking short term loans in large amounts for entirely private reasons is another. The fact that Mr Gillies was at the very top of Downer's staff was hardly a reason to sanction such an unauthorised short term loan, indeed it was a reason not to make it. That Mr Gillies had New Zealand connections is not relevant. That no actual loss occurred is irrelevant. There was no actual loss occurred is irrelevant. There was no evidence of any disclosure of these loans.

10. [123]

    At [66] of his reasons, the primary judge found that had the board been aware of these transactions it would not have objected to them. For the reasons discussed earlier in relation to the boat payments, that is not to the point. The question is whether the board of Downer could have reasonably viewed this as serious misconduct.

11. [124]

    Mr Gillies in his affidavit (paragraph 89) said that "[f]rom time to time Downer permitted its senior employees to utilise Downer's treasury function to make payments in foreign currency". In terms this was not evidence of any practice of making unsecured loans to employees. However, in cross-examination, Mr Gillies gave an example of a loan or extension of a loan to an executive without insisting an interest. In cross-examination, Mr Gillies accepted that the loans were not authorised (other than by him).

12. [125]

    I cannot agree with the primary judge's view that the arrangement was neither inappropriate nor improper. There was no satisfactory evidence of any practice of lending foreign currency interest free to employees. It was on its face the managing director dealing with the company's funds for his own private purposes by the making of a related party benefit (unless it be characterised as remuneration, which it is difficult to do).

13. [126]

    If the New Zealand payments stood alone, it may be that the board, taking into account Mr Gillies' honest belief that he was entitled to do this as part of some ill-defined and undocumented practice, could come to the view that dismissal was not warranted. Taken, however, with the bonus account and the payments related thereto, the New Zealand payments, inappropriate and improper in themselves, reinforce the conclusion that Mr Gillies' conduct as Managing Director and Chief Executive Officer was inconsistent with and repugnant to his duties as the most senior executive in the company.

The contractual consequences of the finding of serious misconduct

1. [127]

   The consequences of this finding depend upon the proper construction of the contract.

2. [128]

   Mr Gillies submitted that any finding of serious misconduct has no effect upon his entitlement to the payment in lieu of notice made by Downer under cl 4.1(b) or the additional benefits under cl 4.2, because his termination was not "effected" for the purposes of cl 4.3 under cl 4.1(c), but rather under cl 4.1(b).

3. [129]

   Downer submitted that even though it acted as a matter of historical fact in August 2007 under cl 4.1(b) or, at least, that as a matter of historical fact that it did not act under cl 4.1(c), it is entitled, upon discovery of the facts to rely upon termination for serious misconduct whether under cl 4.1(c) or the general law to deny Mr Gillies such entitlements as he claims.

4. [130]

   Clause 4 identifies circumstances in which the employment may be terminated: resignation on notice, termination on notice, termination by payment in lieu and termination for misconduct. The word "misconduct" in cl 4.1(c) in its context is to be construed as serious misconduct that would entitle the employer to dismiss summarily. Looking at the matter thus, the scope of cl 4.1(c) is co-extensive with the entitlement to dismiss at common law for misconduct or dishonesty.

5. [131]

   Clause 4.2 addresses the circumstances in which a further payment may be made in addition to a payment in lieu of notice. Clause 4.3 addresses the circumstances in which termination payments are not payable. It is to be noted that cl 4.3 refers to "termination payments". These clauses, and the whole of cl 4, should be understood against the background of the common law of contract as it may be applicable to a contract of employment. One well-known feature of the common law is that a contracting party who gives a reason for a contractual position being taken (such as termination) does not by the giving of that reason (which may be wrong) deprive itself of a justification which existed, whether known of or not at the time: Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 at 377-378 and cases there cited; approved in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 262 (Mason CJ with whose reasons Deane J, Dawson J and Toohey J agreed) and 274-5 (Gaudron J) and Concut at [27]-[29].

6. [132]

   The principle enunciated in Shepherd v Felt and Textiles often operates when a contractual act sought to be justified cannot be so justified on the ground contemporaneously relied upon, but can be so justified on a ground then existing but not known about: see for example British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 at 70-71; and see the discussion of principle by Devlin J in Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401 at 443-446 approved by Mason CJ in Sunbird Plaza at 262.

7. [133]

   It was submitted by Mr Gillies that the principle in Shepherd v Felt and Textiles was restricted to circumstances where the act purportedly taken under the contract required other justification to be valid. In support of this contention the decision of Vickery J in Hodgson v Amcor Ltd [2012] VSC 94 at [1602]-[1614] was cited. In that case, Vickery J said at [1612]:

8. [134]

   In support of that reasoning, Vickery J relied on the reasoning in Bell v Lever Brothers Ltd [1932] AC 161 and in particular the passage from Lord Atkin's speech which Vickery J set out at [1614]:

9. [135]

   This passage from Lord Atkin's speech is not, however, determinative. As Gleeson CJ, Gaudron and Gummow JJ pointed out in Concut at 701-703 [31]-[38], Bell v Lever Brothers was concerned with whether an agreement was void for mistake and the question of non-disclosure.

10. [136]

    As a matter of principle and authority, the limitation on the principle should not be accepted. There is no reason in principle for Shepherd v Felt and Textiles to be confined to supporting as justifiable acts done under contract which are not valid without further justification from the facts not previously known. In principle, it should equally extend to adding a further basis for justification of the act if that further basis has separate relevance. So to approach the matter accords with the approach to the availability of damages for loss of bargain even if the contract be terminated in the exercise of a contractual power: Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17 at 31; and Sunbird Plaza at 260-262. Of course, whether or not the two contractual bases can operate concurrently or severally will be affected by the terms of the contract.

11. [137]

    As a matter of authority, the principle was expressed by Mason CJ in Sunbird Plaza at 262 in a fashion not so limited:

12. [138]

    To the extent that the principle was limited to supporting otherwise unjustified acts by the Court of Appeal in England in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27 at [44] approved in Cavenagh v William Evans Ltd [2012] EWCA Civ 697 at [41], this Court is bound by the wider expression of the principle in Sunbird Plaza.

13. [139]

    That said, how a contract operates both by reference to its own terms and to the general law of contract will depend upon the content and meaning of the contract.

14. [140]

    If, as Mr Gillies submitted, cl 4.3 is to be limited to where the termination is contemporaneously "effected" as a matter of historical fact under cl 4.1(c), the contract would bear a meaning that the termination payments referred to in cl 4 (both three months' salary and additional benefits) would be payable under the contract. For Downer's contractual obligation in that respect to be defeated would require the operation of either another distinct provision of the contract or of a principle of law cutting back or destroying an accrued contractual entitlement of Mr Gillies. It was this very consideration with which the English Court of Appeal was dealing in Cavenagh. Mr Cavenagh claimed moneys payable under his contract of employment when he was terminated. Known to him, but not to his employer, was the fact that he had engaged in gross misconduct that would have justified the employer in summarily dismissing him without compensation.

15. [141]

    The reasoning of Mummery LJ with which both Tomlinson LJ and Hallett LJ agreed was that the general law did not release the employer from its contractual liability. One important element to that reasoning was that the principle from Boston Deep Sea Fishing and Ice Co v Ansell (being that enunciated in Shepherd v Felt and Textiles) was limited in the manner just mentioned. The second important element to the reasoning was that the employer had elected to act under a provision creating a legal right in Mr Cavenagh. Election, however, is a doctrine founded upon knowledge of the facts that give rise to inconsistent rights or remedies: Khoury v Government Insurance Office (NSW) [1984] HCA 55; 165 CLR 622 at 633-634; Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; 182 CLR 26 at 30.

16. [142]

    It is unnecessary, however, to explore Cavenagh any further or to explore the operation of the general law upon the contract construed such that the word "effected" in cl 4.3 is limited to its past participial meaning contended for by Mr Gillies. If that textual construction of cl 4.3 were to be adopted, the question would arise whether the contract had excluded by necessary implication common law rights of dismissal, the principle in Shepherd v Felt and Textiles and the principle that such summary dismissal involves immediate dismissal without compensation: Blyth Chemicals Ltd v Bushnell at 72. Clear words are needed to rebut the presumption that a contracting party does not intend to abandon contractual rights implied by law: Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 585; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Concut at 699-70 [23]. No such clear words can be discerned here.

17. [143]

    Clause 4.3 should be construed both in the context of the common law, including the principle in Shepherd v Felt and Textiles, and in accordance with honest commercial common sense. One aspect of common sense would be the obvious fact that serious misconduct of an employee is sometimes not discovered for some time. A business contract, otherwise tolerably straightforwardly drafted, to be understood as permitting an employee to obtain contractual benefits on termination on one basis of no misconduct when, unknown to the employer, serious misconduct has occurred, which if appreciated, would have denied the contractual benefits, might give pause for thought. If the words are reasonably capable of conforming to a regime consistent with the parties' rights being resolved by reference to the true position, they should be given that sensible meaning. Here, cl 4 as a whole and the text of cl 4.3 support a meaning to the word "effected" in cl 4.3 broader than the historical fact of what happened.

18. [144]

    Clause 4.3 should be construed where it uses the word "effected" as including in its meaning effected as a matter of law, that is, by reference to the legally available support or justification for the termination that was effected. Accordingly, cl 4.3 would operate in circumstances where, after a termination under 4.1(b) (that is, the act of termination by payment in lieu of notice), Downer became aware of circumstances that would have entitled it to terminate under cl 4.1(c) and to dismiss summarily. In such a circumstance, for cl 4.3 to engage with a termination payment under cl 4.1(b), "effected" must be wider than a description of an historical fact. For cl 4.3 to be addressing termination payments under cl 4.1(b), "effected" must be wide enough to include effected in law as justified. The acting to terminate otherwise than under cl 4.1(c) does not disentitle or debar Downer, if it later discovers facts amounting to serious misconduct, from relying on them to assert that the termination was thereupon justified and took effect in law thereupon (thus was "effected") as one based on the found misconduct. Thus, by the words of cl 4.3, no terminaton payments in cl 4 were payable. Given that the words "not be payable" refer to moneys paid to effect a termination under cl 4.1(b), their meaning is clearly that such moneys were not liable to be paid. In such circumstances, reading cl 4 as a whole, the moneys paid on 9 August were not liable to be paid, were not payable, by reason of cl 4.3. I have read the reasons of Meagher JA in this respect, agree with him and acknowledge his assistance in the expression of this part of these reasons.

Conclusion

1. [145]

   For the above reasons the board of Downer was entitled to consider that Mr Gillies had engaged in serious misconduct and to rely upon that to justify the termination on 9 August.

2. [146]

   This conclusion does not operate to terminate the employment prior to the date on which termination occurred, 9 August 2007. The contrary was not argued.

3. [147]

   Downer is not liable to pay benefits under cl 4.2 and was not liable to pay the moneys under cl 4.1(b).

4. [148]

   The above represents, my understanding of the limits of the debate before this Court. The parties indicated that they would bring in short minutes reflecting the Court's reasons.

Orders

1. [149]

   In these circumstances the parties should bring in short minutes to reflect these reasons and submissions to deal with costs. The orders that I would make are:

2. [150]

   MACFARLAN JA: I agree with Allsop P and also with the additional observations of Meagher JA.

3. [151]

   MEAGHER JA: I agree for the reasons given by Allsop P that the primary judge was correct to conclude that Downer did not terminate Mr Gillies' employment with effect on and from 1 August 2007. It follows, Downer not submitting otherwise, that Mr Gillies' employment was terminated, as the primary judge found, on 9 August 2007 when Downer made a payment in lieu of notice in accordance with cl 4.1(b): [142], [146], [148], [152]. Because the contract expressly provided that it could be terminated by the making of such a payment, there was no breach of contract involved in Downer terminating in that way: cf Sanders v Snell [1998] HCA 64; 196 CLR 329 at [16].

4. [152]

   Downer argues that because Mr Gillies engaged in serious misconduct which justified his being summarily terminated under cl 4.1(c), cl 4.3 applied with the consequence that Mr Gillies was not entitled to any payment under cll 4.1(b) or 4.2. In response Mr Gillies says that his employment was terminated under cl 4.1(b) and not cl 4.1(c) and that cl 4.3 only applies where the termination is in fact "effected under cl 4.1(c)".

5. [153]

   These arguments require close consideration to the terms of cl 4 and in particular cl 4.3. Clause 4.1 provided that Mr Gillies' contract of employment could be terminated on three months' notice given by Mr Gillies (cl 4.1(a)) or by Downer (cl 4.1(b)). It also provided that the contract could be terminated with immediate effect either by Downer making a payment in lieu of three months' notice (cl 4.1(b)) or giving notice that the contract was terminated with immediate effect (cl 4.1(c)). Clause 4.1 also entitled Mr Gillies to resign for either of two reasons, in which event he was entitled to receive a "termination payment" in an amount equal to a payment in lieu of three months' notice.

6. [154]

   Because cl 4.1(c) enables summary termination, the word "misconduct" is to be construed as referring to serious misconduct which would, under the common law, entitle an employer to dismiss summarily. There is then a question as to whether a termination with immediate effect under cl 4.1(c) can subsequently be justified by reference to misconduct or fraudulent activity which was not known at the time of termination. Under the common law the validity of a summary dismissal can be supported by any legal justification which in fact existed at the time of termination and irrespective of whether that justification was known or relied upon: Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 at 371, 373, 377-378; Commonwealth Homes and Investment Co Ltd v MacKellar [1939] HCA 34; 63 CLR 351 at 378; Concut Pty Ltd v Worrell [2000] HCA 64; 176 ALR 693 at [29]. The language of cl 4.1(c) is not in terms restricted to misconduct or fraudulent activity which is known at the time of termination. Nor does it require that the notice specify the conduct or activity relied upon at the time of termination. There is no reason not to read cl 4.1(c) as applying to any prior misconduct or fraudulent activity, whether known or unknown, at the time of termination. To construe it in that way reflects the position as it would be under the common law and accommodates the reality (illustrated by cases such as Shepherd and Concut) that misconduct or fraudulent activity may be discovered subsequently.

7. [155]

   In addition to a "termination payment" in lieu of three months' notice which may be paid under cl 4.1(b) or upon a resignation by Mr Gillies, cl 4.2 provides for an additional termination payment. Under the terms of cl 4.2 that benefit is payable upon any termination. However, the entitlement to each of these payments is subject to cl 4.3.

8. [156]

   Under the common law an employee is able to be dismissed without notice or compensation for serious misconduct: Blyth Chemicals Ltd v Bushnell [1933] HCA 8; 49 CLR 66 at 72-73. Clause 4.3 is directed to circumstances in which there has been misconduct or fraudulent activity on the part of the employee. Again, there is no reason to construe the reference to "your misconduct or fraudulent activity" in cl 4.3 as restricted to conduct or activity of which the employer was aware before the employment was terminated.

9. [157]

   It is significant that the subject matter of cl 4.3 is the "termination payments" referred to in cl 4. Those payments are not limited to a payment under cl 4.2. They also include a payment under cl 4.1(b) or calculated in accordance with that provision. Whereas a payment under cl 4.2 is likely to be made after the date of termination, a payment under cl 4.1(b) is made at the time of termination because it is the fact of payment, and not the giving of any notice, which is the act by which the contract is brought to an end under the second limb of cl 4.1(b).

10. [158]

    Clause 4.3 provides that such payments "will not be payable" in any case where the termination "is effected under cl 4.1(c)" due to misconduct or fraudulent activity. In the first phrase "payable" is used in the sense liable to be paid, or due. Construed in that way it is capable of applying irrespective of whether a termination payment has been made or not. The ordinary meanings of the past participle "effected" include brought about, accomplished, achieved, or produced. However, there are difficulties with construing this second expression as referring to whether the termination was as an historical fact "effected" under cl 4.1(c). First, if the expression is read as requiring for the operation of cl 4.3 that Downer in fact have acted to terminate Mr Gillies under cl 4.1(c), cl 4.3 would have little, if any, operation with respect to termination payments made under cl 4.1(b), or calculated in accordance with that provision. For those payments to have been made, Downer must have acted to terminate Mr Gillies under cl 4.1(b) or Mr Gillies must have resigned. Secondly, such a construction would deny cl 4.3 any efficacy in the face of unknown prior misconduct except where Downer had terminated under cl 4.1(b) for misconduct which, as matters turned out, it could not subsequently prove or was not sufficient to justify summary termination. Thirdly, such a construction would result in an employee whose prior misconduct was not discovered or disclosed being in a better position in relation to entitlements to termination payments than one whose misconduct had been discovered or disclosed.

11. [159]

    When construing a provision such as cl 4.3, the language used is to be given its ordinary meaning unless there is some contrary indication in the 1clause or otherwise within the contract. In the face of such a contrary indication, it is permissible to depart from that ordinary meaning to avoid inconsistency. Ultimately, the construction to be preferred is one which gives a congruent operation to the clause and which, in a context such as the present one, makes commercial sense and reflects what honest businessmen would understand the words to mean: Cohen & Co v Ockerby & Co Ltd [1917] HCA 58; 24 CLR 288 at 300 (per Isaacs J); Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1935) 53 CLR 618 at 636 (per Rich, Dixon, Evatt and McTiernan JJ); Upper Hunter District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437 (per Barwick CJ); Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (per Gibbs J); Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [16] (per Gleeson CJ, McHugh, Gummow and Kirby JJ); Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at [83] (per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).

12. [160]

    The introductory words to cl 4.3 make clear that it was intended to apply to Downer's liability in respect of termination payments made under cl 4.1(b) and therefore in circumstances where the ground relied upon for termination may not have been cl 4.1(c). Clause 4.3 was also intended to be applied taking into account misconduct or fraudulent activity which may not have become known until after the actual termination. The requirement for the application of cl 4.3 is whether "the termination is effected under cl 4.1(c)". Whether that requirement is satisfied is concerned with whether, by reference to subsequent as well as prior knowledge, the termination which has occurred was justified in law, and in that sense can be said to have been effected, under cl 4.1(c).

13. [161]

    Adopting that construction, the clause applies to termination payments made under cl 4.1(b), and in circumstances where Downer has acted under that sub-clause, where the termination was legally justified under cl 4.1(c) due to misconduct or fraudulent activity. On that construction, if Mr Gillies' conduct was "misconduct or fraudulent activity" justifying summary termination, cl 4.3 applies and Downer was not liable to make any payment in lieu of notice under cl 4.1(b). Nor is it liable to make any payment under cl 4.2.

14. [162]

    This outcome turns on the construction of cl 4.3. The present case is not like Cavenagh v William Evans Ltd [2012] EWCA 697 where an express contractual power to terminate without notice had been exercised and the employer sought subsequently to deny liability to pay the amount due in lieu of notice on the basis that it had become aware of prior gross misconduct which it would have relied upon to dismiss the employee summarily. Nor are the circumstances of this case the same as those considered by Vickery J in Hodgson v Amcor Ltd [2012] VSC 94 at [1611]-[1615]. In neither of those cases was there a clause such as cl 4.3 which affected the entitlement of an employee to enforce contractual entitlements or retain benefits received pursuant to them.

15. [163]

    I agree with Allsop P for the reasons he gives that Mr Gillies conduct was sufficiently serious to justify summary termination of his contract.

16. [164]

    I also agree for the reasons his Honour gives that the primary judge did not err in concluding that the phantom option agreement was ratified by the remuneration committee of the Downer Board and that the primary judge did not err in concluding that the loan made to Mr Gillies and applied in 2004 to purchase a motor vehicle was made on the basis that it was secured "against the motor vehicle" and was "non-recourse" in the sense that Mr Gillies was not personally liable to repay that loan.

17. [165]

    For these reasons I agree with the orders proposed by Allsop P.