FEDERAL COURT OF AUSTRALIA Stoelwinder v Southern Health [2001] FCA 115 CONTRACTS – construction – whether actual intention of parties relevant – whether permissible to have regard to variation EQUITY – fiduciary duties – negotiations for contract of employment – duty of employee to make disclosure to employer EMPLOYMENT LAW – employee entitlements and remuneration – entitlement to 'cash in' sick leave Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq HL 461 cited American Casualty Co v Baker, 22 F 3d 880, 887, (9th Cir 1994) cited Attorney-General for Hong Kong v Reid [1994] 1 AC 324 cited Auto Specialties Manufacturing Co, In Re; Boyd v Sachs 153 B.R. 503, (W D Mich 1993) referred to Baker v Hellner Realty Co 265 Mich 625, 631 (1933) cited Baladevon, Inc v Abbott Laboratories, Inc, 871 F Supp 89 (D Mass 1994) cited Berke Moore Co, Inc v Phoenix Bridge Co, 98 NH 261, 269, 98 A 2d 150, 156 (1953) referred to Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 applied BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 applied Breen v Williams (1996) 186 CLR 71 referred to Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 referred to Concut Pty Ltd v Worrell [2000] HCA 64 cited Coomber, In Re [1911] 1 Ch 723 cited Dunn v English (1874) 18 LR Eq 524 cited Eustis Mining Co v Beer, Sondheimer & Co Inc, 239 F 976, 984-985 (S D NY 1917) cited Fill Buildings Inc v Alexander Hamilton Life Insurance Co 396 Mich 453, 460-461 (1976) cited Henderson, Hallam-Eames & Hughes v Merrett Syndicates Ltd [1995] 2 AC 145 cited Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 applied Inland Revenue Commissioners v Raphael [1935] AC 96 cited Lister v Stubbs (1890) 45 Ch D 1 cited Liverpool City Council v Irwin [1977] AC 239 applied Maguire & Tansey v Makaronis (1997) 188 CLR 449 referred to McKenzie v McDonald [1927] VLR 134 cited Nottingham University v Fishel [2000] IRLR 471 cited Pepper v Litton 308 US 295 (1939) referred to Petrotta v Gerson, 98 Cal App 507, 277 P 167 (1929) applied President of India v Jebsens (UK) Ltd [1991] 1 Lloyd's Rep 1 cited Reading v Attorney-General [1951] AC 507 cited Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 referred to Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 cited S A Maritime et Commerciale of Geneva v Anglo-Iranian Oil Co Ltd [1954] 1 WLR 492 applied Sunbury Textile Mills, Inc v Commissioner of Internal Revenue, 585 F 2d 1190, 1196 (3rd Cir 1978) cited Taylor v Johnson (1983) 151 CLR 422 referred to Tradax Export SA v Volkswagenwerk AG [1970] 1 QB 537 applied 3 Corbin on Contracts, § 538 (2nd ed, 1960) Restatement (Second) of Contracts, § 201(1) 17A Am Jur 2d, Contracts (1991) § 388 JOHANNES UILTJE STOELWINDER v SOUTHERN HEALTH V 263 of 1999 FINKELSTEIN J MELBOURNE 23 FEBRUARY 2001 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 263 of 1999 BETWEEN: JOHANNES UILTJE STOELWINDER Applicant / Cross-respondent AND: SOUTHERN HEALTH Respondent / Cross-claimant JUDGE: FINKELSTEIN J DATE OF ORDER: 23 FEBRUARY 2001 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. There be judgment entered against the respondent for $567,642.11. 2. The cross-claim be dismissed. 3. The respondent pay the applicant's costs of, and incidental to, the proceeding. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 263 of 1999 BETWEEN: JOHANNES UILTJE STOELWINDER Applicant / Cross-respondent AND: SOUTHERN HEALTH Respondent / Cross-claimant JUDGE: FINKELSTEIN J DATE: 23 FEBRUARY 2001 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The applicant, Prof Stoelwinder, was the chief executive officer of Southern Health Care Network, a statutory corporation, until 27 November 1998. He held that office under a contract made on 23 October 1995, which had effect from 25 September 1995. The appointment was for a term of three years and it was extended for a short period in 1998. Prof Stoelwinder sues to recover money due under the contract, namely the cash value of sick leave not taken during the term of his employment with Southern Health Care Network and with his previous employer, Monash Medical Centre. The amount claimed is $567,642.11. 2 The respondent, Southern Health, is a statutory authority established under s 181 of the Health Services Act 1988 (Vic) and, pursuant to an allocation made under s 208 of that Act, is responsible for the liabilities of Southern Health Care Network. It denies Prof Stoelwinder's claim on two broad bases: first, that on the proper construction of the employment contract the amount claimed is not payable, and, second, that if the amount is due under the contract, Prof Stoelwinder has committed civil wrongs such that he is not entitled to recover or retain that amount. Before turning to consider these issues, it is necessary to set out the facts. 3 In Victoria, the structure, management and control of public hospitals and other health care agencies is regulated by the Health Services Act. Speaking generally, every public hospital (the Act divides these into two categories: public hospitals and metropolitan hospitals) is a body corporate with a board of directors whose function it is to oversee and manage the hospital: for public hospitals, see Pt 3, Div 4; for metropolitan hospitals, see Pt 3, Div 4A. The Health Services Act makes provision for the aggregation of two or more metropolitan hospitals: Pt 3, Div 9A. Aggregation is an administrative act effected by an order in council: s 65C(2). When there is an aggregation of hospitals the incorporation of each aggregated hospital is cancelled (s 65C(4)(a)) and a new hospital comes into existence (s 65C(4)(b)), as a body corporate (s 40A) with a new board of management (s 65C(5)). All the property and rights of the aggregated hospitals vest in the new hospital and all the liabilities of the aggregated hospitals become liabilities of the new hospital (s 65D). Any agreement to which an aggregated hospital was a party has effect as if the new hospital had always been a party (s 65E). Every person who was an employee of an aggregated hospital becomes an employee of the new hospital under the same terms and conditions as previously and with the benefit of all accrued entitlements (s 65L). 4 By order made on 18 July 1995, with effect from 1 August 1995, the Governor in Council declared that seven metropolitan hospitals in Melbourne's south-eastern suburbs, including Monash Medical Centre, be aggregated, and that the new hospital be named Southern Health Care Network: s 65C(4)(b). The order appointed an initial eight-member board of directors (s 65C(5)), with Mr O'Duill, an experienced banker and company director, as its chairman (s 65C(9)). At the time, Prof Stoelwinder was the chief executive of Monash Medical Centre, having been appointed to that post in 1987. Before then, Prof Stoelwinder was the chief executive of Queen Victoria Medical Centre, which amalgamated with other hospitals under the Hospitals and Charities Act 1958 (Vic) in 1987 to form Monash Medical Centre. Upon aggregation, Prof Stoelwinder became an employee of Southern Health Care Network with executive responsibility for that part of its operations that had previously been conducted by Monash Medical Centre. 5 Section 65C contemplates that, upon aggregation, a chief executive officer will be appointed to the new hospital. Section 65C(7) provides that the first chief executive may be appointed by the Governor in Council on the recommendation of the responsible Minister. A person so appointed is deemed to have been appointed by the board of directors: s 65C(8). If the Governor in Council does not appoint a chief executive, the appointment may be made by the board: s 40D(2)(c). 6 Shortly after the establishment of the new hospital, the board appointed a sub-committee, under the control of Mr O'Duill, to find a chief executive. In fact, in anticipation of the establishment of Southern Health Care Network and other aggregated hospitals, the Metropolitan Hospitals Planning Board, a State government authority, had begun this search in June 1995, appointing a recruitment consultant to identify and interview suitable candidates. 7 In the latter part of August 1995 (probably on 23 August and perhaps on more than one occasion) Mr O'Duill and Ms Marriott, a member of the sub-committee, interviewed Prof Stoelwinder, who had applied for the position of chief executive of Southern Health Care Network. Prof Stoelwinder also applied to be appointed to similar positions at other hospitals. Mr O'Duill and Ms Marriott were impressed by Prof Stoelwinder and recommended to the board his appointment. 8 Towards the end of August (perhaps on 31 August) Mr O'Duill spoke to the Minister, advising her of the board's desire to appoint Prof Stoelwinder. The Minister was of opinion that the chief executive should be a person who was not currently employed by the hospital, and suggested that other applicants be interviewed. This occurred, but Mr O'Duill remained of the view that Prof Stoelwinder should be appointed. The Minister agreed and so advised Mr O'Duill. 9 On 19 September 1995 a meeting of the board was held. Prof Stoelwinder was in attendance so that he could, to use his words, "be presented" to the board. The minutes record that: "Mr O'Duill reported that the CEO Appointment Subcommittee had met with the Minister to discuss the short listed candidates. The Board resolved to recommend the appointment of Prof Just Stoelwinder as the Network Chief Executive Officer." 10 The respondent has argued its case on the assumption that Prof Stoelwinder was appointed to the position of chief executive on the passing of this resolution. There are a number of reasons why this assumption is unlikely to be correct. First, the resolution does not in terms purport to appoint Prof Stoelwinder to the post. It contemplates that the appointment will be made later and by some other body. Perhaps it was thought that the appointment would be made by the Governor in Council. Perhaps the board was of the view that the appointment would take effect when a contract of employment was agreed. On the other hand, Mr O'Duill thought the appointment had been made and so informed the Minister, as appears from her letter dated 19 September, part of which reads: "Thank you for your letter dated 19 September 1995 advising that the Board of the Southern Health Care Network has appointed Professor Just Stoelwinder as Chief Executive Officer. I will arrange for Professor Stoelwinder's appointment to the Board of the Network to be submitted to Cabinet and Governor in Council." The reference to the appointment of Prof Stoelwinder to the board of Southern Health Care Network reflects the policy of the government that the chief executive of each newly aggregated hospital should be a member of the board of that hospital. 11 The second reason for holding the assumption to be incorrect is that there could be no appointment without the consent of Prof Stoelwinder (Tradax Export SA v Volkswagenwerk AG [1970] 1 QB 537), and there is nothing in the evidence to suggest that he had agreed to the appointment before there was a concluded contract of employment. Indeed, the evidence points to the contrary conclusion, because both Prof Stoelwinder and Mr O'Duill regarded Prof Stoelwinder as only the "chief executive officer-elect" until the contract was made. 12 The negotiations for the contract began shortly after the board meeting and were between Mr O'Duill and Prof Stoelwinder. Initially Mr O'Duill said that the meeting took place a day or so before the board meeting, but later he accepted that it also occurred on 19 September. Both Mr O'Duill and Prof Stoelwinder gave evidence about the meeting. It is apparent that they had an informal discussion which was conducted in a cordial atmosphere, as one might expect of a meeting between a chairman and his future chief executive. Mr O'Duill and Prof Stoelwinder agree that at least two topics were discussed. The first was the duration of the appointment. The Minister had instructed Mr O'Duill that the appointment should be for three years. Mr O'Duill so advised Prof Stoelwinder. For his part, Prof Stoelwinder wished to be appointed for five years, explaining that if he left the public hospital system before age fifty-five (at the time he was forty-nine) he would miss out on certain superannuation benefits. The issue was left on the basis that Mr O'Duill would discuss with the board whether it would agree to extend the initial term for a further three years if there was satisfactory work performance. 13 The second topic that Mr O'Duill and Prof Stoelwinder discussed was salary. The Minister had instructed that the "salary package" should not exceed $300,000. Mr O'Duill suggested that it would be sensible for the amount to be $295,000. Prof Stoelwinder agreed. 14 So far I have been dealing with matters that are not in controversy. There is, however, a direct conflict in the evidence of the two witnesses over an issue of some importance. Before detailing that evidence I should mention at once the opinion that I formed about the witnesses. Mr O'Duill is a well-regarded and respected member of the business community. He sits on the board of a number of publicly-listed companies and has a reputation of honesty and fair dealing. His approach to giving evidence was to make every effort to recall the relevant events and to state, as precisely as the circumstances would permit, what was said, without exaggeration or embellishment. 15 Prof Stoelwinder approached the task of giving evidence in much the same fashion. Following a career as an academic and as a private medical practitioner, Prof Stoelwinder has been a successful hospital administrator who made a significant contribution to the public hospital system in Victoria. He was, successively, the chief executive of Queen Victoria Medical Centre, Monash Medical Centre and Southern Health Care Network. For the most part, I am of opinion that Prof Stoelwinder also attempted to recall accurately what had passed between himself and Mr O'Duill. 16 It should be apparent that I face an unenviable task in deciding whose evidence I should prefer. Yet a choice must be made. In undertaking that task I must bear in mind that we are dealing with a brief conversation that occurred nearly six years ago, in circumstances where neither Mr O'Duill nor Prof Stoelwinder could anticipate that their discussion would ever assume any significance. That said, let me now return to the evidence. 17 Mr O'Duill said that, in addition to the discussion about salary and term of employment, he and Prof Stoelwinder discussed what would occur if there was an early termination of the contract. Mr O'Duill recalls Prof Stoelwinder suggesting that there should be a term of the contract that he be paid twelve months' salary if the contract was terminated not less than twelve months before its expiry. On the other hand, Prof Stoelwinder says that there was no discussion on this topic. 18 The other controversial matter is whether there was any discussion about any other term of the proposed contract. Mr O'Duill said that after the discussion concerning salary, duration and compensation for early termination, Prof Stoelwinder agreed to draft the contract of employment. Mr O'Duill gave evidence that he told Prof Stoelwinder that apart from the matters that had been discussed, "such a contract should be in accordance with his existing entitlements" and that Prof Stoelwinder did not demur. Mr O'Duill acknowledged that this instruction was but "a brief allusion" to Prof Stoelwinder's existing terms of employment. When challenged, Mr O'Duill said that he did not think his recollection was wrong. 19 Prof Stoelwinder has a different recollection. He is adamant that there was no discussion about what should be included in the contract. He said that he was not told to draft the contract on the basis that he would only receive that which he was receiving under his existing agreement, apart from salary and the duration of the contract. According to Prof Stoelwinder, he simply offered to draft the contract and Mr O'Duill agreed. 20 Immediately after the conversation, Prof Stoelwinder spoke to Ms Kennedy, a friend at a law firm, and told her that he had been appointed as the chief executive of the hospital and that he was required to draft the contract of employment. Ms Kennedy provided Prof Stoelwinder with a pro forma contract of employment to assist him in preparing the draft. Prof Stoelwinder used the document for that purpose. The draft took the form of a letter typed on Southern Health Care Network letterhead with two attachments. The first paragraph of the letter contained an offer to appoint Prof Stoelwinder as chief executive from 25 September for an initial period of three years, and it provided that the term would be extended if Prof Stoelwinder performed his work satisfactorily. The second paragraph referred to the attachments. Schedule A contained what was described as the "salary package". Schedule B set out the terms and conditions of the appointment. One term, cl 6, concerned leave entitlements. The clause provided: "Annual, sickness and long-service leave will apply as per the Hospital's Remuneration Tribunal award previously applicable to Chief Executive Officers and Deputy Chief Executive Officers of public and metropolitan hospitals in the State of Victoria. Current accrued leave entitlements shall stand. All accrued leave entitlements shall be paid out in full on resignation or termination of employment." 21 It is common ground that until 1993, the relevant award which related to Prof Stoelwinder was the Chief Executive Officers' and Deputy Chief Executive Officers' Award 1986. On 23 December 1993 this award was replaced by the Health Services Union of Australia (Victoria – Public Sector) Interim Award 1993. It is also common ground that the terms and conditions of the later award were relevantly the same as those under the award which it replaced. 22 Each award made provision for various benefits, including annual leave, long service leave and sick leave. As regards sick leave, each award provided that an officer could be absent on account of ill health or sickness without loss of pay for twenty-eight days in every twelve months of service, and if the full period of sick leave was not taken, the unused portion would accumulate. No provision was made for "cashing-in" sick leave. 23 Clause 9 of Sched B should be noted. It dealt with the termination of the appointment. It provided that the appointment could be terminated by the hospital for cause; the events giving rise to this right were set out. The clause also provided that if the appointment was terminated for any other reason, Prof Stoelwinder would be paid twelve months' salary by way of liquidated damages. An examination of the draft contract provided by Ms Kennedy shows that cl 9 was based on clauses 27 to 31 of her draft. 24 Prof Stoelwinder handed the draft letter with the attachments to Mr O'Duill, probably on 25 September, although at one stage each of them believed this had taken place on 22 September, presumably because that was the date which appeared on the draft letter. Both agree that when the documents were handed over nothing much was said about their contents, certainly nothing of any consequence. 25 On 25 September Prof Stoelwinder relinquished his position as chief executive of Monash Medical Centre and took on the functions of chief executive of Southern Health Care Network, moving to an office at the Network's headquarters. It is far from clear on what basis this occurred. It is likely that Prof Stoelwinder and Mr O'Duill had discussed the matter, but it was not touched upon in their evidence. I assume that Prof Stoelwinder took up the post because he was confident that a contract of employment would be concluded, and that some interim agreement was reached pursuant to which Prof Stoelwinder was to act as chief executive, pending finalisation of his contract. What we do know is that he acted as chief executive without any increase in salary and probably without any alteration to the other terms and conditions of his employment, apart from the duties he was required to perform. 26 On 10 October, the Governor in Council appointed Prof Stoelwinder to the board of directors of Southern Health Care Network with immediate effect. It is likely that this appointment was made in the belief that there was a concluded contract of employment with Prof Stoelwinder. 27 Mr O'Duill read the draft contract that he had received from Prof Stoelwinder. He made minor changes to the provision in the letter that dealt with the extension of the term of office. He then returned the documents to Prof Stoelwinder by facsimile transmission. Prof Stoelwinder was satisfied with Mr O'Duill's suggested alterations and retyped the letter incorporating those changes. He made a corresponding change to Sched B. He then signed the contract at the foot of Sched B, in the space provided for his signature. On 23 October, Prof Stoelwinder handed the signed contract (letter and attachments) to Mr O'Duill, who immediately executed it on behalf of the hospital. The contract of employment was then concluded. 28 There is one final aspect of the contractual relationship between the parties that should be mentioned. Prof Stoelwinder's appointment was due to expire on 24 September 1998. Shortly before that date, Mr O'Duill and Prof Stoelwinder discussed the possibility of extending the term until 31 March 2000. However, Prof Stoelwinder decided that he did not wish to remain with the hospital. But he did agree to stay on for two months to assist in the changeover. An agreement to that effect (which was probably a variation of the 1995 contract) was recorded in a letter dated 16 September 1998. The letter reads: "Further to our previous discussion regarding the CEO transition period I propose the following arrangement. You will continue as CEO of the Network until 27 November 1998. Terms and Conditions of Appointment will be as per your current contract (attached: Schedule B) with the current Remuneration Package (as per the 17th February, 1998). Pay out at the conclusion of this period of all accrued long service, sick and annual leave, as per clause 6 of the Terms and Conditions of Appointment, will be at the original salary package of $295,000 per annum." 29 It is not necessary to consider the effect of this agreement. It is apparent that many of the terms and conditions referred to in Sched B could have no application to Prof Stoelwinder during the two month extension of his appointment. The extent to which those terms and conditions must be qualified or read down because of the nature of the appointment is not a matter that is in issue. But it will be necessary, later, to come back to this agreement for another purpose. 30 The first issue that arises is whether, on the proper construction of cl 6 of Sched B, Prof Stoelwinder is entitled to cash-in his accumulated sick leave entitlements. Put another way, was it the parties' mutual intention that Southern Health Care Network would assume the legal obligation to convert to cash and pay Prof Stoelwinder his accumulated sick leave benefits? In this connection, the relevant intention of the parties is their objective or presumed intention, on the assumption that they are reasonable people, rather than their actual intention. This follows from the acceptance of the objectivist theory of contract: Taylor v Johnson (1983) 151 CLR 422 at 428-429. In Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 Lord Wilberforce said (at 996): "When one speaks of the intention of the parties to the contract, one speaks objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties." In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (at 352) Mason J (as he then was) said that: " … when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract." In Eustis Mining Co v Beer, Sondheimer & Co Inc, 239 F 976, 984-985 (S D NY 1917) Learned Hand J, a strong proponent of the objectivist school, said: "It makes not the least difference whether a promisor actually intends that meaning which the law will impose upon his words. The whole House of Bishops might satisfy us that he intended something else, and it would make not a particle of difference in his obligation … Indeed, if both parties severally declared that their meaning had been other than the natural meaning, and each declaration was similar, it would be irrelevant, saving some mutual agreement between them to that effect. When the court came to assign the meaning to their words, it would disregard such declarations, because they related only to their state of mind when the contract was made, and that has nothing to do with their obligations." 31 In Taylor v Johnson, the High Court did suggest that in practice there should be little difference between the results of the application of the subjective theory and the objective theory of the nature of assent: 151 CLR at 428. While that may be true as a general proposition, inevitably there will be cases where the rigid application of the presumed intention of the parties will be to sacrifice their actual expectations. This case is a good illustration of this potential and the inequity that could arise. Here the evidence is that Prof Stoelwinder drafted cl 6 for the express purpose of imposing an obligation on Southern Health Care Network to pay out his accumulated sick leave entitlements. According to his evidence, Mr O'Duill's understanding of the operation of cl 6 was to the same effect, although plainly he did not appreciate that such a large sum was involved. Yet the respondent argues that the presumed intention of the contracting parties is to a different effect and that their common understanding at the time of entering into the contract is to be ignored. This takes the objectivist theory to its extreme. Yet it may be that this is what acceptance of the theory demands. If an objective standard of construction were not always adopted, certainty would be removed from the process of construction, and that is the main reason why the objectivists have carried the day: Inland Revenue Commissioners v Raphael [1935] AC 96 at 143; President of India v Jebsens (UK) Ltd [1991] 1 Lloyd's Rep 1 at 9. On this view, if it turns out that the contract does not mean what both parties intended it to mean, the remedy is to reform the contract on the basis that there has been a mistake in expressing their intention. 32 On the other hand, there is a view that it is unsatisfactory to prefer a construction which the parties who have entered into the contract acknowledge does not express their mutual agreement. In such a case it would be unjust for a court not to give effect to the parties' actual intention. There is judicial support for this approach. In Berke Moore Co, Inc v Phoenix Bridge Co, 98 NH 261, 269, 98 A 2d 150, 156 (1953) Duncan J said that "[t]he rule which precludes the use of the understanding of one party alone is designed to prevent imposition of his private understanding upon the other party to a bilateral transaction … [b]ut when it appears that the understanding of one is the understanding of both, no violation of the rule results from determination of the mutual understanding according to that of one alone. Where the understanding is mutual, it ceases to be the 'private' understanding of one party." Thus, if there is a common meaning shared by both parties, that meaning is to be preferred to the objective meaning. See also Sunbury Textile Mills, Inc v Commissioner of Internal Revenue,585 F 2d 1190, 1196 (3rd Cir 1978); 3 Corbin on Contracts, § 538 at 59-61 (2nd ed 1960); Restatement (Second) of Contracts, § 201(1); American Casualty Co v Baker, 22 F 3d 880, 887, (9th Cir 1994); Baladevon, Inc v Abbott Laboratories, Inc, 871 F Supp 89 (D Mass 1994). 33 There is another issue that arises in relation to the construction of cl 6. The agreement made in September 1998, which seems to have effect as an amendment to the 1995 agreement, may shed some light on the intention of the parties when executing the 1995 agreement. Can a court of construction have regard to the 1998 variation to discover the meaning of cl 6? Although there is little authority on the point, such authority as there is suggests that it is permissible to have regard to the later agreement to construe the former. Thus in Petrotta v Gerson, 98 Cal App 507, 277 P 167 (1929), the Californian Court of Appeal held that a later agreement, which specifically referred to an earlier contract and which purported to construe a term in the earlier contract, could properly be considered in determining the intention of the parties to the first agreement; see also 17A Am Jur 2d, Contracts (1991) § 388, pp 415–416. 34 Does cl 6 require the respondent to pay out all accrued sick leave entitlements as Prof Stoelwinder contends? I will consider this question first without regard to either the actual intention of the parties or the 1998 agreement. It will be observed that cl 6 is made up of three components. The first is concerned with Prof Stoelwinder's future entitlements; it provides for benefits that Prof Stoelwinder will receive during the currency of his engagement. The second component is designed to preserve Prof Stoelwinder's accrued entitlements. Speaking strictly, it was unnecessary for cl 6 to deal with existing entitlements in light of s 65L(1)(b) of the Health Services Act, but the parties may be forgiven for their caution. Finally, there is the last sentence of cl 6 which is said to impose the obligation for which Prof Stoelwinder contends. It is worth repeating the sentence: "All accrued leave entitlement shall be paid out in full on resignation or termination of employment." Under the applicable awards, two of the three entitlements, annual leave and long service leave, require payments of unused benefits to be made to the employee. This is not true of sick leave. On one view, the "entitlements" that are to be "paid out in full" are those "entitlements" which, by the terms of the applicable awards, are to be "paid out". But this would leave cl 6 with little work to do, and there is a rule of construction that one should lean towards treating words as adding something rather than as surplusage: S A Maritime et Commerciale of Geneva v Anglo-Iranian Oil Co Ltd [1954] 1 WLR 492 at 495. In any case, this is not the preferred construction that is supported by the language of the clause. A fair reading of cl 6 shows that what must be "paid out in full" are "all accrued leave entitlements" (my emphasis). One such entitlement is sick leave. On the proper construction of cl 6, Prof Stoelwinder is entitled to have his accumulated sick leave paid out in full. 35 Having reached this position, it is not necessary to determine whether use can be made of the common understanding of the parties or the 1998 agreement as an aid to construction. However, if it were possible to have regard to either of these matters, the conclusion that I have reached would be confirmed. 36 The next question is whether the obligation imposed by cl 6 is enforceable and, if it is, whether Prof Stoelwinder must disgorge the benefits to which he is entitled under the provision. Here the respondent relies on three arguments. First, it is said that before the contract of employment was made, Prof Stoelwinder was under an obligation in equity to inform Southern Health Care Network of the effect of cl 6, especially the fact that under the applicable award Prof Stoelwinder had no entitlement to be paid any money referable to accrued sick leave. Second, the respondent says that there was an implied term of his contract of employment that required Prof Stoelwinder to provide that information to his employer. Finally, it is alleged that Prof Stoelwinder misled or deceived Southern Health Care Network by impliedly representing that the nature of the entitlements conferred by cl 6 was the same as the nature of those to which he was entitled under the applicable awards. 37 If the respondent can make out any of these allegations, both parties agree that Prof Stoelwinder should not have his sick pay. That is, Prof Stoelwinder accepts that if he has committed a legal mischief then, by one means or another, the court has power to grant a remedy that will see that he does not receive money on account of accumulated sick leave, or if he does receive that money, that it is repaid. 38 The contention that Prof Stoelwinder was under a duty to disclose the effect of cl 6 is based on two premises, first, that Prof Stoelwinder was in a fiduciary relationship with Southern Health Care Network and, second, that disclosure was an obligation of that relationship. The first premise must be accepted. During the period between 19 September 1995 (when the negotiations for the contract commenced) and 23 October 1995 (when the contract was concluded), Prof Stoelwinder held the following positions: until 25 September he was in day-to-day control of the operations of the Monash Medical Centre; from 25 September until 23 October (the day on which Mr O'Duill signed the documentation) he was acting as the chief executive of Southern Health Care Network under some interim arrangement; from 10 October he was a director of Southern Health Care Network. 39 It is clear beyond argument that an employee is in a fiduciary relationship with his employer. This is one of the accepted categories of fiduciary relationships. It is a fiduciary relationship because of the trust and confidence that is reposed by the employer in his employee. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, Mason J (as he was then) said (at 96-97): "The critical feature of these relationships [trustee and beneficiary, agent and principal, solicitor and client, employee and employer] is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person or is accordingly vulnerable to abuse by the fiduciary of his position. The expressions 'for', 'on behalf of', and 'in the interests of' signify that the fiduciary acts in a 'representative' character in the exercise of his responsibility, …." See also Concut Pty Ltd v Worrell [2000] HCA 64. 40 The mere existence of a fiduciary relationship, however, does not define the nature of the duties that are owed. First, as Brennan CJ said in Breen v Williams (1996) 186 CLR 71 at 82, it is wrong to assume that the duty owed by a fiduciary attaches to every aspect of the fiduciary's conduct, however irrelevant that conduct is to the relationship that is the source of the duty; see also In Re Coomber [1911] 1 Ch 723 at 728-729. Second, and this may be just an aspect of the first proposition, the scope of the duty is very much dependent upon the facts of the particular case: Hospital Products 156 CLR 41 at 69, 73 per Gibbs CJ; and 102 per Mason J. See also Henderson, Hallam-Eames & Hughes v Merrett Syndicates Ltd [1995] 2 AC 145, 206. 41 It is also necessary to bear in mind that equity will not impose obligations that are unjust. Its rules are flexible and will be modified to meet the circumstances of each particular case. This is an important consideration here, because the respondent says, in effect, that an employee who is negotiating for his own contract of employment must, in some respects at least, take care of the interests of his employer. If this were the law, then an employee would be placed in a difficult position whenever he seeks a promotion or an improvement in the terms and conditions of his employment. Is it to be supposed, for example, that an employee who is seeking promotion is under a duty to inform his employer that another applicant for the position is better qualified? If an employee is seeking higher wages, is he under a duty to advise his employer that there is good reason why the employer should refuse an increase? Common sense suggests that the answer in each case should be no. If the respondent's argument were accepted, it would seem that the answer would be yes. 42 For the most part, the authorities to which I have been referred, and those that I have been able to discover, are of marginal assistance. Most of the cases deal with a breach by a fiduciary of his duties in the following situations: making an unauthorised profit out of his position (eg, Reading v Attorney-General [1951] AC 507), inducing his principal to enter into a disadvantageous bargain (eg, McKenzie v McDonald [1927] VLR 134), having an undisclosed interest in a contract (eg, Dunn v English (1874) 18 LR Eq 524), diverting to himself benefits or opportunities (eg, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Nottingham University v Fishel [2000] IRLR 471) and receiving bribes or secret commissions (eg, Lister v Stubbs (1890) 45 Ch D 1; Attorney-General for Hong Kong v Reid [1994] 1 AC 324). Only one case is instructive, and I shall refer to it later. 43 How does the respondent put the case that Prof Stoelwinder was under the duty alleged? As it seems to me, the respondent's case is based on the following propositions. Being in a fiduciary relationship, Prof Stoelwinder owed his employer his undivided loyalty: see, eg, Maguire & Tansey v Makaronis (1997) 188 CLR 449. One aspect of that broad obligation was a requirement that Prof Stoelwinder subordinate his own interests to those of his employer. The only means by which Prof Stoelwinder could satisfy that obligation in the circumstances was to disclose the practical effect of cl 6 (and that it conferred a new benefit) before the contract was concluded. 44 Are these propositions correct? What was the content of Prof Stoelwinder's duty? In the arm's length negotiations for his contract of employment, was Prof Stoelwinder required to look after the interests of his employer as well as his own? 45 I began with the proposition that fiduciary duties will not arise in respect of every act of an employee. Take, for example, acts where no trust or confidence is reposed in the employee. Often there will be no need to superimpose any duty in relation to such activities. A fortiori when the act in question is not an act of an employee acting in that capacity. It is also important to remember that we are here not dealing with a case in which a fiduciary has conferred a benefit upon himself. It was the function of the board of directors to select a chief executive, and Prof Stoelwinder had no direct or indirect role to play in that task, even after his appointment as director. 46 The case that I have found useful is Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606. There the court was required to consider whether the directors of a company could maintain membership of a union, having regard to the fiduciary relationship between themselves and their corporate employer. In the course of discussing a director's obligation to avoid a conflict between interest and duty, Upjohn LJ said (at 637-638): "It was submitted that it [the obligation] could not apply to cases where a managing director negotiates too high a salary with his company or takes too long a holiday, or stays at an unnecessarily luxurious hotel when on the company's business. However, a broad rule like this must be applied with common sense and with an appreciation of the sort of circumstances in which over the last 200 years and more it has been applied and thrived. It must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict. It is quite unnecessary to invoke the rule in the case of a director who takes too long a holiday or stays at too expensive an hotel; that is just a plain breach of his duty to serve the company faithfully. So in the case of a director who negotiates too high a salary, the rule does not come into play, for I assume, of course, that the articles permitted the appointment of a managing director at a salary; the company have pro tanto relaxed the rule and are prepared to let the director negotiate a salary and, perhaps, even to vote on its amount in the board room." 47 This shows that it is necessary to look at the realities of the situation in which the fiduciary finds himself, before deciding to impose any particular obligation. So, in negotiations for a new contract of employment, where the employer is expecting the employee to look after his own interests and the employer is in fact taking care of its own affairs, it would be unjust to impose on the employee a duty of disclosure. It would be unjust because the negotiations are conducted at arm's length, and each party should expect the other to be self-interested. That is, the employer is not placing any trust or confidence in the employee and should not require the employee to protect the employer's interests. It would also be unjust because the result of imposing the duty would be to unfairly disadvantage the employee in the negotiations. 48 In some jurisdictions in the United States, the courts have taken a different view in relation to officers of a company. In Pepper v Litton 308 US 295 (1939), Douglas J, in delivering the opinion of the Supreme Court, said (at 306): "A director is a fiduciary. So is a dominant or controlling stockholder or group of stockholders. Their powers are powers in trust. Their dealings with a corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein." (citations omitted) 49 An attempt was made to apply Pepper v Litton to an agreement to pay a director a particular salary which was considered to be too high. But it was held that the rule established by Pepper v Litton would be satisfied if the salary was the result of arm's length negotiations: see In Re Auto Specialties Manufacturing Co; Boyd v Sachs 153 BR 503 (W D Mich 1993). In some States, however, the requirement of fairness is not only concerned with the form of dealings, but also with the fairness and reasonableness of the result of those dealings. In those jurisdictions, it is necessary to establish that a contract between an officer and a corporation is "fair and in the interest of the corporation and all of the material facts must be made known to the directors": see, eg, Baker v Hellner Realty Co 265 Mich 625, 631 (1933); Fill Buildings Inc v Alexander Hamilton Life Insurance Co 396 Mich 453, 460-461 (1976). 50 If the Michigan cases were applied, Prof Stoelwinder could not retain the benefit of cl 6. He had a three year contract at an annual salary of $295,000. When the contract was made, the cash value of sick leave was approximately $450,000 . To pay an employee this sum over and above an annual salary of $295,000 could hardly be described as a "fair" arrangement from the point of view of the hospital. On the other hand, there is no principle of law in this country that, to be valid, a contract between a company and its employee (including a director) must be fair and reasonable. The fact that the contract is the product of arm's length negotiations establishes its fairness, provided the employee is not guilty of fraud or other sharp practices in causing the company to enter into the contract. 51 So far I have been considering the position of Prof Stoelwinder as an employee (chief executive) of the hospital. As I have mentioned, he was also appointed a director. The hospital argues that even if it were going too far to impose a fiduciary obligation of disclosure on an employee who is negotiating a new contract of employment, there could be no objection to the imposition of such a duty on a director. As to the duty owed by a director, see Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq HL 461. I do not accept that Prof Stoelwinder's duties became more onerous once he was appointed to the board. That appointment came about because it was an incident of the chief executive's position and the Minister believed that Prof Stoelwinder had already been appointed to that office. It would indeed be a curious result if Prof Stoelwinder was not under an obligation to disclose the effect of cl 6 when the negotiations began, but fell under such an obligation as soon as he accepted a directorship, one of the benefits of the new position. Unless compelled by authority to reach that conclusion, I would not find in favour of the hospital on this aspect of its case, because to do so would impose what I think is an unreasonable obligation in the circumstances. In any event, the imposition of the alleged duty is inconsistent with what was said by Upjohn LJ in Boulting, in the passage cited. 52 The respondent pressed (but faintly) the contention that there should be implied into the contract of employment a term which imposed upon Prof Stoelwinder an obligation to disclose that cl 6 conferred new benefits. It is not clear how the supposed term is to be implied. If it is to be implied by law, the term must be "necessary": Liverpool City Council v Irwin [1977] AC 239. The supposed term can hardly be regarded as necessary in the sense discussed in the cases. The term could be implied in fact if the criteria established in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 are satisfied. Those criteria are that the term (1) must be reasonable and equitable; (2) must be necessary to give business efficacy to the contract; (3) must be obvious; (4) must be capable of clear expression; and (5) must not contradict any express term. The supposed term would not satisfy criteria (1), (2) or (3). 53 This brings me to the last, and to my mind the most difficult, aspect of the case. The respondent says that Southern Health Care Network was misled by Prof Stoelwinder. It seeks relief under the common law (tort of deceit and estoppel) and by statute (Fair Trading Act 1985 (Vic), s 11). Did Professor Stoelwinder mislead or deceive Mr O'Duill when he handed him the draft contract on 25 September? Was Prof Stoelwinder instructed on 19 September to draft a contract where the terms and conditions would be the same as those that he had previously enjoyed, apart from salary and duration? Was it reasonable for Mr O'Duill to believe that this was the position when he was handed the contract without any indication from Prof Stoelwinder that cl 6 provided him with new and increased benefits? To answer those questions it is necessary to choose between the conflicting evidence of the witnesses. If Mr O'Duill had instructed Prof Stoelwinder to draft the contract as alleged, and Mr O'Duill was of the view (which he plainly was) that cl 6 set out what Prof Stoelwinder was already entitled to receive, then there can be no doubt that producing a contract with cl 6, which conferred new benefits, without explaining its effect would be misleading. 54 How do I resolve this issue? I have already explained my general impression of the witnesses. Each of them gave truthful evidence, according to their best recollection. Overall, however, I have formed the view that Prof Stoelwinder has a better, and more precise, recollection of past events than does Mr O'Duill. In particular, it is clear that Mr O'Duill believed that cl 6, along with the other terms and conditions in Sched B, apart from cl 9, reflected Prof Stoelwinder's existing entitlements. But I am not convinced that anything Prof Stoelwinder said or did contributed to that belief. In particular, I am not persuaded that Mr O'Duill gave a clear instruction to Prof Stoelwinder to draft the contract on the basis that it reflected his existing entitlements, save as to salary, duration and compensation for early termination. 55 Further to my general impression of the witnesses, I have arrived at this conclusion for the following reasons. In the first place, if Mr O'Duill had given such an instruction and Prof Stoelwinder did not intend to comply with it, I believe he would have said so there and then. Prof Stoelwinder was dissatisfied with having been offered an appointment for a three year term, and he sought to cash-in his sick leave entitlements as compensation for not being appointed for five years. If Mr O'Duill had suggested a term that would require Prof Stoelwinder to forgo this compensation, it is unlikely Prof Stoelwinder would have remained silent. Even if he were not able to secure all that he wanted, at least he would have asked for some additional money, payable in a way that would conform to the Minister's instruction that the "salary package" should not exceed $300,000. 56 The second matter that leads me to prefer the recollection of Prof Stoelwinder is as follows. It will be remembered that there was disagreement about whether the parties discussed the inclusion of a term that provided for early termination of the agreement. Mr O'Duill said this topic was discussed at their meeting on 19 September. Prof Stoelwinder denied that any such discussion took place. I think it likely that Prof Stoelwinder first came across the idea of claiming compensation for early termination when he read the draft contract that had been provided to him by Ms Kennedy. He was given that draft after his conversation with Mr O'Duill. Prof Stoelwinder did say that as at 19 September he was aware that other public servants had the benefit of such a provision. I am not sure that Prof Stoelwinder was entirely accurate in this evidence. It is more than likely, to my mind, that Prof Stoelwinder pressed the matter only after he read Ms Kennedy's draft. This suggests that Prof Stoelwinder has a better recollection of the events than does Mr O'Duill. 57 What I think happened is that when Prof Stoelwinder said he would draft the contract, Mr O'Duill made the not unreasonable assumption that all important matters had been discussed and the other provisions of the contract would not differ from the benefits that Prof Stoelwinder was then receiving. However, if Mr O'Duill did act on this assumption, when he read the draft agreement he should have been alerted to the possibility that his assumption was misplaced. Clause 9 was a new provision. Clause 6, to the extent that it allowed Prof Stoelwinder to cash-in his sick leave, was at least novel. Indeed in New South Wales provisions in an award allowing for cashing-in sick leave are outlawed: see s 27 of the Industrial Relations Act 1996 (NSW). When he had turned his mind to cl 6, I am sure Mr O'Duill believed that it would not confer any significant benefits. As the facts show, this belief was wrong. But Mr O'Duill's mistaken view about the effect of the contract was not the result of improper conduct on the part of Prof Stoelwinder. 58 Prof Stoelwinder is entitled to recover $567,642.11, and an order to that effect will be made. There is a cross-claim by which the respondent seeks to recover any amount it is required to pay Prof Stoelwinder. As it has not established any basis for recovery, the cross-claim will be dismissed. The respondent will be required to pay the costs of the claim and cross-claim. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 23 February 2001 Counsel for the Applicant: Mr K Bell QC and Mr S Wood Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: Dr C Jessup QC and Mr D O'Callaghan Solicitor for the Respondent: Corrs Chambers Westgarth Date of Hearing: 29, 30 and 31 August 2000 Date of Judgment: 23 February 2001