Grave Consequences for Breach of Executive’s Employment Contract

In May 2008, an executive accepted an offer of employment from Indochine Resources Limited (IRL). The terms of his employment were ‘for an initial term of five years, renewable with at least six months notice on substantially the same terms.’ The termination provisions of the contract stated that if IRL terminated the executive’s employment in breach of the terms of the contract, IRL would be liable to pay the executive 5 years’ salary from the date of the termination.

His starting salary was $USD240,000 per annum, and the contract included benefits such as a car allowance capped at $USD20,000, travel and living away from home expenses, airfares for him and his family, and membership to a prestigious Sydney members only Club and a gymnasium.

Additionally, the contract included provisions to increase his salary by 20% each year.

IRL started the process for an ASX listing during which time the board reduced all executive employee salaries by 50% in order to cut its costs. As such, the executive’s remuneration dropped to $USD120,000 per annum. IRL’s Board made assurances that salaries would return to the contracted remuneration once the capital raising was completed, and all arrears would be paid.

The capital raising was completed in November 2009 but the arrears were never paid. IRL then summarily terminated the executive’s employment in June 2010, alleging ‘serious misconduct’ and on the basis that he had made ‘untrue statements signifying his dishonesty’.

The executive subsequently took action against the company, alleging numerous breaches of his employment contract, including in relation to payment of the salary arrears and allowances. The executive also claimed IRL had breached the Fair Work Act (FWA) in failing to pay his accrued annual leave. Most significantly, he also sought liquidated damages on the basis that had IRL not terminated his employment in breach of contract, he would have continued to be employed for a further five years.

At trial, IRL failed to produce satisfactory evidence that the executive was guilty of serious misconduct, which meant IRL had terminated his employment in breach of the employment contract. The Court therefore found in the executive’s favour in both his claims under the FWA and for damages for breach of contract. In awarding the liquidated damages, the Court had regard to the fact the employment contract was for a fixed term of 5 years and that the parties had contemplated that he would be employed for subsequent terms. Further, the Court took into account that the executive “was not a young man”, and potentially could have difficulty finding further work. As a consequence, the amount of liquidated damages specified in the contract (i.e. 5 years’ salary) was appropriate. He was awarded $USD2.6 million, the equivalent of $AUD3.7 million, which included $US2,307,890 in respect of liquidated damages.

The case provides insight into the significant potential consequences of dismissing a senior employee in breach of their employment contract, particularly where the contract is of a fixed term with the potential for renewal for subsequent terms.

HR Legal can prepare template executive employment agreements and provide advice on the engagement of executive level employees.

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This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.