Supreme Court New South Wales Medium Neutral Citation: Gillies v Downer EDI Ltd [2011] NSWSC 1055 Hearing dates: 09/05/2011, 10/05/2011, 11/05/2011, 16/05/2011, 18/05/2011 Decision date: 09 September 2011 Jurisdiction: Common Law Before: Rothman J Decision: (i) Judgment for the plaintiff on the Statement of Claim; (ii) Judgment for the cross-defendant on the cross-claim; (iii) Cross-claim dismissed; (iv) The parties are directed to file an agreed form of orders to reflect the calculation of the amounts owing in accordance with the reasons for judgment; (v) Failing agreement in accordance with order (iv) above, the plaintiff shall file a form of order that he seeks within 21 days from the date hereof and the defendant shall file, within 7 days thereafter, any alternative proposed order; (vi) The parties have liberty to address the Court on the calculation of damage, including any particular aspects that have not been specifically dealt with in the foregoing reasons, and on costs and interest. Catchwords: EMPLOYMENT - contract of employment - interpretation - misconduct - summary dismissal; DAMAGES - loss of opportunity damages - necessity to identify breach upon which loss of opportunity is to depend Legislation Cited: Civil Procedure Act 2005 Corporations Act 2001 (Cth) Income Tax Assessment Act 1997 (Cth) Long Service Leave Act 1955 Taxation Administration Act 1996 Cases Cited: Australian Securities and Investments Commission v Healey [2011] FCA 717 Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003 Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418 Bruce v AWB Ltd (2000) 100 IR 129 (FCA) Chalmers v the Commonwealth [1946] HCA 37; (1946) 73 CLR 19 Clouston & Co Limited v Corry [1906] AC 122 Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22; (2008) 236 CLR 342 Contractors Ltd v Fareham Urban District Council [1956] UKHL 3; [1956] AC 696 Deputy Commissioner of Taxes (SA) v Executor Trustee & Agency Company of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108 Downe v Sydney West Area Health Service (No 2) [2008] NSWSC 159; (2008) 71 NSWLR 633 Fabre v Arenales (1992) 27 NSWLR 437 Foggo v O'Sullivan [2011] NSWSC 501 Fraser v NRMA Holdings Limited (1995) 55 FCR 452 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 Immer (No 145) Pty Ltd v Uniting Church In Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26 Johnson v Agnew [1980] AC 367 Johnson v Unisys Ltd [2003] 1 AC 518 Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115 Lennon v State of South Australia [2010] SASC 272 Mahmud v Bank of Credit and Commerce International [1998] AC 20 McDonald v Dennys Lacelles [1933] HCA 25; (1933) 48 CLR 457 McDonald v State of South Australia [2008] SASC 134; (2008) 172 IR 256 North v Television Corporation Ltd (1976) 11 ALR 599 Pepper v Webb [1969] 1 WLR 514 Photo Production v Securicor Transport Ltd [1980] AC 827 Quality Lodges International Pty Ltd v Bibby (No 2) [2002] SASC 147 R v Burdett (1820) 4 B & Ald 95; 106 ER 823 Rogan-Gardiner v Woolworths Ltd (No 2) [2010] WASC 290 RPS v R [2000] HCA 3; (2000) 199 CLR 620 Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198 Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217; (2008) 72 NSWLR 559 Sanders v Snell [1998] HCA 64; (1998) 196 CLR 329 Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 State of South Australia v McDonald [2009] SASC 219; (2009) 103 SASR 344 T D Preece & Co Pty Ltd v Industrial Court of New South Wales [2008] NSWCA 285 Taske v Occupation and Medical Innovations Ltd (2007) 167 IR 298; [2007] QSC 118 The State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 The Queen on the Prosecution of J.B. Saunders v The Postmaster-General (1878) 1 QBD 658 The Queen on the Prosecution of J.B. Saunders v The Postmaster-General (1878) 3 QBD 428 Thomson v Orica [2002] FCA 939 Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 62 ACSR 1 Texts Cited: J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, 5th Ed, (2007), LexisNexis Butterworths, at 856-858 Category: Principal judgment Parties: Stephen John Gillies (Plaintiff / Cross-Defendant) Downer EDI Ltd (Defendant / Cross-Claimant) Representation: Counsel: D L Williams SC / R Beasley (Plaintiff / Cross-Defendant) C R C Newlinds SC / J C Giles (Defendant / Cross-Claimant) Solicitors: DibbsBarker Lawyers (Plaintiff / Cross-Defendant) Corrs Chambers Westgarth Lawyers (Defendant / Cross-Claimant) File Number(s): 2007/265271 Table of Contents Employment background [3] Initial employment agreement [9] The addendum to the contract of employment [22] Accrued bonus pool [28] Witnesses [37] The inference available from the failure to call evidence [60] Was the Addendum part of the contract of employment? [68] Operation of the bonus pool [80] Tax implications [86] Did Mr Gillies engage in any misconduct or breach his duties as CEO of Downer? [95] The car loan [108] Termination of employment [119] The events of 1 August 2007 [120] The subsequent correspondence [137] Findings as to termination and breach of contract [143] Summary Dismissal [156] Resignation [177] Issues associated with the calculation of damages [183] Alleged Entitlement under the Long Service Leave Act 1955 [184] Loss of opportunity damages [186] The Claim for unpaid bonus entitlements [193] Other claims [197] The Implied Mutual Trust duty [200] Conclusions [209] Judgment 1Stephen Gillies was the Chief Executive Officer (hereinafter, "CEO") of Downer EDI Ltd (hereinafter "Downer"). Downer had employed him for nearly 20 years, the last 10 of which he occupied the position of Managing Director and CEO. The employment relationship between Mr Gillies and Downer ended in August 2007. There is an issue between the parties relating to the circumstances giving rise to the termination of employment and Mr Gillies sues Downer for damages alleging one or more breaches of the contract between them. 2The issues between the parties are defined by an amended statement of claim and defence and a cross-claim and defence. Essentially, the issues revolve around: the terms of the contract of employment; how and when termination of employment was effected; whether there has been misconduct by Mr Gillies; and the consequences of the foregoing in the calculation of damage, if any. Within each of those categories there are issues of fact (and, in some cases, issues of law) on which those central issues depend. The parties filed an "Agreed Chronology" and an "Agreed Statement of Facts and Contentions". The Agreed Chronology discloses areas where there are disagreements, as does the "Agreed Contentions". While I do not recite each of the documents, they can be viewed in the attachments to these reasons. Employment background 3Downer is the successor in title to a number of differently named entities and consists of a group of which there are a number of subsidiaries. For the purposes of this background, as has been expressed in the various employment documents, employment with one or other of the predecessors and/or subsidiaries is treated as employment with the group and with Downer. Mr Gillies commenced employment with Downer in or about 1988 in New Zealand, earning approximately NZ$35,000. In 1992 he moved to Hong Kong on a base salary of NZ$73,250 and by 1994 he was earning approximately HK$1,050,000, including a base salary of HK$600,000. By 1996 his total remuneration package was HK$2,500,000 (with a base HK$1,700,000). 4In May 1997 Mr Gillies was appointed CEO and Managing Director of the Downer group of companies and relocated to Australia. His remuneration package was $400,000. This package was reviewable each 12 months commencing 1 July 1998. His salary increased to $750,000 effective 1 July 1998 and was at $1,500,000 by the time his employment ended in August 2007. 5When Mr Gillies commenced employment with the Australian operations, he compiled a business plan. That business plan was implemented, as altered from time-to-time, and Mr Gillies guided the company through a stock exchange listing in June 1998. 6In 1997 (at the commencement of Mr Gillies' Australian employment), the turnover of Downer's business was $145 million. By 2007, the annual turnover had grown to $5.4 billion and the company had operations in the United Kingdom, Asia, Australia and New Zealand. It had 22,000 employees. Until 2007, there was a consistent and significant increase in Downer's total turnover, earnings before tax, total operating profit, earnings per share and total shareholder equity. As a result of the re-assessment of certain construction/mining activities in 2006 and 2007, Downer downgraded its profits in 2007, which led to the events of August 2007. 7Mr Gillies had significant delegated authority as the CEO, as one would expect. That delegated authority included the ability to make acquisitions of other business valued up to AUD$50 million. 8On any analysis of the evidence before the Court, Mr Gillies' employment with Downer was extremely successful for both parties. He was, until the events leading up to August 2007, a most valued employee, upon whom the Board had relied to build a successful business into a multi-billion dollar business. Initial employment agreement 9The initial Employment Agreement (hereinafter, "the Agreement") is embodied in the terms of a letter dated 31 May 1997. The letter expressly "continues" the terms of Mr Gillies' appointment as CEO and Managing Director. The terms of Mr Gillies' original appointment are not before the Court. The Agreement was apparently a clarification of the terms of Mr Gillies' employment "in consideration of [Mr Gillies'] agreement to continue working" under those terms. 10Clause 1 of the Agreement describes the position as CEO and Managing Director reporting to the Board of Directors, with executive responsibility to Mr Tom Lau (Chairman). Mr Gillies had responsibility for, and was to continue, "to provide management directions for and to overview financial, administration and operational matters throughout the Company's activities" (including subsidiaries). The position required a 51/2-day working week plus whatever other days or times were necessary "to get the job done". 11Mr Gillies' remuneration was set out in a number of clauses, only one of which was headed "Remuneration", which was Clause 2 of the Agreement. As earlier stated, it set a "total remuneration package" of A$400,000 effective from 1 July 1997, to be reviewed annually, the next review to be on 1 July 1998. There was also an entitlement to a bonus share scheme, expressed in the following terms: "2.2 In addition to the bonus scheme referred to in Clause 9, it is confirmed that the Company intends to arrange the introduction of a scheme whereby its management will be able to participate in entitlement to shares in the Company. This scheme will be the subject of a separate letter to you. (Although attached is a draft of the Executive Share Option Plan and Executive Bonus Scheme, see Appendix I and II.)" 12The period of employment was of an indefinite duration and acknowledged, notwithstanding the date of the Agreement, that the period of continuous employment commenced on 13 June 1988. Employment, therefore, as understood in this Agreement, included periods during which Mr Gillies was not the CEO. Clause 4 of the Agreement dealt with the termination provisions and was in the following terms: "4. Termination of Agreement 4.1 Your employment under this Agreement may be terminated in any of the following ways: (a) by you giving three (3) months' notice to the Company in writing; or (b) the Company giving you three (3) months' notice in writing or payment in lieu thereof; or (c) in the event of your misconduct or fraudulent activity, by the Company notifying you that your employment is terminated with immediate effect. Notwithstanding Clause 4.1(a) you will be entitled to resign for the following reasons: (a) Ill health such as to preclude the possibility of your continuing your duties in the opinion of a properly qualified medical practitioner who shall be selected by the Company. (b) The termination of the services of the present Chairman of the Company, Mr Tom Lau, unless he is replaced by an experienced and qualified director acceptable to you. In the event of your resignation for these reasons, you will be entitled to receive a termination payment calculated in accordance with the provision of Clause 4.1(b) and 4.2 In addition to the payment in lieu of notice which may be made pursuant to Clause 4.1(b) you will be paid an additional benefit, which shall be capped at 150% of your annual base salary, as follows: (a) for the first five years of continuous employment, an additional two (2) months' base salary for each completed year of continuous service (or pro rata for part thereof); (b) for each year of continuous employment in addition to the first five (5) years a half (1/2) of a month's base salary for each completed year of continuous service (or pro rata for part thereof). 4.3 The termination payments referred to in this Clause 4 will not be payable in any case where the termination is effected under Clause 4.1(c) due to your misconduct or fraudulent activity." 13There was an entitlement to 5 weeks annual leave and annual leave accrued, without limitation, with an acknowledgment that accrued annual leave up to 30 June 1997 stood at 27 weeks. Sick leave was discretionary. The Agreement continued Mr Gillies' membership in his New Zealand superannuation fund and the company provided medical scheme insurance for Mr Gillies' spouse and immediate family. There were temporary arrangements for accommodation on relocation in Sydney and a clause confirming, as is the case under the common law, that the company would reimburse all business expenses properly incurred by Mr Gillies in the performance of his duties. 14The Agreement provided for the expenses (airfare and removal of personal effects) in relocating to New Zealand to be reimbursed by the company at the completion of Mr Gillies' employment. Mr Gillies was also to be provided with a fully maintained (including petrol) BMW 5 Series motor vehicle for his sole use. 15Clause 12 of the Agreement provided that the Agreement set out "all remuneration and terms and conditions of [Mr Gillies'] employment unless agreed otherwise in writing from time to time by the Chairman of the Company and yourself [Mr Gillies] subject always to the approval by the Remuneration Committee of the Board of the Company, if and when one is constituted". Presumably the constitution related to the Remuneration Committee not the Board or the Company. The governing law of the contract is "the laws of Australia". Lastly, I should refer to the provision in the Agreement, Clause 9, dealing with the bonus scheme. Clause 9 is in the following terms: "9. Incentive/Bonus Scheme 9.1 In the absence of the Executive Share Option Plan and the Executive Bonus Scheme as referred to in Clause 2.2 herein and upon successful realisation of forecast/budgeted results the Company will pay you a bonus capped at 50% of your current base salary. 9.2 In the event of termination of your employment for any reason during the financial year, a pro rata payment will be made three (3) months after the earlier of the date of such termination and the date of audited financial statements of the Company for that financial year. For this purpose, 'pro rata' shall mean the profit after tax earned from the commencement of the financial year to the date of termination." 16Notwithstanding the opening words of Clause 9.1, each of the parties before the Court accepts that the bonus scheme described in Clause 9 was payable over and above the Executive Share Option Plan or any other right to participate, by virtue of Mr Gillies' employment, in the shares of the Company. Notwithstanding the attitude of the parties as to the manner in which the Agreement operated, such ex post facto consensus cannot alter the express terms of the Agreement. There seems to be, at least initially, a tension between the wording of Clause 2.2 (recited above) and Clause 9.1 (also recited above). However on proper analysis, the announced consensus of the parties as to its operation is in accordance with the intention derived from the wording of the Agreement itself. 17The opening words of Clause 2.2 make express that the participation in entitlement to shares in the Company is in addition to the bonus scheme referred to in Clause 9. The opening words of Clause 9.1, on the other hand, refer to a bonus scheme that will be paid "in the absence of the Executive Share Option Plan and the Executive Bonus Scheme referred to in Clause 2.2". Clause 9.1 may be drafted ambiguously. The Court makes three comments on the relationship between the two clauses. 18First, it may be that the bonus is payable either in the absence of the Share Option Plan and Executive Bonus Scheme or upon successful realisation of forecast/budgeted results. Secondly, the tension in the opening words of Clauses 9.1 and 2.2 arises from the operation of the doctrine of construction summarised in the maxim expressum facit cessare tacitum or inclusio unius est exclusio alterius. This rule of construction states that where there is express mention of certain things, then implicitly other things of the same kind not mentioned are excluded. It is a rule of construction that is not strictly logical and must also give way to a contrary intention in the document. 19As a matter of strict logic (as distinct from ordinary rules of the construction of documents), a statement that an amount will be paid in the absence of certain other amounts does not mean that the amount will not be paid in the presence or existence of those amounts. As a matter of strict logic, if one says that one is going swimming if it is raining, it does mean that one is not going swimming if it is not raining: if P then Q, does not mean: if not P then not Q. Usually, in construing documents a different approach is taken, but as stated, that approach gives way to a contrary intention obtained from the document. Given the express words of Clause 2.2 in this Agreement, which require the participation in share entitlement to be in addition to the bonus scheme referred to in Clause 9.9, the rule of construction ought to give way to those express sentiments. 20Thirdly, as a matter of fact, to which I will shortly come, the Executive Share Option Plan did not operate. In lieu of the Executive Share Option Plan a "Phantom Option Scheme" (hereinafter, "POS") operated. Therefore, both the Executive Share Option Plan and the Executive Bonus Scheme were not in operation and Clause 9.1 could operate, as it did. 21Lastly, as a consequence of the construction of the Agreement to the effect that Mr Gillies was entitled to amounts other than those described in Clause 2 of the Agreement, the term "remuneration" where used in the Agreement has a meaning more consistent with base salary than its ordinary meaning of total consideration for the performance of the contract of work: see The Queen on the Prosecution of J.B. Saunders v The Postmaster-General (1878) 1 QBD 658 at 663, 664, per Blackburn J and in The Queen on the Prosecution of J.B. Saunders v The Postmaster-General (1878) 3 QBD 428 (Court of Appeal); Chalmers v the Commonwealth [1946] HCA 37; (1946) 73 CLR 19 at 34, per McTiernan J and 37, per Williams J; and Quality Lodges International Pty Ltd v Bibby (No 2) [2002] SASC 147 at [16] - [33], per Perry J, and the cases cited therein. The addendum to the contract of employment 22By letter dated 23 October 2001, Mr Lau wrote to Mr Gillies in relation to his employment agreement attaching an Addendum (hereinafter "the Addendum"). The terms of the letter, other than the formal parts, to Mr Gillies bears repeating: "Attached please find the addendum to your Employment Agreement which has been agreed in principle by the board of directors quite some time ago. I have signed this addendum on the condition that it will be ratified, given it has been approved in principle, by the remuneration committee of the board. Please kindly present this document to the remuneration committee accordingly." 23As earlier stated, the letter, dated 23 October 2001, was sent, apparently, by facsimile and was signed by Mr Lau. Mr Lau was then the Chairman of the Board. Copies went to the other two members of the Remuneration Committee, Messrs Michael Kent and Ken Roche (also by facsimile). In evidence before the Court is a copy of that foregoing letter, with the Addendum, which bears the handwritten note "Remuneration Committee Meeting, held 19 February 2002, Purpose: to ratify attached addendum to employment contract". The Chief Financial Officer, Mr Bruce, wrote the note. 24It is unnecessary to recite large portions of the Addendum, although the document is relatively brief. It is sufficient, for present purposes, to explain that the Addendum, if operative, was an agreement between Downer and Mr Gillies that Mr Gillies' remuneration would be varied by including an additional performance bonus, calculated on a basis which was equivalent to the amount of money that would be payable (less expenses) if Mr Gillies were receiving shares under the Executive Share Option Plan. 25The bonus would only be payable in the event that a duly signed and dated "election" had been provided by Mr Gillies to Downer some time during the course of his employment. The election could occur on only one occasion after which no further unit would remain to be vested. In strict terms, it was not an election (being a confrontation of the person electing with two mutually exclusive courses of action between which a choice must be made, for example, to discharge a contract or keep it on foot: Immer (No 145) Pty Ltd v Uniting Church In Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26, but an "exercise of an option". The parties and the Addendum, refer to it as an election, and I will also. 26Essentially, the scheme sought to give Mr Gillies all of the benefits of a Share Option Plan without shares ever being issued (or options issued) and, it was said, therefore, not to require reporting to the shareholders and/or the ASX. The bonus was calculated in accordance with a formula in the following terms: Bonus = U (EP - BP) Where: EP means the closing price of Downer ordinary shares as quoted on ASX on the business day immediately prior to the election date; BP means 43 cents; U means the number of units specified in the notice of bonus election to an aggreg ate maximum of 3 million. 27As a consequence of that formula, the bonus would be calculated on the notional basis that Mr Gillies had 3 million shares and the bonus was 3 million times the difference in share price at the time of the notional grant of the scheme (i.e. with a value of 43 cents) and the day prior to the notional vesting of the Phantom Shares. I will return to issues associated with whether the Addendum was operative as an agreement between Downer and Mr Gillies. It is appropriate to note that the POS was, if operative, intended to replace the Share Option Plan under which Mr Gillies had been granted options for 3 million shares, which grant had been approved by the Board and shareholders. Accrued bonus pool 28As already stated, Mr Gillies was entitled to a bonus, calculated in accordance with Clause 9 of the Agreement. Later in these reasons, I will deal with the conclusions that the Court reaches on the manner in which this accrued bonus pool operated, but, for present purposes, it is necessary to set out the primary facts, which, largely, are uncontested. 29Each year a bonus would be declared, the amount of which would be credited in a journal entry, in the records of Downer. No money was, at that point in time, paid to Mr Gillies. Further, at that point in time, no tax was deducted from the amount declared. The bonus from each year accumulated as a credit in the books of Downer and, in the journal, as an amount standing to the credit of Mr Gillies. 30No separate account was opened or operated in relation to these amounts. From time-to-time Downer advanced monies to Mr Gillies, which, largely, were repaid within a short time. Downer did not pay interest to Mr Gillies in relation to any amount standing to his credit at any particular time. Likewise, no interest was payable by Mr Gillies on amounts to which he had access by virtue of the "advance" to which I have earlier referred. 31The accrued bonuses were awarded for the following amounts in the respective year: 1998 - $150,000; 1999 - $187,500; 2000 - $187,500; 2001 - $243,750; 2002 - $243,750; 2003 - $341,250; 2004 - $502,125; 2005 - $500,000. In the foregoing, the yearly reference is to the year ending 30 June in the year prescribed. The total amount of bonuses from year ending 30 June 1998 to year ending 30 June 2005 was $2,355,875. The Court relies upon the list of the transactions relating to declared bonuses included in the Joint Report of Experts at page 4. 32Bonuses were taken for 1998, 1999, 2000, part of 2005 and part of 2004, being a total of $777,240, leaving $1,578,635 in the accrued bonus pool. Further, other amounts were "advanced" and/or paid to Mr Gillies. $8,419 was paid in July 1999 to satisfy a Hong Kong tax debt of HK$42,465. Advances were made of $450,000 in August 2002; $1,200,000 in September 2002; $20,000 in November 2003. An amount of $33,947.06 was also paid to Mr Gillies to finance a private purchase in Singapore. The total amount advanced was $1,712,366. 33Amounts were "repaid" by Mr Gillies to Downer to the following effect: in October 2002 - $250,000; in November 2002 - $450,000; in January 2003 - $100,000; and in July 2004 - $83,616.06. 34The net effect of the foregoing is that a total of $2,355,875 accrued in bonuses; an amount of $777,240 was taken in bonuses; and a number of advances and/or partial/total repayments brought the amount to $749,885 on which there was an unaccrued PAYG liability of $734,065.28, once the full amount was derived as income. This left a balance to the credit of Mr Gillies of $16,907. No bonus was awarded for the years ending 30 June 2006 and 30 June 2007. 35It is appropriate at this stage to refer to one other species of transfer. On 13 December 2006, Downer paid an amount equivalent to AUD$175,439 on behalf of Mr Gillies, which amount was repaid on 15 December 2006. On 13 January 2007, a similar transaction occurred for an amount of AUD$494,019, which was repaid on 5 February 2007. On 7 February 2007, there was a further payment of the same kind for AUD$43,783, repaid on the same day, and on 17 July 2007 and 18 July 2007, respectively, an amount of AUD$45,196 was transferred by Downer to a bank account controlled by Mr Gillies and repaid. It is not in dispute that these payments were payments made by Downer, at the request of Mr Gillies, in foreign currency, utilising the treasury functions of Downer, and repaid on notification to Mr Gillies of the Australian dollar cost of the payment. 36On page 4 of the joint expert report, the transactions were analysed as follows: Definition of Transactions Defined As Type Amount ($) Date B1 Declared Bonus 150,000 15-Dec-98 B1.1 Declared Bonus 150,000 20-Aug-98 B2 Declared Bonus 187,500 30-Jun-00 B2.1 Declared Bonus 187,500 24-Aug-99 B3 Declared Bonus 187,500 30-Jun-01 B3.1 Declared Bonus 187,500 22-Aug-00 B4 Declared Bonus 243,750 30-Jun-02 B4.1 Declared Bonus 243,750 6-Sep-01 B5 Declared Bonus 243,750 30-Jun-03 B5.1 Declared Bonus 243,750 23-Aug-Q2 B6 Declared Bonus 341,250 12-May-04 B6.1 Declared Bonus 341,250 26-Aug-03 B7 Declared Bonus 502,125 24-Sep-04 B8 Declared Bonus 500,000 12-Sep-05 Definition of Transactions (continued) Defined As Type Amount ($) Date W1 Withdrawal 8,4191 31-Jul-99 W2 Withdrawal 450,0001 12-Aug-02 W3 Withdrawal 1,200,0001 16-Sep-02 W4 Withdrawal 20,0001 3-Nov-03 W5 Withdrawal 33,9472 10-Jun-04 W6 Withdrawal 525,0003 2-Jul-04 W7 Withdrawal 143,0004 14-Sep-05 W8 Withdrawal 107,0005 31-Dec-05 W8.1 Withdrawal 107,0005 15-Dec-05 W9 Withdrawal 175,4391 13-Dec-06 W10 Withdrawal 494,0191 31-Jan-07 W11 Withdrawal 43,7831 7-Feb-07 W12 Withdrawal 45,1961 17-Jul-07 R1 Repayment 471,000 12-Sep-02 R1.1 Repayment 450,000 12-Sep-02 R2 Repayment 250,000 9-Oct-02 R3 Repayment 100,000 15-Jan-03 R4 Repayment 83,616 6-Jul-04 R5 Repayment 175,439 15-Dec-06 R6 Repayment 494,019 5-Feb-07 R7 Repayment 43,783 7-Feb-07 R8 Repayment 45,196 18-Jul-07 1 No PAYG withholding tax was withheld by Downer on this Withdrawal 2 PAYG withholding tax of $16,464 was withheld by Downer on this Withdrawal 3 PAYG withholding tax of $254,625 was withheld by Downer on this Withdrawal 4 PAYG withholding tax of $69,355 was withheld by Downer on this Withdrawal 5 PAYG withholding tax of $51,895 was withheld by Downer on this Withdrawal Witnesses 37Mr Gillies called three witnesses in his case. They were himself, the Chief Financial Officer, Geoffrey Bruce, and Tom Ko Yuen Lau. Each swore at least one affidavit and gave oral evidence. Further affidavit evidence was adduced from Michael Helin and Peter Boyle in relation to the discovery of a note, not originally discovered, of the meeting of 1 August 2007, and the value of a motor vehicle, respectively, and were not subject to cross-examination. 38Both the plaintiff and defendant adduced expert evidence. Paul Lyon, accountant, was qualified by Mr Gillies and Jenny Wheatley, accountant, was qualified by Downer. 39There are seven volumes of documents, representing a tender bundle of material relied upon by either or both Mr Gillies and Downer. The seven volumes were marked Exhibits 1 - 7 respectively, as a matter of convenience. The first volume of that bundle includes documents that are not adduced for the purpose of the truth contained in the documents and includes pleadings and particulars. 40As a result of the operation of Schedule 7(6) of the Uniform Civil Procedure Rules 2005, and the standard directions and practice notes, the two accountants conferred and compiled a joint report (Exhibit 2, page 300a-300dd). As a result of that process, there was no substantial disagreement between the experts. 41Mr Lau is a Director of Downer and was the only Director called to give evidence. He was Chairman of the Board up until 2003 and was, at all relevant times, a member of the Remuneration Committee, once established. The cross-examination of Mr Lau was confined and the submission of each party is that the Court should consider him an honest witness. Mr Lau gave evidence to the best of his recollection and as completely and honestly as he could, and I so find. 42The submission of Downer was that the Court should reject (except to the extent otherwise corroborated by independent evidence) the evidence of Mr Gillies and Mr Bruce. That evidence is not rejected. The demeanour of each of them, the style of their answers, some of which were, in their view, inconsistent with their interests, was, in my view, plainly an honest recollection of the facts as they occurred and their state of mind (to the extent that was an issue) when the events occurred. I consider that Mr Gillies was an honest, forthright witness, whose recollection of events, while not perfect, was fundamentally accurate. I have the same view of Mr Bruce. 43To the extent that the rejection of the evidence of Mr Gillies and Mr Bruce involves the acceptance of a conspiracy between the two to assist Mr Gillies' case before the Court, I reject that conspiracy. Mr Gillies and Mr Bruce are close professional acquaintances, and probably friends, who, notwithstanding the departure of Mr Gillies from Downer, have continued a professional relationship. Nevertheless, I do not consider that either one of them lied on oath, exaggerated or reconstructed in a way that deliberately or unintentionally improved the case that was sought to be put before the Court. I will deal, more fully, with their evidence later in these reasons. 44The attack on Mr Gillies' conduct and the attack on Mr Gillies' claim in these proceedings does not depend on the lack of veracity or accuracy of his evidence, or the evidence of Mr Bruce. Further, except in the broadest sense, Mr Gillies' case does not depend upon the accuracy or reliability of his or Mr Bruce's evidence. 45Downer's submission as to the credibility of Mr Bruce's evidence is based upon a submission that his evidence is "glaringly improbable". Further, Downer submits that Mr Bruce, as the Chief Financial Officer of Downer, must have been aware that the arrangements he oversaw with Mr Gillies as to his accrued bonus were inconsistent with the tax laws. Yet, Mr Bruce permitted those arrangements to be effected. Associated with this submission, Downer maintains that the lack of disclosure of these arrangements to the Board should be taken as evidence of conduct concealing Mr Bruce's involvement in wrongdoing and/or dishonesty. 46Downer submits, in relation to Mr Gillies' credibility, that, given Mr Gillies' background as an accountant, his alleged failure to appreciate the breach of Australian tax law and the balance in his accrued bonus pool were, again, glaringly improbable and the Court should draw the inference that Mr Gillies was a person not to be believed. 47I will deal later, as earlier stated, with the details of the operation of the accrued bonus pool and the balance at any particular time. That part of the reasons for judgment will deal with, albeit not on a final basis, the tax implications of the bonus pool arrangement, and the degree to which Mr Bruce and Mr Gillies were entitled to act in that way. It is sufficient, for present purposes, to note that I do not consider the conduct of either Mr Gillies or Mr Bruce to be, in any of the foregoing respects, dishonest, improper or inappropriate. 48Further, to the extent that Downer relies upon Mr Gillies' background as an accountant to submit that the failure to appreciate Australian tax law and the balance in his accrued bonus pool was glaringly improbable, the submission fails to appreciate a number of factors. 49First, Mr Gillies had worked as a CEO for over 20 years. Prior to that, Mr Gillies had worked as the Senior Executive Officer in a number of smaller operations associated with Downer. He had not worked as a chartered accountant for many decades. 50Secondly, when he did work as a chartered accountant, or learnt accountancy, he did so in the context of the laws of New Zealand. Without further evidence, I could not and do not draw the inference that as a consequence of his background as an accountant in New Zealand, Mr Gillies would be familiar with the intricacies of Australian tax law, particularly in the period of his employment. 51This proposition is not qualified by the fact that Mr Gillies completed his own tax returns. Those tax returns were relatively simple and embodied a reflection of the group certificate provided by Downer and, presumably, other independent income, for example, interest. The completion of a tax return of that simplicity does not involve the drawing of an inference that Mr Gillies was aware of the complexities of Australian tax law, such as would apply to the accrued bonus pool. 52Thirdly, in relation to his own employment situation, Mr Gillies was entitled to treat Downer as an employer that complied with its tax obligations and act accordingly. Mr Gillies, in his capacity as an employee of Downer, was not directly responsible for Downer's compliance with the tax law. The Court notes that Mr Gillies, in his capacity as CEO, was required to take responsibility for Downer's financial reports, as recently discussed by the Federal Court in Australian Securities and Investments Commission v Healey [2011] FCA 717 (Middleton J), but that does not involve the proposition that Mr Gillies was not entitled to rely on the advice of the Chief Financial Officer for internal purposes. 53Fourthly, Mr Gillies asked the Chief Financial Officer, Mr Bruce, what was the amount of money to his credit in the accrued bonus pool, was told an amount and acted upon that advice. He was entitled to do that. 54Fifthly, Downer increased Mr Gillies' base salary by amounts upon which Mr Gillies never drew. Mr Gillies disclosed an attitude that showed he was not significantly interested in some minor aspects of his personal financial affairs, although he was a person who enjoyed a lifestyle consistent with high earnings and high expenditure. 55Sixthly, as to the utilisation of Downer's credit facilities, I do not consider this arrangement inappropriate or improper. Mr Gillies was a person at the very top of Downer's staff. Others, for a variety of reasons, utilised the credit facility. They did so in circumstances where there were transfers from a variety of countries. 56By the arrangements that Downer made with Mr Gillies, Mr Gillies was initially employed in New Zealand, maintained a financial existence and interest in New Zealand by virtue of his continued membership of the New Zealand superannuation funds, and was transferred to Hong Kong and ultimately to Australia. In those circumstances it is to be expected that there would be a continuing need to transfer earnings from Australia for purchases overseas. There is no evidence before the Court, or upon which the Court could draw an inference or come to a finding, that the arrangement was effected at an actual cost to Downer, as distinct from a theoretical opportunity cost. On the contrary, the evidence before the Court is that Mr Gillies transferred such amounts as were required to cover the cost of the treasury facility, and if additional costs were incurred by Downer in the transaction or from the loss of interest, there is nothing to suggest that such costs would not have been, and/or were not, included in the reimbursement. Certainly, Downer has adduced no evidence of any such cost. 57In relation to the one major issue associated with Mr Bruce's credibility, namely, the lack of disclosure to the Board of the details of advances (or the process) from the accrued bonus pool, I do not accept that there was either a deliberate or unintentional failure to disclose the arrangements. The arrangements between Downer and Mr Gillies, as to Mr Gillies' accrued bonus pool, were known to the relevant staff members in the accounting section of Downer, were disclosed to the auditors and, it seems, to the audit committee of the Board of Downer. The submission, in effect, is suggesting some kind of dishonesty associated with a failure to disclose expressly and separately a credit arrangement relating to a maximum of $600,000 in any one year in a budget of $5.4 billion. 58Given the level of disclosure to the auditors and the audit committee, no criticism can be made of Mr Bruce in that regard. Further, the amounts in question were bonuses granted by the Remuneration Committee and the Board and the delayed payment of the bonus was expressly notified to the Board. The submission as to "non-disclosure" relates only to the arrangement for the utilisation of those amounts, by way of short-term advance. 59Lastly, in relation to the immediately foregoing issue, there is no suggestion that the delay in receipt of bonus by Mr Gillies would have had the effect of reducing the tax paid on the bonus. Given Mr Gillies' income, and consequent marginal tax rate, the tax payable on the bonus in any one year, or when accumulated, would be identical. The inference available from the failure to call evidence 60As has been stated, Downer decided not to adduce any oral testimony and did not call any witnesses. It was entitled not to call witnesses. The burden of proof for the breach of contract rests, on the balance of probabilities, with the plaintiff, Mr Gillies. 61It has been urged upon me by Mr Gillies that much can be inferred from the failure by Downer to adduce evidence that was available to it: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. Significant aspects of the evidence of Mr Gillies and Mr Bruce relate to conversations between each of them and members of the Board and/or the attitude of the Board and/or Remuneration Committee. 62The inferences that arise from the judgment of the High Court in Jones v Dunkel, supra, are a matter of common sense. It was so described by the Court of Appeal in Fabre v Arenales (1992) 27 NSWLR 437. Nevertheless, a party to proceedings that does not bear the burden of proof is entitled to say and do nothing. The inference that arises from the principles adumbrated in Jones v Dunkel, supra, does not fill a shortfall in the evidence; its purpose is only to allow the drawing of an inference more comfortably than would otherwise be the case. In Jones v Dunkel, supra, the High Court (per Windeyer J, at 321) cited with approval two passages from R v Burdett (1820) 4 B & Ald 95; 106 ER 823. The passage from the judgment of Best J was to the following effect: "Nor is it necessary that the fact not proved should be established by irrefragable inference. It is enough, if its existence be highly probable, particularly if the opposite party has it in his power to rebut it by evidence, and yet offers none; for then we have something like an admission that the presumption is just." (R v Burdett, supra, at 122; 883.) (This is said in the context of criminal proceedings, for which now see RPS v R [2000] HCA 3; (2000) 199 CLR 620, hence the reference to burden of proof higher than the civil standard.) 63As earlier stated, the Court of Appeal described the process as "plain commonsense": Fabre v Arenales, supra. It said of the above passage within the larger judgment of Windeyer J in Jones v Dunkel, supra: "There is in this nothing esoteric or peculiar to legal reasoning. It is, as Windeyer J said, 'plain commonsense'. A factual inference (if A, B, C exist,Z exists) is open if, to quote the words of Knox CJ and Dixon J, 'human experience would be contradicted if' Z did not exist: see the cases referred to in Jones v Sutherland Shire Council (at 222 et seq). It follows that the inference will or may be drawn if general human experience (plain commonsense) will not be contradicted if the inference be drawn." (Fabre v Arenales, supra, at 445 per Mahoney JA, with whom Priestley and Sheller JJA agreed.) 64The foregoing references to witnesses, and the findings of fact in these reasons, do not depend, greatly or at all, on the inference described by the High Court in Jones v Dunkel, supra. Nevertheless, the reasoning process described by the High Court in Jones v Dunkel, supra, provides comfort in the findings otherwise made as to the terms of the conversations to which reference has been made and the attitude of the Remuneration Committee and the Board of Downer. 65It would have been very easy for Downer to have adduced evidence as to the attitude of the Board, and/or its members, to the use of the treasury facility in relation to purchases in New Zealand. The Board contracted with Mr Gillies to bring him from New Zealand and, at the end of his employment, to return him to New Zealand. It understood from the terms of its agreement with Mr Gillies that he would continue to have financial and personal interests in New Zealand, including Mr Gillies' superannuation arrangements. It must have expected that Mr Gillies would have a continuing need to be involved in transactions in New Zealand. Downer adduces no evidence that the Directors were unaware or disapproved of the use of treasury facilities for Mr Gillies in relation to New Zealand transactions. 66Other members of staff were entitled to use the treasury facilities in circumstances where the transactions were part of the process of relocation to and/or from Australia. The overwhelming inference is that, if the Board were to have been aware of the transactions, it would not have opposed them or objected to them. That inference is available, even without Jones v Dunkel, supra. The failure to call evidence on this issue supports the drawing of the inference. 67The other issues, associated with the car loan and its terms, and the accrued bonus pool should be treated, and are treated, in the same way. The information that was before the Board, even on a formal basis, makes clear that the Board did not care when it was Mr Gillies drew down or received the benefit of the bonuses that they were prepared to award. So long as the process adopted was lawful and did not occasion any cost to Downer that was not approved, the overwhelming inference is that the Board, and Downer, did not object to the process implemented, and would not have objected to that process, if they were aware of all of the details (assuming, in the foregoing, that the process was lawful). Was the Addendum part of the contract of employment? 68The evidence establishes that the Board of Downer discussed the effect of the Executive Option Scheme to which Mr Gillies was entitled and a scheme in substitution for that scheme, being what has been referred to as the POS. 69Mr Lau and Mr Gillies both testified that the options to which Mr Gillies was entitled, and which were approved by shareholders, were not taken up because of the Board's representation to Mr Gillies that he would be entitled to a POS no less beneficial than the Executive Option Scheme to which he was otherwise entitled. Relying upon that representation, Mr Gillies did not take up the options to which he was entitled within the time necessary for the options to be effective. There is no doubt that, in reliance upon the representation, Mr Gillies acted to his detriment. 70It is unnecessary to determine whether, as a consequence of the foregoing, Downer is estopped from denying Mr Gillies' entitlement to the POS. It is unnecessary because, as a matter of fact, I find that the POS embodied in the Addendum was part of Mr Gillies' contract of employment. 71On 23 October 2001, Mr Lau, then Chairman of the Board of Downer, wrote to Mr Gillies informing him of the agreement in principle by the Board of Directors. Mr Lau had signed the Addendum. The Addendum, summarised previously, granted Mr Gillies "Phantom Options" in the manner already described. 72As already stated, the letter of 23 October 2001 expressed a condition, being that the Remuneration Committee would ratify the Addendum. The contract of employment required amendments to the terms of employment to be agreed by the Chairman of the Board and ratified by the Remuneration Committee (see Clause 12). Mr Lau was, as earlier stated, Chairman of the Board and, as a consequence, a member of the Remuneration Committee. He did not attend all meetings of the Remuneration Committee, which operated informally and on an ad hoc basis. The Remuneration Committee met once or twice per year, as and when the need arose. 73At the time that these events were occurring Mr Lau represented corporate interests that owned over 96% of the shares in Downer. According to Mr Lau's evidence, Mr Kent (another member of the Board and Remuneration Committee) was given the task of implementing the Addendum. Mr Bruce, who attended the Remuneration Committee meeting on 19 February 2002, noted that the meeting was convened in order to ratify the attached amendment to the employment contract of Mr Gillies. That note was contemporaneous. 74Minutes of Remuneration Committee meetings were not usually taken and there is no evidence inconsistent with the handwritten note of Mr Bruce. The understanding of Mr Lau, Mr Gillies and Mr Bruce was that the Remuneration Committee had ratified the Addendum. 75That ratification by the Remuneration Committee was conditional on the receipt of an advice from legal practitioners. An advice was received. The evidence is overwhelming to the effect that the Addendum was ratified and formed part of the employment conditions of Mr Gillies. It had been agreed, in principle, by the Board. 76Further, there is other evidence corroborating the inclusion of the Addendum in Mr Gillies' employment conditions. Downer's solicitors forwarded drafts of the Addendum to Mr Gillies, prior to the final version. Mr Gillies' evidence, which evidence was in this respect unchallenged, was that Mr Kent confirmed that the Remuneration Committee had approved the Phantom Option arrangement. Mr Kent was not called to controvert this assertion. This accords with the evidence of both Mr Gillies and Mr Bruce. The letter of 23 October 2001, sent to Mr Gillies, was copied to the other two Board members of the Remuneration Committee, Messrs Kent and Roche. Yet, notwithstanding his position as Chairman, no one notified Mr Lau that the Addendum that he had signed had not been ratified. Subsequent conduct of both Mr Gillies and Downer was based upon the assumption that the Addendum formed part of the terms of employment. While there may be some doubt as to whether the subsequent conduct may be used to determine the terms of the contract of employment, the direct evidence otherwise available renders the drawing of an inference as to its ratification open and the Court, as has been said, draws that inference. 77Further, Downer has called no evidence, including evidence from Mr Kent or Mr Roche, to the effect that the Addendum was not ratified. In those circumstances, the Court is more confident, if more confidence were required, in drawing the inference as to the ratification of the Addendum. The Addendum also formed part of Mr Gillies' employment file at Downer. 78Against the foregoing corroboration, there is evidence that Mr Bruce wrote to Mr O'Callaghan, Downer's Chairman, in response to a request for Mr Gillies' contract of employment, by enclosing a copy of the original Agreement, but not the Addendum. 79Further, the annual reports for Downer did not disclose either a current or contingent liability in relation to the Phantom Options, nor disclosed such amounts as part of remuneration of its CEO. None of those factors, on the evidence before the Court, overtakes the direct evidence of two persons who attended the Remuneration Committee meeting that ratified the Addendum, the effect of the letter signed by the Chairman of the Board, and the subsequent conduct of each of Downer and Mr Gillies that assumed that the Addendum was operative. Operation of the bonus pool 80As earlier stated, the Remuneration Committee and/or Board of Downer declared a bonus payable to Mr Gillies. The first such declaration occurred in December 1998 and related to the year ending 30 June 1998. The bonus was the subject of reporting to the shareholders, but was not paid until Mr Gillies exercised an election for the payment of the bonus. More than one election could issue for part or all of the accrued bonus pool. 81It seems, from the timing of the announcement or declaration of the entitlement to a bonus and the manner in which it was treated immediately thereafter, that the arrangements in relation to the bonus were made prior to the first declaration, i.e. prior to 15 December 1998. 82The evidence points, in my view, to an arrangement with the following effect. I am also of the view that the conduct of the parties is consistent with the evidence adduced as to the arrangement. (a) An agreement was made between Mr Bruce, on behalf of Downer and Mr Gillies, the effect of which was that when and if a bonus entitlement arose, that entitlement would be noted, as a journal entry, but no amount would be placed into a separate account or paid to Mr Gillies. (b) The accumulated entitlements would remain unpaid until such time as Mr Gillies opted to receive a bonus, on the understanding that such an option may not ultimately be exercised, or may be exercised only in respect of some of the amounts standing to Mr Gillies' credit. (c) Mr Gillies could borrow an amount up to the accumulated total of bonus entitlements in the following circumstances: (i) the amount borrowed would be a short-term loan; (ii) the amount borrowed, if still outstanding, would be repayable on call and without written notice; (iii) no interest would be payable by Downer to Mr Gillies for any amounts outstanding to his credit in the accrued bonus pool and no interest would be payable by Mr Gillies for any monies advanced to him by way of loan; (iv) the amounts advanced were intended to be for short-term loan purposes and, if payment were not made on call, would operate as a set off against any entitlement (of any kind) otherwise due and owing to Mr Gillies, including any amount standing to the credit of Mr Gillies as accrued bonus; (v) an option to receive the bonus could be exercised as often as desired and for any amount up to the total standing to Mr Gillies' credit, less any PAYG tax. 83Mr Lau attested to the fact that Mr Gillies disclosed to the Board, at a meeting, that he had arranged for the payment of bonuses not to be paid for some period, even though he was entitled to receive them. According to Mr Lau, there was not a particularly lengthy discussion about the merits of the arrangement, nor how the matter was treated on the books of Downer, but no objection was raised to Mr Gillies delaying the payment of bonuses awarded to him. Each party accepts Mr Lau's evidence. As earlier stated, the spreadsheet recording these arrangements was provided to the auditors and I do not consider that there was any attempt to conceal the arrangements that were made. On the contrary, it seems all ordinary steps were taken in relation to the amounts and, in some respects (such as the fact of the delay) there was a report to the Board beyond that which was strictly necessary. 84The details of the conditions upon which an advance from the accrued bonus pool was provided were not recorded. The Court has inferred from the expressed attitude and the conduct of the parties, what those conditions were (see [82]). They should have been recorded. Nevertheless, the failure to record the precise details does not evidence dishonesty by either Mr Bruce or Mr Gillies. Rather, it was recognition that the amount borrowed was an amount, generally, that Mr Gillies could require to be paid to him and to which, at the exercise of that option, he was entitled. 85The exception to the foregoing, and an issue raised by Downer, was the advance of $1.2 million in September 2002. At the time that the last mentioned advance was made, it was $200,002 over the amount standing to the credit of Mr Gillies in the accrued bonus pool. The money was paid for Mr Gillies' private purposes and occurred in the following circumstances. Mr Gillies asked Mr Bruce whether an amount of $1.2 million was available as an advance. Mr Bruce confirmed that it was. The amount was advanced and, when it was realised that there was a shortfall of $200,000, an amount of $250,000 was "repaid". Tax implications 86Each of the independent accounting experts, qualified by different parties to the proceedings and who testified in these proceedings, accepted that such an arrangement did not incur PAYG debt, and the Court's preliminary view is that a PAYG debt did not arise at the time that the bonus was awarded or the entitlement was noted as a journal entry. Downer was required to withhold PAYG tax only when Mr Gillies elected to receive the amounts in question as bonus, and Mr Gillies was entitled to obtain an advance (on the foregoing specified arrangement) for all or any monies standing at the time to his credit, with the amount of PAYG withholding tax being unavailable only at the point in time that it was required to be forwarded to the ATO. 87The reasons for that preliminary view relate to the proper interpretation of the Income Tax Assessment Act 1997 (Cth) (hereinafter "ITAA") and the Taxation Administration Act 1996 (hereinafter "TAA"). It should be noted that Mr Gillies' tax return was, as is usual for employees, calculated on a cash basis (as distinct from an accruals basis): Deputy Commissioner of Taxes (SA) v Executor Trustee & Agency Company of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108 at 158. Ordinarily, in those circumstances, the amount received by way of remuneration, including salary and bonuses, is the income upon which tax is calculated and from which an employer must deduct PAYG tax (see s 6-5 ITAA and s 10-5 of the TAA) and, except where the ITAA otherwise provides, depends on the ordinary meaning of the word "derived": Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418 at 427-428, per Gibbs J. 88The difficulty with deferred payment arrangements is determining whether income has been derived and whether it has been applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs: s 6-5(4) of the ITAA. In circumstances where the agreement between an employer and employee concerns that part of the annual income to which the employee is entitled, which is foregone and payment thereof deferred, such payment, ordinarily, would be income and derived in the year in which it was due and payable. However, there are exceptions. Salary sacrifice is one such exception. 89Where the entitlement, as here, is yet to be determined (and may not be determined in any one year) and arrangements are made that, if and when it were determined, it will be paid only at the option of the employee, the income is not ordinarily (but for the provisions of the ITAA) derived in the year in which the entitlement is announced, but in the year in which the entitlement is paid. 90However, as already mentioned, under the provisions of s 6-5(4) of the ITAA an employee's income is taken to have been received in the year it is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. In the current circumstances, the taxpayer has not, after the entitlement has accrued, directed that the amount should be dealt with in any way, unless and until such time as the employee elects to receive the amount. The declared bonus has not been applied, accumulated or invested for the benefit of the taxpayer and remains cash in the hands of the employer: see Tax Determination TD 93/242. Rather, the arrangement between Downer and Mr Gillies can be better described as a salary deferral arrangement, albeit that the "salary" is a bonus that may or may not be determined in any particular year. 91As a consequence of the foregoing, the bonus that was determined by the Board was not salary or wages derived by Mr Gillies in the year in which it was declared. Further, the advances of loans provided by Downer to Mr Gillies were not an amount equal in value to the income that was otherwise deferred and were intended to be, and were, as a matter of fact, repaid within a short period. Moreover, the loan was not used to acquire an income-producing asset; the monies were not held in a separate account on trust or otherwise; and were not paid until Mr Gillies exercised an option for payment or receipt as bonus. 92With reference to the provisions of Part IVA of the ITAA (see TD 2010/11), the amount of the bonus, or the amount standing to the credit of Mr Gillies in the accrued bonus pool, was never derived by Mr Gillies, never paid to Mr Gillies until the option was exercised, and PAYG was due to be withheld only at the time that occurred. 93The foregoing raises issues associated with fringe benefits tax, which, do not require final determination. Nevertheless, the monies received by way of loan were for a very short period and were generally on a commercial basis. The commercial basis was the quid pro quo associated with the capacity of Downer to utilise monies that would otherwise have to be paid out, without interest, except to the extent a short-term loan was provided. The only exception to the aforementioned was, as earlier stated, the loan for one month which was taken out in circumstances where the monies borrowed by Mr Gillies exceeded the amount Downer would have otherwise been required to pay. Given the terms of the advances and the misunderstanding as to the balance available for lending, it would be difficult to categorise such an arrangement as a fringe benefit of the kind that would be subject to fringe benefits tax. 94No debt arose to the Australian Taxation Office from Downer, and no breach of the tax laws was occasioned by the arrangement between Downer and Mr Gillies. Even if there were a tax breach, it is not one that has been either carelessly or deliberately occasioned. Further, it would seem, pursuant to the Taxation Determination TD 2010/11, the salary deferral arrangement between Mr Gillies and Downer would not fit the Australian Taxation Office's view of a scheme to which the avoidance provisions in Part IVA of the ITAA applied. This conclusion accords with the view expressed by each of the expert accountants who gave evidence in the proceedings (see Transcript, p 244, line 38-44), albeit not in the detail to which I have now referred. Did Mr Gillies engage in any misconduct or breach his duties as CEO of Downer? 95Downer raised the issue associated with the treatment of the accrued bonus pool in its cross-claim and/or defence, as part of its allegation that Mr Gillies engaged in misconduct. The Court is not satisfied that the foregoing amounts to misconduct or fraudulent activity of a kind that would give rise to the capacity by Downer to terminate Mr Gillies' employment with immediate effect (see Clause 4.1(c) of the Agreement, above). I will deal, later in these reasons, with the principles applicable to summary dismissal for misconduct and the interpretation of the termination provision in the contract, but I find that, as a fact, in relation to the foregoing, no dishonesty, in the ordinary sense, has occurred. That finding does not depend upon issues associated with the burden of proof. Simply, Mr Gillies relied upon the information provided to him by Mr Bruce, who, in that respect, represented Downer. Mr Bruce made an honest mistake, which, when discovered, was notified to Mr Gillies, who corrected the situation. 96The submission that Mr Gillies engaged in misconduct was also put, either as part of the foregoing considerations or in the alternative to them, on the basis that Mr Gillies' arrangement in relation to the accrued bonus pool incurred an unfunded PAYG debt by Downer for the amounts credited. It is unnecessary to determine finally whether such a debt was incurred. It is sufficient to note that Mr Gillies adopted an arrangement that was suggested as appropriate by those in Downer who had greater familiarity with Australian tax law and the requirements of Downer's accounts. Acceptance of that arrangement does not disclose misconduct. 97On any analysis, given the expert opinions before the Court, it cannot be said that Mr Gillies was either careless or acted unreasonably in assuming that no PAYG liability arose prior to the drawdown of the bonus as remuneration, rather than as a loan. I have already commented that the conduct in question was not dishonest, within the ordinary meaning of that word, and, as a consequence of all of the foregoing, I do not consider that the arrangements as to the accrued bonus pool amounted to misconduct on behalf of Mr Gillies, nor grounds for his dismissal, summary or otherwise. 98The foregoing does not imply that a failure to notify a company's board of management, or the chairman, of dealings with the company's assets would not, ordinarily, be misconduct or inappropriate for purposes of the Corporations Act 2001 (Cth): see Fraser v NRMA Holdings Limited (1995) 55 FCR 452 at 466A-B; Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 62 ACSR 1; Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [7178] et seq; Healey, supra; Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287. 99The duty on a CEO and/or Managing Director toward the Board is at least as strict as that contemplated by the Full Court of the Federal Court of a director toward member for the purpose of a general meeting: Fraser, supra. Further, the duty of care imposed by s 180 of the Corporations Act would, in ordinary circumstances, require disclosure of all financial issues in which there is a potential conflict of interest. Nevertheless, in the current circumstances, I do not consider anything done by Mr Gillies to be with a dishonest intent and I have regard to the disclosure to Mr Bruce (and thereby strictly to Downer). The conduct of Mr Gillies is not misconduct for the purpose of the Agreement for all the considerations in these reasons, including the following (if not otherwise made clear). 100First, the amounts involved are, relative to either the remuneration and/or monies with which Downer was otherwise concerned, not significant. Secondly, the inexorable inference is, if the Board were informed, it would have approved the transactions. Thirdly, there is no evidence that the transactions actually cost Downer anything. 101Furthermore, an employee may be requested or directed to perform an unlawful act by the employer. If so, the employee may refuse. But if the employee were foolish enough to perform the task, the employee may be acting illegally, but is not necessarily in breach of the contract under which work is performed such as to give rise to a right of the employer to effect summary dismissal. Whether or not it was misconduct would depend, inter alia, on whether there was actual dishonesty, knowledge of unlawfulness and the seniority or duties of the position. 102Considering the foregoing, and the other issues to which reference has been made, Mr Gillies' conduct was not misconduct in the context of the Agreement and did not give Downer a right to dismiss summarily. 103Lastly, in this respect, the distinction here made between misconduct under the Agreement and the duties on the CEO and his position as Managing Director ought to be explained. As Middleton J explained in Healey, supra, the statutory duty of directors extends to the application of their own minds to, and carrying out a careful review of, published financial and other statements, to ensure they reflect the directors' own knowledge of the company's affairs and do not omit material matters known to them or ought to be known: Healey, supra, at [13]. 104The reasons of Middleton J cited with approval and relied upon the judgment of Austin J in ASIC v Rich, supra, see Healey, supra, at [180] - [182]. The reasons of Austin J in Healey, supra, rely on the reasons of Gzell J in Macdonald (No 11), supra. I agree, with respect, with each statement of principle. A director must take all reasonable steps to ensure that the duty imposed by s 180 of the Corporations Act 2001 is fulfilled. That duty requires care and diligence of a reasonable person, which, in part, at least, may be evidenced by the conduct of others engaged in that field. 105In this case, Mr Gillies informed the Board of the delay in his accrued bonus. The Board approved that arrangement. Mr Gillies made enquiries of the responsible officer of this current balance and acted on that advice. There was no failure to inform or to take reasonable steps to enquire in relation to the accrued bonus pool. 106Furthermore, since Mr Gillies did not derive a benefit from deferring his bonus payments, no conflict of interest arose. He did not exploit his position as CEO for personal gain at the detriment of shareholders. Considering the general remarks of Middleton J recent judgment in Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003 concerning the punishment of directors, even if Mr Gillies breached his duty as a director, he should not be punished for taking an honest and diligent approach. 107The Board itself awarded each bonus, which was reported in the annual report. The only possible breach of directors' duties arises from the failure to report in the annual report the existence and amount of the POS. This was an arrangement devised by a member of the Board and approved by the Board. It seems (although the advice is unavailable) that legal advice confirmed the absence of a requirement to disclose the Scheme in Downer's annual reports. In any event, the POS replaced the Executive Share Option Plan and was precisely to the same value and deliberately designed to be so. The Executive Share Option Plan was reported to, and approved by, shareholders, as was the grant of 3 million share options to Mr Gillies. If there were, in this, a breach of s 180 of the Corporations Act, or any other directors' duties, it was not a breach by Mr Gillies. He was merely obeying directions in his capacity as an employee of Downer. If the transactions were a breach of the Corporations Act (or some other statutory regime), which I doubt, they were transactions countenanced by Downer, either expressly or impliedly and in some respects, both. Thus, it is not misconduct in employment. The car loan 108As already stated (see [14], supra) the Agreement required Downer to provide Mr Gillies with a fully maintained (including petrol) BMW 5 Series motor vehicle for his sole use. The motor vehicle was never provided. Mr Gillies does not allege breach for the non-provision of the motor vehicle in accordance with the provisions of the Agreement. Rather, Mr Gillies did not consider the provision of a motor vehicle in accordance with the Agreement appropriate and did not arrange for the provision of such a vehicle, at least for the period from 1997 until 2004. 109In 2004 arrangements were made whereby Downer paid $342,000 for a Series 7 BMW for Mr Gillies. Downer, in its cross-claim, pleads that this money was lent to Mr Gillies and claims its repayment together with significant interest. 110In his affidavit of 15 March 2010, Mr Gillies refers to the arrangements in relation to the loan and the purchase of the BMW 7 Series. The affidavit is in the following terms: "46. In or about February / March 2004, I wished to obtain a new motor vehicle and reviewed this issue with the directors which [sic] decided (in the manner set out in paragraphs 47 - 54 below) that rather than have Downer provide me with a motor vehicle (in accordance with my contract of employment), that Downer would loan me an amount necessary to purchase a BMW Series 7 motor vehicle. 47. On or about February / March 2004 I attended a meeting of the directors during which they approved the making of a loan to me so that I could purchase a BMW Series 7 motor vehicle. The loan was to be structured such that I was required to pay the interest on the loan at a commercial rate of interest. The loan was also to be secured against only the motor vehicle, and to be a 'non recourse' loan. 48. The discussion that occurred at the directors meeting referred to in paragraph 47 was in words to the following effect: Me: 'As you know, I have for a number of years now bought two motor vehicles myself and I have borne the depreciation costs on those motor vehicles, notwithstanding that my contract provided for me to be provided by Downer with a fully maintained company car. I feel it is now time for the company to honour the agreement and provide me with a motor vehicle and to bear the depreciation costs of that. I have been talking this issue through with Geoff and what we have come up with is that Downer can loan to me the money to buy the motor vehicle. I can then buy it and at the end of the ownership period I can give the car back to Downer in discharge of the loan. Obviously there will need to be a provision made on the loan agreement, however, that should be able to achieve the result sought with [sic: read "without"] unnecessarily incurring a large FBT liability for Downer. We are getting advice from PriceWaterhouseCoopers to see if FBT will be incurred by Downer.' 49. All the directors at the time and in particular I recall Barry O'Callaghan and John Humphreys nodded and agreed. 50. Advice was subsequently obtained from PriceWaterhouseCoopers. 51. In order to compensate me for the fact that I would be required to make interest payments on the loan, my base remuneration was increased. Annexed to this affidavit and marked with the letter 'N' is a true copy of a letter dated 4 May 2004 I sent to Barry O'Callaghan, who at the time was Chairman of the Board, on or about 4 May 2004. Annexed to this affidavit and marked with the letter 'O' is a true copy of a letter dated 12 May 2004 I received from Mr O'Callaghan on or about 12 May 2004." 111In August 2007, Mr Gillies offered the return of the motor vehicle, purchased in accordance with the foregoing alleged arrangement, in full satisfaction and discharge of the loan. 112In his affidavit of 13 October 2010, Mr Gillies added to the statement made to the Board, as he recalled it, attesting to the fact that he said: "As far as paying interest on the loan is concerned, to ensure that I am no worse off as a result, there will need to be an adjustment made to my remuneration to cover the costs of the interest payments." (Affidavit of Stephen Gillies, 13 October 2010, at [14].) 113According to Mr Bruce (affidavit of 12 March 2010), Mr Gillies confirmed these arrangements with him. Further, Mr O'Callaghan, Chairman of the Board of Downer by 2004, confirmed to Mr Bruce that he and Mr Gillies had a conversation. Mr O'Callaghan said to Mr Bruce that Mr Gillies "explained to me [Mr O'Callaghan] a loan structure whereby he [Mr Gillies] acquires the vehicle he [Mr Gillies] is entitled to under the terms of his employment contract in the form of a limited recourse loan. As a lawyer, my boy, I [Mr O'Callaghan] do not profess to fully understand the tax issues and the reasons for it being structured in that way but have approved the loan. Please proceed." Mr O'Callaghan declined an offer by Mr Bruce to explain the tax structure. 114On 4 May 2004, Mr Gillies wrote to Mr O'Callaghan the effect of which was to note the discussion and agreement of the Remuneration Committee and to seek approval of a salary increase, a bonus and to confirm that, during the course of 2004, Downer "will make available a loan secured against any assets purchased such as a motor vehicle, where commercial rates of interest will be paid. The value of this loan facility should not exceed $350,000" (Exhibit 2, p 1173). The loan was confirmed by letter of the same date (Exhibit 2, p 1174). Mr Gillies alleges that this correspondence corroborates the agreement reached as to the loan. 115The terms of the report to the Board and the agreement between the Board, on behalf of Downer, and Mr Gillies as to the limited-recourse or non-recourse loan are not controverted. Mr O'Callaghan was available, as were other members of the Board, and could have given evidence to dispute these arrangements. 116There was agreement, in terms of the discussion between Mr Gillies and the Board under which the Board provided a loan on which commercial interest rates applied. Mr Gillies' salary was increased to cover (after tax) the amount of those interest payments. Further, the loan was a non-recourse or limited-recourse loan and the amount outstanding would be fully satisfied by the return of the car. There is, in this context, no difference between a limited-recourse loan and a non-recourse loan. 117The allegation by Downer, in its cross-claim, that the loan was independent of any arrangement and was required to be repaid in full including interest is an improbable one. It ignores the contractual obligation of Downer to provide, at the time of the execution of the Agreement, and throughout the ensuing period of employment, a BMW 5 Series to Mr Gillies for his sole use. It is likely that, if a car were provided in accordance with the contract, there would have been agreement between the parties, in subsequent years, to improve the quality of the car to be provided. 118Evidence before the Court suggests that expensive cars were provided to other senior executives. At the very least, it is glaringly improbable that a loan of this kind would be granted to Mr Gillies, as the CEO, to be repaid in full, without any credit for the contractual obligation to provide a motor vehicle. The loan is satisfied by the return of the motor vehicle and the cross-claim, in this respect, is dismissed. Termination of employment 119As earlier stated, in August 2006, Downer announced that it would be downgrading its profit forecast for the 2005/2006 financial year. This was occasioned by a provision for losses made on the construction of a mineral sands project in Victoria and other matters. Further downgrading of profits occurred in mid-2007. The events of 1 August 2007 120On 1 August 2007, the Board of Downer met, to discuss, amongst other things, the announcement relating to the profit forecast for the 2006/2007 financial year. Mr Gillies disagreed with the extent of the profit downgrade, which disagreement is irrelevant for present purposes. At the conclusion of the meeting, Mr O'Callaghan, then Chairman of the Board, called Mr Gillies aside and spoke with him. In attendance during that discussion were Mr Gillies, Mr O'Callaghan and Mr Peter Jollie (then Deputy Chairman of the Board). Mr O'Callaghan, according to Mr Gillies, said to Mr Gillies words to the following effect: "The market will call for accountability, and that must be you. I want you to stand down. Here is a draft press release that we've prepared. Please review and we will take comments from you up until tomorrow morning when we plan to advise the market." 121Mr O'Callaghan, as reflected in the foregoing, gave Mr Gillies the draft press release and Mr Gillies, relevantly, responded by commenting on the appointment of Mr Brent Waldron as temporary CEO and suggested a slightly different timing, in the following terms: "If you want to offer me to the market as being accountable, I would suggest that I announce [the] results, complete the process through August and at a convenient time in the future we will organise a more orderly transition process." 122Mr O'Callaghan did not accept that proposal and said: "In terms of stepping down, could you please stay out of the office tomorrow to allow Brent the freedom to deal with staff in the announcement process." The conversation continued in the following terms: Mr Gillies: "Sure, clearly you want me to stand aside. How do I deal with my personal matters?" Mr O'Callaghan: "If you would clear with Peter [Jollie] your future attendance at the office." Mr Jollie: "I'll be available to provide assistance on access to your personal matters." Mr Gillies: "Thank you Peter but I believe that you, Barry, are my chairman and since I report to you, you should handle the future process. You have my assurance that I'll act in a professional and mature manner. However, I do not regard this as a resignation process and will be relying on the provisions contained in my contract which provide for entitlements relating to such things as termination. I will work with Brent as needs be ..." (Affidavit of Stephen Gillies, 15 March 2010, at [64].) 123There is a more or less contemporaneous note, the discovery of which was initially controversial, that Mr Gillies made of this conversation (Exhibit 2, p 297-298). The note is relevantly consistent with the terms of the conversation recited in the affidavit and above. 124The media release, a draft of which Mr O'Callaghan gave to Mr Gillies, was in similar terms. Relevantly, in relation to the arrangements between Downer and Mr Gillies it was in the following terms: "Management change The Board and Managing Director Stephen Gillies have agreed that he will step down from the company, effective immediately. Mr Gillies will be available to the company as a consultant for a further three months to facilitate an orderly transition. 'I have greatly enjoyed my time at Downer EDI and am very proud of what has been built. The time is right for me to move on to new challenges. The time is also right for Downer EDI,' said Mr Gillies. The Board wishes to thank Stephen for his service to Downer EDI over 19 years, 11 as Managing Director and CEO. Under his stewardship Downer EDI has transformed from a small company with a narrow shareholder base and a high portion of one-off revenue, to being Australia's leading provider of engineering services for essential infrastructure with a largely annuity based revenue stream. Revenue has grown from $1.3 billion in June 2000 to over $5.4 billion for the twelve months ended 30 June 2007. The Board has appointed Brent Waldron as interim CEO. ... Brent will be supported by a committee of the Board. The Board has commenced a global search for a new CEO and will consider both internal and external candidates." 125The evidence before the Court, and necessary inferences arising therefrom, make it indisputable that the press release was drafted some time prior to the Board meeting of 1 August 2007. Downer and Mr Gillies dispute whether the termination of employment was effected on 1 August 2007. Each relies on different aspects of the foregoing conversation and press release. The press release is a document of Downer, not Mr Gillies. 126Prior to the Board meeting of 1 August 2007, there was a telephone meeting of non-executive Directors at or about 9.45am. The original minutes or notes of that meeting were significantly altered, but, for present purposes, I will accept the finalised version. The original version stated the purpose of the meeting in the following terms: "The Chairman indicated that he thought it was appropriate and timely to consider whether the non executive directors retained confidence in the Managing Director." The altered version is in the following terms: "The Chairman indicated that the purpose of the meeting was to consider the performance of the Managing Director. The Chairman indicated that he thought it was appropriate and timely to consider whether the non executive directors retained confidence in the Managing Director. He invited comments from the non executive directors." 127Whatever be the precise terms of the stated purpose by the Chairman, or the precise terms of the discussion, the minutes note that the meeting: "RESOLVED that the Chairman and the Deputy Chairman attend the Corporate Office this afternoon and advise the Managing Director that he had lost the confidence of the Board and that in the circumstances the non executive directors believe that it was in the best interests of the company and the Managing Director for him to resign effective immediately. RESOLVED that the Chairman and the Deputy Chairman agree the terms of a market release with Mr Gillies to go out with the announcement tomorrow of the company's results. RESOLVED to offer Mr Gillies a three month consultancy with the company to assist with the transition to a mew [sic] management team." 128At the time that Mr O'Callaghan met with Mr Gillies he had been authorised by the Board to seek the resignation of Mr Gillies and to offer a three-months' consultancy. There is no resolution of the Board of Downer that would have authorised Mr O'Callaghan to dismiss Mr Gillies. Furthermore, there was no authorisation for a dismissal that would have been effective immediately, because of misconduct. 129In order for a consultancy to have been implemented, if Downer were to have dismissed (or were to have intended to dismiss) Mr Gillies with immediate effect, Mr Gillies would have been required to agree to that consultancy arrangement. There is no evidence before the Court that there was an agreement as to a consultancy or the terms of any such consultancy. 130The three-month consultancy period referred to by the Board in its resolution and mentioned in the press release coincides with the period of notice of termination that Downer or Mr Gillies was required to give, under the Agreement, in order to effect a termination of employment. Downer submits that the reference to three months is mere coincidence. 131No evidence has been adduced by Downer to controvert the conversation to which Mr Gillies attests. The Court accepts the terms of that conversation. No attempt was made by Downer to dismiss Mr Gillies, effective immediately. Rather, Downer requested Mr Gillies to resign. Such a resignation would require three months' notice, subject to a variation of the terms of the Agreement by the parties. 132The terms of the conversation, and the intention of Downer, as I infer it, was to have Mr Gillies resign and utilise the three-month period of notice as a consultancy for the purposes of continuity and a "seamless transition". Alternatively, the conduct effected a termination on notice by Downer, the notice period being utilised as a consultancy, again, for the purpose of a seamless transition to the new management team. There was no suggestion that the consultancy was on terms other than a contract of employment. 133No attempt was made by Downer to dismiss with immediate effect for misconduct. No attempt was made by Downer to pay an amount in lieu of notice. No reference was made to payment in lieu of notice. The foregoing are conclusions of fact, the legal consequences of which will be dealt with later in these reasons. That part of the conversation dealing with a direction to Mr Gillies "to stay out of the office tomorrow", and "clear ... future attendance" with Mr Jollie, is inconsistent with an immediately effective termination. Such a direction would have been otiose, if the termination of employment were immediately effective. 134Further, if Downer were of the view that it was dismissing Mr Gillies, it would have had no right to give him directions. Downer could have prevented him from attending the office, but the conversation is not consistent with a request by Mr Gillies for access to his personal items; it is consistent with a direction that Mr Gillies not attend (as if he were otherwise entitled so to do). 135As might be expected, correspondence ensued. Before dealing with that correspondence, I should recite that the Board of Downer met at 6.30pm on 1 August 2007, at which meeting the Chairman advised the Board that he and Mr Jollie had met with the Managing Director and that the Managing Director "had agreed to resign immediately as a Director of the company and the parties had agreed a draft ASX announcement to that effect. It was RESOLVED to accept the verbal resignation and to lodge the announcement with the ASX." There was further resolution relating to the appointment of Mr Waldron as a Director. There is no evidence before the Court, independent of this minute, that Mr Gillies resigned as a Director, except to the extent that agreement to stand down as CEO necessarily involved such a proposition. Nothing turns on the issue. 136The foregoing subsequent meeting related to the position of Mr Gillies (and Mr Waldron) as Directors of the company. It is noteworthy that it is not suggested, and was not suggested, at that meeting, that the Chairman and Mr Jollie had dismissed Mr Gillies. The Court draws no conclusions in relation to that omission. It seems to me that the subsequent Board meeting dealt with the requirements under the Corporations Act for the resignation and appointment of Directors and adds nothing to the evidence relating to the employment of Mr Gillies. If any inference were to arise from the subsequent Board meeting of 1 August 2007, it would be to confirm that no attempt was made by the Chairman and Mr Jollie to dismiss Mr Gillies. The subsequent correspondence 137On 3 August 2007, Mr Gillies wrote to Mr O'Callaghan. That correspondence was said to refer to the discussions on 1 August 2007, which, Mr Gillies described as "concerning [his] tenure as Managing Director and Chief Executive Officer of Downer EDI Ltd". The letter refers to the advice to the ASX that Mr Gillies had stepped down from the positions of Managing Director and CEO. The letter then states: "Without entering into further debate about the Company's decision, it seems plain that the consequences of this are that my employment has not been terminated and that I remain a director of the Company. You have required me not to attend the Company's offices until further notice and I am complying with this requirement. I have also noted that the ASX has been told (as indeed, have analysts and others) that it is proposed that I should continue in the employment of the Company as a consultant for a period of three (3) months. I am, of course, content to continue my employment for that period on the same terms and conditions as those which were applicable to me prior to 1 August 2007, save that I not be required to attend the Company's offices except as directed by you. ... As you will be aware, the continuation of my employment is a necessary pre-condition to my ability to exercise my right to receive a performance bonus in accordance with the addendum to my employment agreement dated 23 October 2001. In reliance upon the statements made to the ASX and to others that my employment will continue for a further period of three (3) months, I have not issued a notice of election. In my view, the underlying strength of the Company's performance is such that the share price of the Company is likely to improve during the period of my continuing employment and I seek your confirmation that the Company will not seek to resile from the representation, on which I am relying, that my employment will continue for a further period of three (3) months, and that the Company will not take any other step which would have the effect of denying to me the benefits which the addendum provides for. At the conclusion of this three (3) month period, it is a matter for the Company whether it wishes to retain my services for a further period, or to terminate my employment in accordance with the terms provided for in my contract of employment dated 31 May 1997. ..." 138Prior to the foregoing letter being received by Mr O'Callaghan, Mr Gillies spoke to Mr O'Callaghan to advise him of the letter. Mr O'Callaghan complimented Mr Gillies on the way things had been handled. Mr Gillies advised Mr O'Callaghan that the letter referred to Mr Gillies' entitlement under the POS. Mr O'Callaghan did not recall this agreement, at least initially, although, later, he started to recall some of it. 139On 6 August 2007, Mr Gillies met with Stephen Mockett, the group HR Executive, who was working with the new Board Supervisory Committee. This conversation involved Mr Gillies asserting his entitlements to the phantom share arrangements and being warned that there might possibly be issues associated with it. After that meeting, Mr Gillies sent a further letter to Mr O'Callaghan, which is, relevantly, in the following terms: "I refer to my letter to you of 3 August 2007 and to my discussions with you concerning that letter. I have assumed from the lack of any objection to any of the matters set out in that letter that the Company agrees with the essential matters which I have set out in that earlier letter. However, in light of the fact that the Company has not given me any written assurance that it will not act to terminate my continuing employment, the question of my right to receive a performance bonus in accordance with the addendum to my employment agreement dated 23 October 2001 remains unresolved. As I indicated to you in my letter of 3 August 2007, it is my preference, given what I consider to be the underlying strength of the Company's business, to defer the issue of the notice of election. However, I must balance my faith in the performance of the Company's share price with the need to ensure that my position is protected and that the Company does not take any step which would have the effect of denying me the benefit of the performance bonus. Obviously, I expect that the company will act in good faith in these matters but as I have not received the confirmation which I sought in my letter of 3 August 2007 concerning the intentions of the Company, it is necessary for me to act to protect my position. Accordingly, a signed and dated notice of election is enclosed . ..." 140On 7 August 2007, at or about 7.47pm, Mr Waldron notified EDI staff (including subsidiaries) that Mr Gillies had resigned and left the company. On 9 August 2007, Mr O'Callaghan wrote, in his capacity as Chairman, to Mr Gillies in the following terms: "I refer to your letters of 3 and 6 August 2007. It is apparent from these letters that you are now attempting to misrepresent the content and outcome of discussions that Peter Jollie and I had with you at our meeting on 1 August 2007. During the meeting we advised you that: 1. your employment with Downer EDI Ltd was terminated with effect on and from 1 August 2007; and 2. Downer EDI would pay you your entitlements under your contract of employment, which includes a sum representing three months' salary in lieu of notice of termination; and 3. subject to certain provisos, Downer EDI would engage you as a consultant for a period not exceeding three months from 2 August 2007 to 2 November 2007, at the completion of which Downer EDI would pay you a fee for the provision of your consultancy services at a rate based upon the amount you would have been paid in Base Salary over an equivalent period. These points were reflected in the statements subsequently made to the markets and the media, and remain the operative terms under which we are conducting matters. Please be advised that the payment in lieu of notice has been deposited by electronic funds transfer into your nominated account. We are presently calculating outstanding leave entitlements under your contract of employment and we will advise you once the calculations are finalised and payment has been deposited into your nominated account." 141The terms of that letter do not reflect the conversation of which evidence has been given. That conversation did not purport to terminate with effect on and from 1 August 2007. Further, the announcement of the consultancy arrangement was not predicated upon any condition or renegotiation of different rates of pay and conditions of employment (nor any contract for services). Neither Mr O'Callaghan nor Mr Jollie mentioned anything about the entitlements under the contract of employment or payment in lieu of notice. Neither Mr O'Callaghan nor Mr Jollie gave evidence and sought to support the representations made in the letter of 9 August 2007. I find, as a matter of fact, that the representations in that letter do not accord with the conversation that occurred on 1 August 2007, at least in those respects. 142I also infer that this misrepresentation of the terms of the conversation was an attempt, ex post facto, to create circumstances that were thought to deprive Mr Gillies of his entitlement to the POS. I find, as a matter of fact, that payment in lieu of notice was provided on 9 August 2007 and, for reasons I will later discuss, notice was given on that date by Downer, for the first time, terminating, or purporting to terminate Mr Gillies' employment with it. Findings as to termination and breach of contract 143As earlier recited, Mr Gillies wrote to Downer on 3 August 2007 and 6 August 2007, the relevant parts of which have been extracted at [137] and [139] respectively. Downer responded on 9 August 2007 (see [140]). The response by Downer on 9 August 2007 recites a purported summary of the meeting of 1 August 2007. Apart from the letter itself, there is no evidence that the meeting on 1 August 2007 was to the effect described. 144The Court has already made findings of fact as to the content of the conversation on 1 August 2007. There was no reference during the course of the discussion between Mr Gillies, Mr O'Callaghan and Mr Jollie to the effect that Mr Gillies' employment had been terminated with immediate effect. There was reference to Mr Gillies standing down and/or being terminated as CEO. There is a difference between employment with Downer and employment with Downer as CEO. 145Furthermore, there was no conversation at the meeting on 1 August 2007 in or to the effect that Mr Gillies would be paid his entitlements under his contract of employment including a sum representing three months' salary in lieu of notice. I find as a fact that no such statement was made and there was not a termination effected under Clause 4.1(b) by the payment or promise of payment of salary in lieu of notice. 146This is corroborated by the total failure of any discussion as to the terms upon which it was proposed that Mr Gillies would continue as a consultant for the three-month period to which Downer referred in its media release and which proposal is otherwise uncontroversial in these proceedings. The letter of 9 August 2007 (see [140]), on that basis, misrepresents the conversation that occurred between Mr O'Callaghan and Mr Gillies on 1 August 2007. Nevertheless, the letter of 9 August 2007 (and the accompanying payment) advises of a termination in accordance with Clause 4.1(b) by payment in lieu of three months' notice. 147Mr Gillies submits that only the actual payment, rather than notice of termination and a later payment, could effect termination under Clause 4.1(b) of the Agreement by the payment in lieu of notice. It is unnecessary to determine that issue finally. A commercially sensible construction of the contract would seem to suggest that there could be a combination of notice and payment. In that sense, notice could be given of termination and payment made shortly thereafter for the remaining part of the three-month period. As earlier stated, it is unnecessary to determine that issue finally. 148As a fact, termination was not effected in accordance with either Clause 4.1(b) or 4.1(c) on 1 August 2007. Also found, as a matter of fact, termination was sought to be effected on 9 August 2007 and, as a matter of mixed fact and law, that notice of 9 August 2007 was effective under the Agreement. 149Prior to 9 August 2007, namely, as already cited, on 6 August 2007, Mr Gillies exercised his option under the POS. The exercise of that option was effective and entitled Mr Gillies to the amounts calculated in accordance with that Scheme. 150Mr Gillies submits that the letter of 9 August 2007 is not a written notice of termination with immediate effect. The letter of 9 August 2007 was an assertion that termination had been effected on 1 August 2007. I have found that assertion was factually incorrect. Nevertheless, the assertion of prior termination by the employer, together with the provision of what purported to be three months' pay in lieu of notice, was effective as notice of termination on 9 August 2007. An assertion that termination had been effected by the employer, even though factually incorrect, would be sufficient to amount to a notice of termination as at the time of the assertion. Any other construction or analysis would not be commercially sensible or realistic. 151Further, a miscalculation of the amount of entitlement, where that which is proffered purports to be three months' salary, is sufficient to effect the terms of Clause 4.1(b) of the Agreement, being payment in lieu of notice. There may be breach, because of underpayment, but the termination has been effected. 152Termination was effected on 9 August 2007 as described in the foregoing paragraphs. 153The evidence before the Court requires a finding that all entitlements have not, at this stage, been paid by Downer. It cannot be suggested that termination has yet to be effected. If, as Mr Gillies submits, payment of all entitlements had to be made before termination could be effected, he would (subject to any other termination) still be employed. He is not still employed and he would not be employed, whether or not there had been some other terminating event. However, all entitlements have not been paid. The non-payment of full entitlements, in accordance with the Agreement, requires a finding that Downer has breached the Agreement. The entitlements accrued on termination and were not merely executory: McDonald v Dennys Lacelles [1933] HCA 25; (1933) 48 CLR 457 at 476- 477 per Dixon J. 154Before dealing with other alleged breaches of the Agreement, I need to deal with one other aspect of the termination. On 21 August 2007, over a letter signed by Stephen Mockett, by then the Company Secretary, Downer notified the ASX of its results by filing its Preliminary Final Report. The letter from Mr Mockett attaches a document described as ASX/Media Release and a document described as the Full Financial Report for the year ended 30 June 2007, although, it is, it seems, a Preliminary Final Report (Exhibit 6, p 1669 and following). At page 6 of 75 of the Report (Exhibit 6, p 1686), the Report describes Mr Gillies as having "resigned 1 August 2007". If that note, approved by the Board and Mr O'Callaghan, were a reference to Mr Gillies' employment, it is inconsistent with the representation by Mr O'Callaghan, in his letter of 9 August 2007, of the terms of the meeting of 1 August 2007. Both accounts cannot be correct. One of them, at least, must be knowingly incorrect. On my findings, if, as already stated, the comment were to relate to Mr Gillies' employment, each of them is incorrect. 155Given the context of the statement to the ASX, dealing, as it does, with payments to directors, it is more likely that the reference to Mr Gillies having "resigned 1 August 2007" is a reference to his position as Director, not, necessarily, his position as CEO or from employment with Downer. I have dealt already with the Board meeting of 1 August 2007 that occurred after the meeting between Mr Gillies, Mr O'Callaghan and Mr Jollie. That Board meeting was informed that Mr Gillies had resigned as a Director. No part of the conversation that occurred on 1 August 2007 involved a resignation as Director, except to the extent that an agreement to stand down as the CEO may have involved, necessarily, a resignation as a Director. The formal position was CEO and Managing Director. Nevertheless, the conversation of 1 August 2007 did not include any reference to a resignation as a Director of Downer. The issue of resignation is further discussed at paras [177] - [182]. Summary Dismissal 156Summary dismissal, in the law relating to contracts of employment, derives from the general law of contract and the capacity of a party to terminate a contract where the other party is in breach of the contract. In North v Television Corporation Ltd (1976) 11 ALR 599, Smithers and Evatt JJ said: "For purposes of the application of the common law principles to the facts of this case, the remarks of the Master of the Rolls in Laws v London Chronicle (Indicator Newspapers) Ltd [1959] 2 All ER 285 at 287 and 289, are in point. He said:- 'To my mind the proper conclusion to be drawn from the passages which I have cited and the cases to which we were referred is that, since a contract of service is but an example of contracts in general, so that the general law of contract will be applicable, it follows that, if summary dismissal is claimed to be justifiable, the question must be whether the conduct complained of is such as to show the servant to have disregarded the essential conditions of the contract of service. ... I do, however, think (following the passages which I have already cited) that one act of disobedience or misconduct can justify dismissal only if it is of a nature which goes to show (in effect) that the servant is repudiating the contract, or one of its essential conditions; and for that reason, therefore, I think that one finds in the passages which I have read that the disobedience must at least have the quality that it is "wilful"; it does (in other words) connote a deliberate flouting of the essential contractual conditions.' Mr Hughes expressed the relevant question at common law as being whether the acts complained of as misconduct are of such gravity or importance as to indicate a rejection or repudiation of the contract by the employee." In North, supra, Franki J was to similar effect. 157The right to rescind a contract for breach has moved significantly since 1976 when North, supra, was decided. Rescission, here, refers to termination of a contract rather than rescission for fraud and other matters affecting its formation: Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22; (2008) 236 CLR 342 at [2], per Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ. See also Photo Production v Securicor Transport Ltd [1980] AC 827 at 844, per Lord Wilberforce and Johnson v Agnew [1980] AC 367. (Hereinafter, in order to avoid confusion with termination ab initio, I will refer to rescission of the kind that includes termination for breach as "discharge".) 158There are three relevant bases upon which a party may terminate a contract. The contract may be terminated by agreement of the parties. In this case, such an agreement exists. It is Clause 4 of the Agreement, entitled "Termination of Agreement". The terms of the Agreement, and the agreement of the parties, expands the bases upon which a party could terminate a contract under common law. For example, the Agreement allows for termination by Downer on payment in lieu of notice, which is not an entitlement under the common law: see Sanders v Snell [1998] HCA 64; (1998) 196 CLR 329 at [16] and [19], per Gleeson CJ, Gaudron, Kirby and Hayne JJ; T D Preece & Co Pty Ltd v Industrial Court of New South Wales [2008] NSWCA 285 at [79] per Basten JA. 159The general principles of contract law have emerged from a number of sources, but the principle of cohesion and the desirability of having consistent principles that apply equally have had the inexorable result that, save to the extent that the particular nature of a relationship dictates different treatment, contracts should, as far as possible, be governed by the same principles. That is, the principles of contract law apply equally to all contracts, including contracts of employment. In that way, the extent to which different kinds of contracts are treated differently reflects the rational differences in those particular kinds of contracts. In short, except to the extent necessary to reflect the peculiarities of contracts of employment, the common law relating to contracts should apply in the same way to contracts of employment as it does to other contracts. As noted above, the basis upon which a party may terminate a contract for breach by the other party has developed significantly since 1976 (and, a fortiori, since 1959, the year in which Laws v London Chronicle was decided). Breach of an essential term of a contract is not the only basis upon which termination may be effected. 160Leaving aside for present purposes the doctrine of frustration, under the common law a party may terminate a contract, including a contract of employment, for a breach of a condition (or essential term), or for a sufficiently serious breach of an intermediate term: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. 161In Hong Kong Fir, supra, the United Kingdom Court of Appeal applies to the notion of a sufficiently serious breach of an intermediate term, the test that applies to frustration, namely, that the contractual obligation, as originally negotiated, is incapable of being performed: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 357 citing Contractors Ltd v Fareham Urban District Council [1956] UKHL 3; [1956] AC 696 at 729, per Mason J, and compare Hong Kong Fir, supra, at 71.6 per Diplock LJ. 162Some academic analysis suggests that there may be a slight difference between the taxonomy utilised by the High Court of Australia in Koompahtoo, supra, and that adopted by the UK Court of Appeal in Hong Kong Fir, supra. The High Court refers to "non-essential terms", at [49], whereas Diplock LJ refers to terms "going to the root of the contract" or depriving the party "of substantially the whole benefit which it was the intention of the parties as expressed in the [contract] that the [parties] should obtain from the further performance of their own contractual undertakings", at 72.2. It is unnecessary to discuss or explore any difference, if, which I doubt, there be a difference. 163In both Koompahtoo, supra, and Hong Kong Fir, supra, an intermediate term is a provision the breach of which may be sufficiently serious to allow discharge of the contract, because the breach goes to the root of the contract or, on other occasions, the breach will have been not so serious and would give rise only to the right to sue for damages: Koompahtoo, supra, at [49] and Hong Kong Fir, supra, at 71.6. Misconduct in employment is such a term. For that reason, the texts and a number of cases have referred to the right of an employer to dismiss an employee summarily for "serious misconduct"; non-serious misconduct being such as not to give rise to the right to dismiss summarily. 164In terms of the earlier analysis, the duty imposed on an employee not to engage in misconduct is an intermediate term, a less than serious breach of which would not give rise to the right to discharge the contract. 165The principles applicable to contracts provide that the parties are, subject to currently irrelevant exceptions, free to determine the terms upon which they agree and, in that respect, override implied obligations and rights that the common law would otherwise impose and grant. 166I repeat, for present purposes, that the Agreement between Mr Gillies and Downer, as has been stated, has express provision for the termination of the contract. 167The kind of misconduct that, under the common law, entitled an employer to effect a summary dismissal was summarised by Einstein J in Randall v Aristocrat Leisure Limited [2004] NSWSC 411. For present purposes, it is sufficient to adopt his Honour's summary, which I further summarise below. As noted by Einstein J, it must at all times be remembered that the Court is presently dealing with the contract between the parties and its construction, rather than the general principles applicable under the common law. * There is "a defined spectrum of classes of conduct" that warrant the summary dismissal of an employee. Einstein J gave three examples at [448]: "(1)'misconduct' which may encompass insolence (Vardy v Cuthbert (1872) 3 AJR 25), abusive language (Farley v Lums (1917) 19 WALR 117), drunkenness (Meyrick v Stirling Bros Ltd (1899) 1 WALR 51), physical assault (Brackenridge v Toyota Motor Corp Australia Ltd (1996) 142 ALR 99) and sexual impropriety (Orr v University of Tasmania (1957) 100 CLR 526)); (2)'Disobedience', being the wilful disregard of instructions lawfully and reasonably made: Turner v Mason (1845) 14 M & W 112; Adami v Maison de Luxe Ltd (1924) 35 CLR 143; and (3)'Incompetence', being the failure by an employee to afford an employer of the degree of skill expressly or impliedly warranted: Harmer v Cornelius (1858) 5 CB (NS) 236." * The degree of misconduct that justifies summary dismissal is a question of fact. It is not governed by rules of law. (See Starke and Evatt JJ in Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 at 73 and Lord James of Hereford in Clouston & Co Limited v Corry [1906] AC 122 at 129). * To determine, at common law, whether the conduct justifies summary dismissal, the Court must have regard to: (a)the totality of the employment relationship between the parties; and (b)whether the employee has repudiated his or her obligations under his or her specific contract of employment (see Bruce v AWB Ltd (2000) 100 IR 129 (FCA) at 140, per Sundberg J and Pepper v Webb [1969] 1 WLR 514 at 517, Harman LJ). (c)The motive of the employee (see Blyth Chemicals, supra, and Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 at 358 per Cotton LJ). (d)The necessary test under common law, namely, whether: "the employee's conduct has destroyed all the necessary confidence subsisting between the parties to an employment relationship, where the essential conditions of service have been disregarded or where an intention no longer to be bound has been objectively evinced." [at 448] 168I note, as did Einstein J in Randall, supra, that in Blyth Chemicals, supra, the High Court reiterated that the burden of justifying summary dismissal on the basis of misconduct rests with the employer. 169There are a number of aspects of the provisions in Clause 4 of the Agreement (extracted at [12]) that, arguably, depart from the principles embodied in common law. I have already mentioned the right of the employer to terminate without notice by payment in lieu of notice. There are others. 170First, "misconduct", so described, is that which gives rise to the capacity of Downer to notify the employer of termination with immediate effect. The term used in the Agreement is not "serious misconduct" or "wilful misconduct". Nevertheless, the expression "misconduct" is used together with the expression "or fraudulent activity". If the term "misconduct" were intended to invest in Downer the right to dismiss summarily for misconduct, simpliciter, (i.e. misconduct that does not amount to serious misconduct or wilful misconduct), then it must include all fraudulent activity and the words "or fraudulent activity" would be otiose. 171On the other hand, if "misconduct", where used in Clause 4.1(c), were intended to import the common law notions of "serious misconduct" or "wilful misconduct", being the kind of misconduct that deprived Downer of substantially the whole benefit which it was the intention of the parties that they should obtain from the further performance of their own contractual undertakings (see: Hong Kong Fir, supra), it would include most fraudulent activity, but may not include some minor activity that could be described as fraudulent (at least in the sense that equity uses it). On that basis, amongst others, it seems to me that the term "misconduct", where used in Clause 4.1(c) of the Agreement, properly construed, requires serious or wilful misconduct of the kind described in the foregoing. 172The second apparent departure from common law rules relates to the manner by which an employer may dismiss for "misconduct." Whether or not misconduct, where used in Clause 4.1(c) of the Agreement, means serious or wilful misconduct, the terms of Clause 4.1 require, for employment to be terminated with immediate effect, for the company, at the time, to notify Mr Gillies of that occurrence. 173On the facts, as I have found them, Downer, through Mr O'Callaghan, Mr Jollie or otherwise, did not notify Mr Gillies of the termination of his employment with immediate effect on 1 August 2007. Further, Downer did not notify Mr Gillies that the termination was effected immediately on account of misconduct or fraudulent activity. Indeed, the letter of 9 August 2007, and the payment at that time of an amount that was said to be three months' notice is inconsistent with a utilization of Clause 4.1(c) on either 1 August or 9 August. 174The provisions in Clause 4.1(c) of the Agreement require Downer to notify Mr Gillies of his immediately effective dismissal, in order to terminate on grounds of misconduct or fraudulent activity. This seems to be confirmed by the terms of Clause 4.3 of the Agreement. Downer failed to notify Mr Gillies of his summary dismissal in accordance with the Agreement and are not able to take advantage of (and did not purport to take advantage of) Clause 4.1(c) of the Agreement. 175The submission that the common law permits subsequent reliance upon misconduct to justify summary dismissal misses the point. Assuming without deciding that the common law operates in the manner suggested, the contract of employment, in particular Clause 4.1(c) of the Agreement, requires, if misconduct or fraudulent activity is relied upon by Downer, to notify Mr Gillies "that your employment is terminated with immediate effect". 176Downer did not notify Mr Gillies of termination with immediate effect, on 1 August or otherwise, pursuant to Clause 4.1(c) or otherwise. In this respect the terms of the Agreement displace the rights of the parties under the common law. Resignation 177Downer submits that the effect of the meeting on 1 August 2007, if it were not a termination with immediate effect, was a resignation by Mr Gillies. As already noted, the Chairman, Mr O'Callaghan, and Mr Jollie had authority to seek the resignation of Mr Gillies. They did not have the express authority to terminate. That is not to say that Mr O'Callaghan could not have acted unilaterally to terminate, without express authorisation from the Board. Nevertheless, I have found that it is unlikely and did not occur. Given the express terms of the authorisation sought by Mr O'Callaghan and granted by the Board, what was sought from Mr Gillies was a resignation. That is consistent with the terms of the conversation. Mr Gillies was asked to resign and, during the next three months, would act as a consultant. 178If, as I have found, such a resignation were sought, it could have been effected only in accordance with Clause 4.1(a) of the Agreement. Such a resignation would require three months' notice to the company, Downer, for which payment (or the equivalent set off) would not suffice. In other words, Mr Gillies' resignation from employment (as distinct from the standing down from the position of CEO) could be effected only upon three months' notice. 179The notice period accords with the period that the company, expressly or impliedly, determined Mr Gillies should be available for consultancy. The terms of the media release, drafted well before the meeting between Mr Gillies and Mr O'Callaghan, reflect such an understanding. The three-month period referred to in each is not mere coincidence. Given the interim arrangement for an Acting CEO from a person who was a Senior Executive Officer in the employ of Downer, it is unlikely that the consultancy would be essential from Downer's management perspective, which confirms that Downer was acting on the basis that it was required to provide notice and that "employment", albeit not as CEO, would continue. 180It may be suggested that the parties had a right to vary the Agreement. While it is generally permissible for parties to agree to vary their contract instanter, the Agreement contains a manner and form provision (Clause 12). Under the terms of Clause 12, the Agreement could be altered only by agreement in writing from time-to-time between the Chairman of the company and Mr Gillies with the approval of the Remuneration Committee of the Board. If there were intended to be a variation of Clause 4.1(a) to allow a resignation with immediate effect, that would have required, pursuant to the Agreement, a variation to the Agreement, which variation would need to be evidenced in written form and approved by the Remuneration Committee. No such variation was effected. 181Of course, there could have been a collateral agreement. However, there is no submission to suggest, and no evidence that would allow a finding of, such a collateral agreement. 182In any event, there was not a resignation on 1 August 2007, with immediate effect or otherwise. The reference by Mr Gillies to the termination provisions points to a termination by Downer, effective after a three months' notice period absent another intervening act of termination. Ultimately that issue does not affect the outcome of the proceedings. Whether Downer terminated pursuant to the terms of Clause 4.1(b) of the Agreement, or Mr Gillies terminated in accordance with the provisions of Clause 4.1(a) of the Agreement, has no effect on that which was required to be paid or the damages that flow for breach, assuming, notwithstanding my findings to the contrary, that the resignation and/or dismissal was sought to be effected on 1 August 2007, but was not immediately effective. Issues associated with the calculation of damages 183Some issues have been raised in the pleadings that, seemingly, do not form part of the agreed contentions between the parties. Nevertheless I will deal with some of them. Before doing so I will deal with those issues that remain necessary to determine in order to calculate damages. Ultimately, I will leave to the parties the calculation of damage arising from these reasons for judgment, with recourse to the Court if agreement cannot be reached within a reasonable time. Alleged Entitlement under the Long Service Leave Act 1955 184There is no disagreement between the parties as to the provisions of the Long Service Leave Act 1955 (hereinafter, "the Act"). The provisions of the Act are well known and have been the subject of much authority. The calculation of long service leave requires a calculation based on the period between the employee's commencement of employment, on or about 13 June 1988, to the date of his termination, namely, on the above findings, 9 August 2007. Neither party has thus far calculated the damage on that basis. Interest is payable on the amount between 9 August 2007 and the date upon which payment was made, if ever. Otherwise interest would be calculated in accordance with ss 100 and 101 of the Civil Procedure Act 2005. 185If it be necessary to state a view, if payment of the amount were not already to have been made, I would exercise the discretion of the Court to order interest up to payment in accordance with the usual rate. Loss of opportunity damages 186The second issue associated with the calculation of damage relates to the claim by Mr Gillies of "loss of opportunity" damages arising from the exercise of the election under the POS. 187Damages for loss of opportunity is recoverable in contract when the contract as a whole is such as to promise an opportunity to obtain a benefit and where the loss of that opportunity arises because of the breach of the contract: see Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 at [2], per Allsop P (with whom Beazley JA agreed), and the cases cited therein and, in particular, the reference to J W Carter, E Peden and G J Tolhurst, Contract Law in Australia, 5th Ed, (2007), LexisNexis Butterworths, at 856-858. As Allsop P said: "The task is to identify and characterise what, in substance, was promised and what has been lost or denied by the breach of contract." 188The plaintiff's submission is based upon the proposition that, if proper notice had been given, Mr Gillies would have held the shares for a longer period, namely, until the latest time during his employment on which the "election" could have been exercised. The Court accepts, given the terms of the letter of 6 August 2007, that Mr Gillies would have held the notional shares for as long as possible. Nevertheless, the claim misunderstands loss of opportunity damages. The breach by Downer is in the non-payment of entitlements in accordance with the Agreement at the time (or as soon as practicable thereafter) that termination was effected. In other words, on the foregoing findings, on 9 August 2007, Downer effected termination. Downer did not terminate Mr Gillies on either 1 August 2007 or on 5 September 2007. 189Downer was entitled to terminate Mr Gillies by payment in lieu of notice. Payment in lieu of notice, in accordance with the Agreement, would not have been, and was not, a breach of contract. As the description implies, payment in lieu of notice is a payment instead of providing notice and is effective at the time payment is made (at the latest). If the payment were made as required, calculated appropriately, there would have been no breach of the Agreement. Indeed, if Downer had in fact terminated on 1 August 2007, without notice, but with payment in lieu of notice, Mr Gillies would have had no opportunity to exercise the election required under the POS. 190Downer, in exercising its rights under the Agreement to terminate Mr Gillies by payment in lieu of notice, has not breached the Agreement. As a consequence, after 9 August 2007, Mr Gillies would not have had the right, under the Agreement or the Addendum or the POS, to exercise the option. 191Because of the unusual circumstances of this termination, Mr Gillies obtained the right to exercise the election under the POS in circumstances where, had Downer effected the termination on 1 August 2007 in accordance with the Agreement, he would not have had that right. 192In this case, that which Mr Gillies claims as "loss of opportunity" damages does not arise from any breach of contract. The "loss" arises from the necessity, pursuant to the contract, to exercise the option whilst still in employment. Understandably, and necessarily, Mr Gillies exercised that option on 6 August 2007. If Mr Gillies were not to have exercised that option at that time, on 9 August 2007, when Mr Gillies was dismissed with immediate effect, he would never have had the right to obtain the value of the POS. It was not a breach of the contract, nor did damage arise, because, were Downer to have terminated in another way, different and greater payments would have arisen. The Claim for unpaid bonus entitlements 193Mr Gillies claims the remaining amount standing to his credit (after the deduction of any tax liability) in what I have referred to earlier as "the bonus pool", as payment, plus interest on that amount. The amount is $16,907. I have not calculated interest. 194If Mr Gillies were to have had a present entitlement, during his employment, to the accrued bonus pool, the amounts would have been dealt with, from the time of that entitlement, at the direction of Mr Gillies and the amounts would have been subject, immediately, to the requirement on Mr Gillies to pay income tax on the amounts when credited to him, and on Downer to deduct PAYG amounts. 195As previously discussed, the arrangement between Downer and Mr Gillies was such that there was no present entitlement to the accrued bonus pool. That finding is crucial in determining the tax liability. It is also significant that Mr Gillies may, at the end of the employment, not have opted to receive any amount by way of bonus. Certain amounts have already been received, as is obvious from the earlier terms of these reasons for judgment. There is no evidence before the Court that, prior to his termination, Mr Gillies opted to receive the $16,907 as bonus, which was the balance, after tax, of the accumulated bonuses awarded. 196There is, on the findings the Court has made, no requirement that the option to receive the bonus need be exercised during the terms of Mr Gillies' employment. As a consequence, it seems that, at least by 28 February 2011, by reason of the filing of the amended statement of claim (see paragraphs 46, 47 and 48 thereof), Mr Gillies, at that time, opted to receive the balance, after tax, that had accrued to him in the bonus pool. As a consequence of the lateness of that option, I would not be minded to exercise my discretion to award interest on any amount owing in that regard and would award the amount of $16,907, being the balance due. I have some doubt as to whether one can use pleadings to effect an election or option of that kind, but I am bound to accept that it is possible: The State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 at [44], per Gaudron, Gummow and Hayne JJ, with whom McHugh J agreed on this issue. Other claims 197Downer submits that the calculations of the amounts to be paid is based on a salary of $400,000 and no more. Such a submission ignores the terms of the Agreement, which expressly contemplate annual increases in the salary specified in Clause 2, the first such increase occurring in 1 July 1998. 198The three months' salary must be all salary that would otherwise have been paid and the payments under Clause 4.2, where referring to "annual base salary" refer to the salary payable under Clause 2 as last adjusted. In other words, the salary component actually paid and/or payable is the figure that is required to be used for any calculation utilising "annual base salary". The annual base salary does not include the value of bonuses declared, the value of the motor vehicle, if any, or the value of the POS. 199Three other matters were pleaded in the amended statement of claim, but did not seem to be the subject of detailed analysis or submissions. No submission was made as to any additional damages that would arise from the breaches. However, the Court will address each of those claims briefly. The Implied Mutual Trust duty 200The plaintiff claims that the Agreement contained an implied term which required Mr Gillies and Downer "to conduct themselves in such a manner as not to destroy, or seriously to damage, the relationship of trust and confidence arising from" the Agreement and the relationship between Mr Gillies and Downer (hereinafter "the mutual trust duty"). The Court accepts that such an implied term operated on the relationship and was a term implied into the contractual relationship between Mr Gillies and Downer: see, inter alia, Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198; Downe v Sydney West Area Health Service (No 2) [2008] NSWSC 159; (2008) 71 NSWLR 633; Thomson v Orica [2002] FCA 939 at [141] per Allsop J; Rogan-Gardiner v Woolworths Ltd (No 2) [2010] WASC 290 at [125]; Lennon v State of South Australia [2010] SASC 272 at [177]; Foggo v O'Sullivan [2011] NSWSC 501; Taske v Occupation and Medical Innovations Ltd (2007) 167 IR 298; [2007] QSC 118; McDonald v State of South Australia [2008] SASC 134; (2008) 172 IR 256; State of South Australia v McDonald [2009] SASC 219; (2009) 103 SASR 344. 201The mutual trust duty is an implied term that cannot, by definition, apply to termination of employment (Russell, supra). The conduct of Downer, about which Mr Gillies complains, is conduct in effecting the termination of his employment and cannot be qualified by the implied duty not to destroy or to damage seriously the relationship of trust and confidence. Further, as I understand the submissions of the parties, it is not suggested that additional damage arises as a consequence, even if breach of the duty were disclosed. Other implied terms including the Duty to Act in Good Faith 202The second aspect pleaded was the implication of a term into the Agreement that each of Mr Gillies and Downer were required to perform their obligations under the Agreement in a manner that permitted the other party to have the full benefit of that other party's rights and entitlements under the Agreement (hereinafter "the second implied duty"). There is a third implication, which, it is said, is a duty, implied into the Agreement, for each party to act in good faith. The duty to act in good faith, if it be implied, is a duty that would subsume the second implied duty, being a duty described as one requiring each party to permit the other party to have the full benefit of that other party's rights and entitlements. 203The Court notes that the implied duty to act in good faith must give way to the express agreement of the parties and cannot alter the amount to be paid when termination is lawfully effected. 204As I sought to make clear in Russell, supra, it seems to me that the duty imposed on a party to act in good faith is a duty that is fundamentally different from the mutual trust duty. The latter duty cannot apply to termination. The duty to act in good faith may, arguably, apply to termination. In this regard I did not follow the UK House of Lords decision in Johnson v Unisys Ltd [2003] 1 AC 518, which implied that the two duties were the same. (See also Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217 at [32]; (2008) 72 NSWLR 559, per Basten JA). 205In Russell, supra, I concluded that, given the particular resources of the employer and their interstate operation, the failure to interview a complainant face-to-face was a breach of the duty to act in good faith. It was, contrary to some academic and judicial opinion, not held that it was a breach of the mutual trust duty. The distinction between the two duties is important. The duty to act in good faith is a duty imposed upon the manner in which a party exercises its rights under the contract and may apply to termination. The mutual trust duty is a substantive duty that applies independently of the express rights under the contract. 206The manner in which the implied mutual trust duty arose was in circumstances where an employer had engaged in illegal conduct unrelated to the exercise of particular rights under a contract of employment: see Mahmud v Bank of Credit and Commerce International [1998] AC 20. That illegal conduct "tarred" the employees and diminished their capacity to obtain employment into the future. 207Considering the foregoing distinction between the implied duties, whilst Downer's exercise of the right to terminate Mr Gillies' employment, may not be a breach of the implied mutual trust duty, it may constitute breach of the implied duty to act in good faith. In other words, the decision of Downer "to offer [Mr Gillies] to the market as being accountable" may be lacking in good faith. Serious issues arise as to that which is required when dismissing a senior executive, particularly the most senior executive, when the employee no longer possesses the confidence of the Board. Nevertheless, neither party suggested that the decision to terminate was exercised otherwise than in good faith and even if it were argued, no further damages could, in this case, arise as a consequence. 208Other than the decision to terminate, no other decision was even arguably exercised otherwise than in good faith. Moreover, as stated, no additional damage arises, even if, contrary to the view already expressed, there were to have been a breach of the duty to act in good faith. Conclusions 209The Court has substantially found for the plaintiff, Mr Gillies. Mr Gillies has not engaged in misconduct which warranted his termination. Moreover, the express terms of the contract require notification by Downer that immediate termination is being effected on the basis of misconduct. 210Further, I have found that Mr Gillies is entitled to payment of the amounts owing under the POS, the credit in his accrued bonus pool and a properly calculated long service leave payment. The BMW 7 Series, currently in the possession of Mr Gillies, must, as has been offered, be returned, but no other payment is due by Mr Gillies to Downer on account thereof. 211The Court makes the following orders: (i) Judgment for the plaintiff on the Statement of Claim; (ii) Judgment for the cross-defendant on the cross-claim; (iii) Cross-claim dismissed; (iv) The parties are directed to file an agreed form of orders to reflect the calculation of the amounts owing in accordance with the reasons for judgment; (v) Failing agreement in accordance with order (iv) above, the plaintiff shall file a form of order that he seeks within 21 days from the date hereof and the defendant shall file, within 7 days thereafter, any alternative proposed order; (vi) The parties have liberty to address the Court on the calculation of damage, including any particular aspects that have not been specifically dealt with in the foregoing reasons, and on costs and interest. ********** Annexure A Annexure B DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 September 2011