Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor

CORAM: Wright J President; Walton J Vice-President; Backman J

CATCHWORDS: Appeal - Unfair contract - Application under s106 of the Industrial Relations Act 1996 - Arrangement at first instance found to be unfair on the basis that a sales agency agreement did not provide for notice of termination - Whether there was a failure to identify the arrangement whereby a person performs work in any industry - Whether there was a failure to include in the order under s106(5) made in favour of the first respondent, wages and superannuation paid to the second respondent - Whether the wrong question addressed in considering the issue of whether the arrangement was unfair - Whether appellants denied natural justice - Whether misdirection as to factors taken into account in determining the period of notice - Whether principle of mitigation should have been applied - Challenges unsuccessful save as to issue of mitigation - Held: principle of mitigation fell to be applied but amount earned by second respondent post-termination not substantial and may therefore be disregarded for the purposes of s106(5) - Leave to appeal granted - Appeal dismissed - Costs.

LEGISLATION CITED: Industrial Relations Act 1996

Bastian v Brent & Ors (2001) 111 IR 306 Brown v Rezitis (1970) 127 CLR 157 English v Aradlay Brokers Pty Limited (2005) 145 IR 129 Ex Parte VG Haulage Services Pty Limited & Anor; Re The Industrial Relations Commission of New South Wales & Anor [1972] 2 NSWLR 81 Fish & Anor v Solution 6 Holdings Limited (2006) 225 CLR 180 CASES CITED: Great Scott International Pty Limited & Anor (No 2) v Cosmetic Suppliers Pty Limited & Anor [2006] NSWIRComm 358 Mark Trenter t/as 'Time Rite Onforwarders' v Australian Air Express Pty Limited [2006] NSWIRComm 314 Mayne Nickless Limited v Industrial Relations Commission of New South Wales (2004) 141 IR 1 Michel v Ogilvy & Mather Pty Limited (1996) 71 IR 417 Ross v GN Comtext (Australia) Pty Limited (2001) 107 IR 1 Soulemezis v Dudley (Holdings) Pty Limited (1987) 10 NSWLR 247 Westfield Holdings v Adams (2001) 141 IR 241

APPELLANT: Mr J Fernon SC Solicitors: Mr P Brown Baker & McKenzie LEGAL REPRESENTATIVES: RESPONDENTS: Mr D Chin of counsel Solicitors: Ms A Sharp Henry Davis York

• 28 - INDUSTRIAL COURT OF NEW SOUTH WALES FULL BENCH

CORAM: WRIGHT J, President WALTON J, Vice-President BACKMAN J

COSMETIC SUPPLIERS PTY LIMITED AND ANOTHER v GREAT SCOTT INTERNATIONAL PTY LIMITED AND ANOTHER

Application by Cosmetic Suppliers Pty Ltd for leave to appeal and appeal against a judgment and orders of Justice Staff given on 13 November 2006 in Matter No IRC 4548 of 2002

1 This is an amended application for leave to appeal and appeal filed by Cosmetic Suppliers Pty Limited and Sebastian Australia Pty Limited from a judgment of Staff J of 13 November 2006 in which his Honour found a sales agency agreement unfair pursuant to s 106 of the Industrial Relations Act 1996 "the Act": Great Scott International Pty Limited and Anor (No 2) v Cosmetic Suppliers Pty Limited and Anor [2006] NSWIRComm 358. 2 The second respondent, Scott Evan Krauss was at the relevant time the sole director, sole shareholder and employee of the first respondent Great Scott International Pty Limited "GSI". From some time in mid 1980 Mr Krauss became involved in stocking, selling and using Sebastian products, a hair care range of products. During approximately 1992 to 1994 Mr Krauss was employed by the Sebastian corporate group which was based in California in the United States of America. While holidaying in Australia in 1994 he was offered employment by Shantdelay Pty Ltd, a distributor of Sebastian brand products in Australia. About two years later Shantdelay was purchased by the first appellant, Cosmetic Suppliers Pty Limited "CS". CS later became the second appellant, Sebastian Australia Pty Limited (SA) and Mr Krauss' employment was transferred to SA. Some time in April or May 1998 Mr Krauss was approached by Peter Ross, the chief executive officer of SA to take up a sales agency. He initially declined the offer but following a second approach from Mr Ross in around June 2000 he agreed to enter into a sales agency agreement. SA required the agreement to be conducted with a propriety limited company and GSI was incorporated for that purpose. On 30 June 2000 a sales agency agreement was entered into between GSI and SA. Following execution of the agreement Mr Krauss resigned from his employment with SA. Under the agreement GSI employees were required to procure orders for Sebastian products from hair dressing salons throughout New South Wales and Mr Krauss was employed by GSI on a full-time basis to undertake the work. 3 In January 2001, SA provided GSI with a new sales agency agreement (SAA) which was executed by GSI on 20 January 2001. The SAA required net sales of Sebastian products to meet monthly sales targets set for the year ending December 2001. Failure to achieve these monthly sales targets was dealt with in cl 11(a) of the SAA which provided: If for three consecutive months Net Sales in the Territory does (sic) not meet the agreed monthly Net Sales Target then SA (Sebastian Australia) may, at its discretion, terminate this Agreement by written notice.

(GSI's "Territory" was defined in the SAA as including New South Wales and the Australian Capital Territory but excluding specified parts of northern New South Wales.) 4 In October 2001 Simon Pitt was appointed General Manager of SA. Following a meeting between Mr Krauss on behalf of GSI and Mr Pitt, Mr Pitt forwarded a letter to GSI outlining his concern that GSI had failed to achieve monthly targets. The letter referred to GSI sales of Sebastian products for September and October 2001 as achieving only 67 and 65 per cent of budget respectively and advised that GSI's, "year to year" achievement of sales targets represented 81 per cent of budget. The letter proposed a further meeting between Mr Krauss and Mr Pitt to discuss a plan to enable GSI to achieve its end of year budget. Mr Pitt concluded the letter saying: I need to feel comfortable that GSI has a plan and the right people in place to achieve the contractual obligations as agreed in the contract between us. Failure of this to occur would require me to consider the feasibility of contract continuation. 5 GSI achieved 97 per cent of its November 2001 monthly net sales target. It met 70 per cent of its December 2001 target. GSI's overall sales results for the calendar year 2001 amounted to 81 per cent of its required sales target. 6 The operations of SA were transferred to CS effective from 1 January 2002. A consequence of this was that CS adopted the rights and obligations of SA under the SAA. GSI signed a novation agreement dated 23 January 2002 which acknowledged the transfer of rights and obligations from SA to CS. 7 Towards the end of January 2002, GSI received new sales targets for the calendar year 2002. The new sales targets represented an increase of 4.2 per cent of GSI's 2001 targets. GSI achieved 102 per cent of its January 2002 sales target. In mid-February 2002 GSI received a novation agreement to which was attached revised sales targets for 2002. The revised targets set out more heavily weighted monthly targets to be achieved in the early months of 2002, that is January, February, March and April with the annual total target remaining the same. One effect of this was that, retrospectively, GSI had failed to meet its January 2002 revised sales target. 8 February 2002 sales amounted to 70 per cent of the revised sales target. On 18 March 2002 Mr Krauss attended a meeting with Mr Pitt and Peter Woodbury, the human resources manager for CS. At the conclusion of the meeting Mr Pitt handed Mr Krauss a letter which was dated 7 March 2002. The letter in its terms sought to invoke cl 11(a) against GSI if it did not meet its sales targets for three consecutive months. In the letter, which was addressed to Mr Krauss, Mr Pitt advised:

I appreciate GSI presenting me with the details of the plan to grow our business in NSW. However, I must reiterate that the current trend is indicating that GSI will not be able to achieve its sales targets as agreed and recently signed. I must now stress that, if target achievement is not met for three consecutive months, then Sebastian Australia will exercise its right to terminate the contract under clause 11a. 9 In March 2002 GSI achieved only 56 per cent of its sales target (as revised). Sales for April 2002 achieved 92 per cent of the revised sales target. According to Mr Krauss, GSI would have achieved its revised sales target for April 2002 had it not been for some April sales being incorrectly attributed to May 2002 sales. 10 On 3 May 2002, following a telephone conversation the day before between Mr Krauss and Mr Pitt, CS sent a letter to GSI addressed to Mr Krauss which terminated the SAA, effective immediately. GSI was asked to return property to CS forthwith. CS offered to pay GSI all moneys due and payable under the agreement within seven days. 11 GSI commenced proceedings by way of summons for relief against SC and SA under s 106 of the Act. The summons was amended following an appeal to the Full Bench from an interlocutory judgment of Marks J. As a result of the appeal, amendments were made to the summons adding Mr Krauss as the second applicant to the proceedings. The judgment at first instance

12 At first instance the appellants contended that the only contract or arrangement amenable to the Court's jurisdiction was the SAA, a contract to which Mr Krauss was not a party. The respondents at first instance relied on the existence of an arrangement to which Mr Krauss was a party for the performance of work under the SAA. 13 Staff J observed that in order for an arrangement to fall within jurisdiction it is not essential that there be a common identity between the person working and the contracting party. These comments related clearly enough to Mr Krauss as the person working, that is in procuring orders for Sebastian products under the SAA, and, GSI as the contracting party to the SAA. The comments followed observations made by Mason P (Hodgson and McColl JJA agreeing) in the Court of Appeal in Mayne Nickless Limited v Industrial Relations Commission of New South Wales (2004) 141 IR 1 at [45]-[48]. In that judgment the Court of Appeal set out a number of prerequisites considered critical to establishing the Court's threshold jurisdiction to decide matters under s 106. One such prerequisite was that there be identified a contract or arrangement, "whereby a person performs work in any industry". Staff J adopted and applied these criteria in construing the contract or arrangement in the proceedings before him. His Honour referred to a number of tests or indicia set out in the Court of Appeal decision and said at [16]:

These tests or indicia set out by the Court of Appeal are well capable of being satisfied in the present case in circumstances where the second applicant performed work for the second respondent for many years before being persuaded by the second respondent to enter into an agency agreement with it. The second applicant was an employee of the first applicant and its sole director, employee and shareholder. The second applicant continued to perform, in essence, the same work for the second respondent, albeit, through GSI, as he had performed as an employee of the second respondent. The first applicant was established at the request of the then General Manager of the second respondent for the specific purpose of entering into an agreement similar to that which the second applicant had when employed by the second respondent. All relevant communications in respect of the SAA were conducted with the second applicant who was personally responsible for sales. In my view, the second applicant was, as Mr Chin submitted the alter ego of GSI. 14 Staff J turned his attention to the claims of unfairness set out in the amended summons. According to his Honour the essence of the allegations in the amended summons was that "the arrangement" was unfair in relation to the sales targets set by the appellants which were unachievable so as to trigger a termination of the SAA. 15 His Honour then proceeded to examine in detail the evidence before him. His Honour rejected most of the respondents' allegations of unfairness but found that the arrangement was unfair on two bases both related to the absence in the SAA of a provision for notice of termination of the agreement. His Honour's findings in this regard are set out in at least two places in the judgment. It is convenient at this point to extract the relevant passages:

[99] However, taking into account all of the circumstances of this matter, I find that the SAA between the parties is unfair in that it provided neither in respect of cl 11(a), Sales Targets Not Achieved, or cl 11(b) Revised Sales Targets for a notice of termination period.

[100] I find the circumstances of the case reveal unfair conduct by the respondents where no such notice provision was included in the SAA, particularly bearing in mind the second applicant's long relationship with the respondents. Such unfair conduct requires a finding that there should be a variation to the contract to insert a notice of termination period. I therefore propose to exercise my discretion to vary the SAA to insert an appropriate notice provision.

[126] I consider that the SAA was unfair for the purposes of s 106 as it did not provide either in the agreement, or by its operation, for adequate notice of termination (or payment in lieu thereof). It should be varied to provide for notice of termination of six months of GSI's average monthly profit over the period of the sales agency agreement. This is calculated by taking GSI's total earnings in sales commission over the period of the agency agreement, less all operating expenses, except for the second applicant's wages and superannuation and calculated over the life of the sales agreement, which the applicants submitted, resulted in a figure of $11,138.82 per month. 16 A number of factors established in the evidence were expressly referred to or taken into account in his Honour's findings that the arrangement was unfair because it failed to provide for a notice of termination period. First, throughout 2000, and prior to the arrival of Mr Pitt in 2001, GSI's consistent failure to achieve its sales targets had not been the subject of comment, adverse or otherwise, by SA. This induced a reasonable belief on Mr Krauss' part that the targets were to be regarded as mere objectives. Secondly, although following Mr Pitt's appointment as general manager in October 2001, concerns regarding GSI's performance had been expressed on a number of occasions, circumstances then existing (such as the changes made to the monthly weightings as set out in the 2002 revised sales targets and doubts as to whether GSI had in reality failed to meet its April 2002 target) inclined his Honour to the conclusion that, "as a matter of fairness the invocation of cl 11(a) which effected summary termination should have included a provision for a period of notice". Thirdly, Mr Krauss and the appellants had had a long mutually beneficial and amicable contractual relationship. Mr Krauss had been an employee of the appellants for eight years followed by the agency agreement for a further two years. Fourthly, his Honour referred to SA's decision to change the nature of the relationship between it and Mr Krauss as employee, to that of an agency relationship with the interposition of GSI, concluding that:

In my view an employer should not be permitted to avoid its obligations to give notice of termination of a contract of employment or payment in lieu thereof by changing the relationship to that of an agency relationship. Such an alteration to the relationship may give rise to unfairness which, in my view, it has in respect of this matter. 17 His Honour then considered the question of appropriate compensatory orders in the context of an agency agreement. After considering the parties' respective submissions his Honour decided that Mr Krauss' period of service with SA's parent company in the United States of America could properly be taken into account. Mr Krauss had been employed by SA's parent company in the United States of America for about two years, followed by his employment in Australia by SA and its predecessor CS from 1994 until 2000, after which Mr Krauss continued to provide services for SA "...as the sole director and alter ego of GSI". His Honour found that there had existed a "...close relationship between Mr Krauss and the SA corporate group for at least ten years". 18 Having determined that the arrangement had been on foot for at least ten years either in the form of an employment contract or an agency agreement between GSI and the appellants, his Honour directed his attention to an assessment of a fair period of notice to be given on termination. He concluded that consistent with an earlier finding, that GSI was the alter ego of Mr Krauss, it was "...inappropriate for compensatory orders to be made separately in respect of those applicants". His Honour also considered it relevant to his assessment that GSI was put on notice in respect of its poor performance at the end of October 2001; and, that Mr Krauss had rejected an invitation by CS to discuss GSI's failure to meet sales targets. Later in the judgment it was determined that the arrangement should be varied to provide for notice of termination of six months. The monetary amount referable to this period, it was determined, should be calculated by taking into account GSI's total earnings in sales commission over the period of the agency agreement less all operating expenses except for Mr Krauss' wages and superannuation calculated over the life of the sales agreement. This method of calculation had been considered in some detail as part of his Honour's consideration of the issue of mitigation. His Honour said this method represented "... a fairer way to approach the determination of monthly income of GSI. To focus on the net profit (as had been submitted by the appellants) ... ignores the actual income earned by both applicants." 19 In relation to the issue of mitigation Staff J commenced his consideration by referring to the requirement to consider, "... whether and to what extent any payment, which would otherwise be made in consideration of any failure of the respondents to afford reasonable notice should be reduced in circumstances where the applicant had avoided its/his loss by obtaining reasonable alternate employment ...". 20 His Honour then noted that Mr Krauss "... did subsequently obtain alternate employment in July 2002." The reference to "alternate employment" referred to Mr Krauss' employment with Ansco Holdings Pty Limited for which he had been paid a net income of $32,262 for the financial year ending June 2003. The appellants had submitted that Mr Krauss obtained employment with Ansco Holdings Pty Limited two months after the termination of the SAA (which was in May 2002) and therefore occasioned no real loss if mitigation were to be taken into account. The respondents had submitted that Mr Krauss' income earned up to December 2003 was substantially offset by losses incurred by GSI over the same period so that any deduction made of actual income earned from a fair notice payment would be negligible. His Honour then referred to a passage from Westfield Holdings v Adams (2001) 114 IR 241 at [146] where the Full Bench observed that when applying the principle of mitigation, in some circumstances it may not be appropriate to reduce an amount awarded in lieu of notice, for example where an employee was able to find alternative employment but it was not reasonable employment. 21 A submission had been made before his Honour by the respondents that Mr Krauss had been unable to seek employment in the same industry because of a serious health issue. In relation to this his Honour said, "But for the decision that I have reached in this matter I would take this factor into account in mitigation." His Honour ultimately decided that it was not appropriate to reduce any payment ordered but for a different reason. In his Honour's view the orders sought for monetary relief were not "... strictly speaking in consideration of economic loss". This approach was adopted by his Honour from the observations of Walton J Vice-President in Ross v GN Comtext (Australia) Pty Limited (2001) 107 IR 1 where his Honour referred with approval to an extract from a judgment of Glynn J in Michel v Ogilvy and Mather Pty Limited (1996) 71 IR 417 at [432]. In the relevant passage in Michel v Ogilvy, Glynn J had said:

In my view, the concept of mitigation in relation to moneys earned after termination is not relevant in respect of this matter. What is being sought by the application is to re-write a contract to include a term ab initio that would, if actually in the contract at the time of termination, have required the payment, at that time, to the applicant of $X in lieu of a specified period of notice. Mitigation would not have been relevant then. I do not see it as relevant now. Grounds of Appeal

22 The appellants' first ground of appeal is that Staff J erred in concluding that Mr Krauss was a party to a contractual arrangement with CS and/or SA. According to the appellants Staff J erred in failing to address the essential precedent question, which was whether an arrangement existed which included the SAA and one to which Mr Krauss was a party. Instead, submitted the appellants, his Honour assumed that there was an arrangement. Mr Krauss, according to the appellants, was not a party to the SAA which was a contract between GSI and CS. The appellants concede that the SAA was a contract, "whereby a person performed work in any industry" but they contend that the SAA did not lead to the performance of work by Mr Krauss. Rather Mr Krauss performed work under another contract, a contract of employment, between himself and GSI. (This latter contract was not the subject of the respondents' application under s 106). 23 In response the respondents submitted that the "critical jurisdictional fact" for the Court's determination is not whether there existed a contract or arrangement in the abstract but whether there was a contract or arrangement, "whereby a person performs work in any industry". According to the respondents his Honour had regard to the appellants' contentions that the arrangement did not exist in the context of considering whether Mr Krauss was party to the arrangement. His Honour rejected the contention that the arrangement did not exist. Rather his Honour accepted that the arrangement existed in circumstances where although there was not a common identity between Mr Krauss as the person working and GSI as the contracting party under the SAA, GSI was the corporate vehicle through which Mr Krauss was personally responsible for achieving its obligations under the SAA. 24 In our view, it seems reasonably clear that his Honour accepted the characterisation of the arrangement advanced and relied upon by the respondents. The arrangement was identified by his Honour early in the judgment. In that regard his Honour said: [8] On or about 20 January 2001, GSI entered into a new SAA with the second respondent to provide services. At the request of one of the agents for the second respondent, new contracts were entered into with all agents of the second respondent so that the contract term would be for three years, rather than one year.

[9] The SAA required GSI's employees and agents to procure orders for the second respondent's products from hairdressing salons throughout New South Wales. GSI employed the second applicant on a fulltime basis to provide these services. In addition, GSI entered into sub-agency agreements with MSJP Pty Ltd (whose employee is Ms Maryetta Bailey) and Wendy Brown.

Was the Second Applicant a Party to the Arrangement?

[10] The first issue that arises for determination is whether the second applicant was in fact a party to the contract or arrangement in question, as s 108 of the Act requires. 25 After setting out the parties' respective submissions as to whether Mr Krauss was a party to the arrangement his Honour referred to a number of observations made by Mason P in Mayne Nickless. In that judgment the Court of Appeal was concerned with an arrangement between Mayne Nickless, Portpath Pty Limited and two doctors who were the directors and shareholders of Portpath. Mason P found that Portpath was the "corporate vehicle" through which the two doctors conducted a pathology practice which was substantially dedicated to Mayne Nickless. A little later in the judgment Mason P commented that it was not essential that there be, "...an identity between the person working and the contracting party"; and, that it is now "...commonplace for modern contracts of employment involving senior executives, professional persons and leading sportsmen and women to use a service company." 26 The facts before Staff J disclosed a similar arrangement. Mr Krauss, a skilled person, utilised his company, GSI, as the corporate medium through which he performed the work of procuring orders for Sebastian products, as envisaged under the SAA. Staff J relied on Mason P's observations that it is not essential that there be an identity between the person working (Mr Krauss) and the contracting party (GSI). Moreover, as the Court of Appeal found, this type of arrangement falls within the jurisdiction of s 106, being an arrangement, "whereby a person performs work in any industry": Mayne Nickless at [50], [51]; Ex Parte V.G. Haulage Services Pty Ltd and another; Re The Industrial Relations Commission of New South Wales and Another [1972] 2 NSWLR 81 at 86D - 88A. 27 Staff J adopted and applied (at [16]) the, "tests or indicia" set out by Mason P in Mayne Nickless to the arrangement between GSI, Mr Krauss and SA to see whether such an arrangement led directly to or directly envisaged, the performance of work. His Honour found that it did because Mr Krauss personally performed the work through GSI as GSI's sole director, sole shareholder and employee. GSI had been interposed between Mr Krauss and the appellants at the initiative of the general manager of SA. Also relevant to his Honour's analysis was the evidence which tended to show that all relevant communications in respect of the SAA were conducted by the appellants with Mr Krauss, and, Mr Krauss was personally responsible for GSI's sales under the SAA. These matters his Honour found tended to support the respondents' contention that Mr Krauss was the alter ego of GSI. 28 The issue which needed to be addressed, therefore, was the identification of the contract or arrangement whereby a person performs work in any industry: Fish and Anor v Solution 6 Holdings Limited (2006) 225 CLR 180 at [19]. Staff J addressed this issue. The arrangement was identified as comprising the SAA between GSI and SA, and the performance of work by Mr Krauss under the SAA. His Honour found that this arrangement was one whereby Mr Krauss continued to perform the same work for SA through GSI, as he had performed as an employee of SA. We perceive no error in this approach. Ground 7

29 The next ground relied upon by the appellants is that Staff J erred in including in the orders for compensation awarded to GSI the wages and superannuation paid to Mr Krauss by GSI. According to the appellants an order for compensation must be connected to any unfairness found to exist in the SAA and therefore could only compensate GSI as the party to the SAA. Secondly, the inclusion in the orders of wages and superannuation paid to Mr Krauss overcompensates GSI for its loss. What is in fact an expense incurred by GSI is treated as if it were income denied to GSI because of the unfairness of the SAA. 30 We do not agree that his Honour's approach to the orders for compensation awarded to GSI which included wages and superannuation paid to Mr Krauss, reveals any error. Staff J found the arrangement was unfair on two bases: the failure of the SAA to provide for notice of termination in subclauses 11(a) and 11(b) of the SAA; and, the conduct of the appellants in failing to make any provision for notice in the SAA. Having found that the broader arrangement which encompassed both the SAA and Mr Krauss as the person performing the work, his Honour made monetary orders for relief based on the unfairness found in the terms of the SAA .

31 In accordance with well established principle his Honour had a wide discretion to make orders for the payment of money, "as can reasonably be thought to have a real connection with the making, variation or avoidance of the contract or arrangement which has been varied or avoided": Brown v Rezitis (1970) 127 CLR 157 at [165]. According to his Honour, Mr Krauss was the alter ego of GSI. The facts that gave rise to this finding were essentially that Mr Krauss was the sole director and shareholder of GSI and performed the work envisaged under the SAA. The inclusion of wages and superannuation paid to Mr Krauss by GSI in the order awarded to GSI, may be said to have a "real connection" with the variation of the SAA to provide for a period of notice of termination, or payment in lieu thereof, because during that period Mr Krauss would have had the benefit of wages and superannuation payable by GSI for the work he performed. 32 In making the order for monetary relief referable to the unfairness found in the arrangement his Honour had a wide discretion and his approach in our view reflected well established principle. Accordingly no error has been shown. Ground 2

33 The appellants also contend that his Honour misdirected himself, finding that the SAA was unfair by addressing the wrong question, namely whether, "as a matter of fairness the invocation of cl 11(a)...should have included a provision for a period of notice." The relevant question that should have been asked according to the appellants was whether the contract is "unfair." By way of illustration, a contract may be fair but use of the phrase "as a matter of fairness" can be misleading because it leaves open a conclusion that a provision in an otherwise fair contract should be varied. Such a contract would be "more fair". Section 106 on the other hand requires a positive finding of unfairness. 34 The appellants in our view have misconceived his Honour's findings. In the passage in the judgment containing the words, "as a matter of fairness", his Honour said:

Although concerns regarding GSI's performance were raised on a number of occasions from 26 October 2001 onwards, including exercising the right to terminate the contract under cl 11(a), the circumstances then existing (the change in monthly weightings), doubts surrounding whether or not GSI reached the April target, inclines me to the conclusion that, as a matter of fairness the invocation of cl 11(a), which affected summary termination, should have included a provision for a period of notice. In my view, the Court needs to be wary of summary termination of contracts of arrangements where the reason a respondent advances to justify such termination is poor performance. The SAA did not contain a provision for notice of termination of the agreement that required the giving or payment in lieu of notice.

35 The comment followed an intensive examination of the various heads of unfairness of the arrangement alleged by the respondents, and the rejection by his Honour of many of those allegations. His Honour's finding that the arrangement was unfair was made a little later in the judgment in the passages earlier extracted. The basis of his Honour's finding was not that the arrangement was "fairer" or "more fair" or some other comparative form of words. His Honour made the express finding that the arrangement was unfair on the two bases earlier identified, namely that it did not provide in clause 11 for a notice of termination, and, the appellants had failed to provide for inclusion of a notice provision in the SAA. This is an entirely correct and orthodox approach. No error has therefore been disclosed in relation to this ground. Ground 2A

36 As a corollary of the ground alleging error in his Honour's use of the words "as a matter of fairness", the appellants also assert that his Honour fell into error by failing to give adequate reasons to establish why the SAA was unfair in the circumstances of the case. The failure according to the appellants arose because his Honour did not address whether the arrangement was unfair and did not give adequate reasons for his finding, focussing instead on the wrong question, namely, "as a matter of fairness," (should the contract have included a provision for a period of notice). 37 In our view there is little substance to this ground of appeal. His Honour's specific finding that the arrangement was unfair was based on an extensive review of the evidence. His Honour articulated what matters he took into consideration in forming his conclusion that the arrangement was unfair. His Honour also clearly set out his view of the facts. This approach is sufficient to discharge the obligation to give reasons for a decision: Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 277-281. 38 By way of illustration his Honour's conclusion that the arrangement was unfair was based on several factors extracted by his Honour from the evidence. These included: (i) GSI's consistent failure to achieve its sales targets prior to Mr Pitt's arrival had not, at that time, attracted any comment adverse or otherwise by SA (thereby inducing in Mr Krauss a reasonable belief that the targets were mere objectives);

(ii) Following Mr Pitt's appointment, and after concerns had been raised as to GSI's failure to achieve SA imposed targets, changes to the monthly weightings which resulted in the 2002 revised sales targets, there was also doubt about whether in fact GSI had failed to meet its April 2002 target.

(iii) Mr Krauss and the appellants had enjoyed a mutually beneficial and amicable contractual relationship for at least 10 years;

(iv) The alteration of Mr Krauss' working relationship with SA from that of employee to agency through the interposition of GSI at the initiative of SA, and, where, as a result Mr Krauss, having lost his status as employee, was denied the benefit of termination with notice. Ground 5

39 The respondents also point to error in his Honour's conclusion that SA's decision to change the arrangement from that of employee to agency was unfair. 40 According to the respondents it was an "essential plank" of his Honour's reasoning that, "an employer should not be permitted to avoid its obligations to give notice of termination ... by changing the relationship to that of an agency relationship." It was not part of the respondents' case nor was there any evidence of an intention to avoid the obligation to give notice. This reasoning by his Honour, say the respondents, suggests, "...some bad faith on the part of Cosmetic Supplies...", where no such allegation had been made. The denial of natural justice, "...is all the greater", because the proposition formed an important part of his Honour's reasoning. 41 In our view, his Honour's conclusion concerning the impact of the SAA on the nature of the employment relationship between Mr Krauss and SA does not suggest an element of intentional avoidance by reason of bad faith on the part of the appellants. The appellants did not direct the Court to any evidence which might have supported a contrary finding. The agency agreement which was apparently at the instigation of the appellants, is a well-known device which can have the effect of dispensing with the obligation on an employer, intended or otherwise, to make a payment in lieu of notice, or to provide for notice in the event of termination. 42 Nor do we agree that the conclusion formed an "essential plank" in his Honour's reasoning. It was simply one of several factors which influenced his Honours' view that the SAA was unfair in that it did not provide for a notice of termination period. Later in the judgment his Honour places particular emphasis on SA's long term relationship with the respondents in support of his finding that the non-inclusion of a notice provision in the SAA revealed unfair conduct by the appellants. A significant issue between the parties at first instance was that the arrangement, which included the SAA, was unfair in that it permitted the termination of the SAA without notice. The amended summons sought an order requiring the SAA to insert a clause which provided for the balance of the duration of the SAA in the event of termination for compensation. None of these matters either singly, or taken together, sustain a suggestion that the appellants have been denied natural justice because they were not given an opportunity to respond to his Honour's reasons concerning the change in the nature to the working relationship through the mechanism of agency. Grounds 3 and 4 43 The appellants also contend that Staff J erred in his conclusion that the SAA should have included a provision for a period of notice of termination of six months, and that he misdirected himself as to the factors to be taken into account in determining that period of notice. In submissions it emerged that the appellants' principal complaint as regards his Honour's treatment of the absence of a notice provision in the SAA, was that his Honour failed to address the rationale for notice when calculating quantum. His Honour had before him the evidence that Mr Krauss commenced employment with Ansco Holdings sometime in July 2002. That meant that Mr Krauss was effectively out of work for about 2 months. According to the appellants, his Honour was required, but failed to incorporate the fact of Mr Krauss' employment with Ansco Holdings into the assessment of a notice period. Had his Honour done so, say the appellants, his Honour would have fixed a reduced period. 44 The appellants also contend that his Honour failed to take into account the actual notice given to GSI in March 2002, which fact should have reduced the notice period awarded from 6 months to 3 months. 45 Finally, the appellants point to Staff J's reference to Mark Trenter t/as 'Time Rite Onforwarders' v Australian Air Express Pty Limited [2006] NSWIRComm 314, in which Staunton J in turn referred to observations of McHugh JA in Crawford Fitting Co and Others v Sydney Valve & Fittings Pty Ltd and Another (1988) 14 NSWLR 438 on the issue of a failure to give notice in the context of commercial agreements. According to the appellant, a number of factors considered by McHugh JA on the issue of what constitutes reasonable notice in a commercial agreement (as distinct from an employment contract) were not taken into account by Staff J. 46 The rationale for notice was explained by the Full Bench in Westfield Holdings v Adams in the context of examining the differing functions of a payment in lieu of notice and a redundancy or severance payment. After considering several authorities on the issue the Full Bench said (at [144]):

In our opinion, these authorities persuasively demonstrate the distinct functions to be served by awarding a payment in lieu of notice and a payment in the nature of redundancy or severance. Whilst a period of notice, or payment in lieu, is directed at supplementing the income of an employee immediately following termination, the focus of a redundancy or severance payment is to compensate an employee for the loss of non-transferable benefits and for the inconvenience and hardship imposed by the termination. This is, in our view, not merely an additional purpose, but rather the dominant function of a redundancy or severance payment. The fact that an employee may apply redundancy or severance payments to supplement the employee's income during a period of unemployment, or to support the employee and their family, does not alter the purpose of those payments being made. In many instances, an employee will, of necessity, be forced to draw on any available resources during a period of unemployment. The purpose of making a redundancy or severance payment is, nonetheless, qualitatively different to providing for the employee during this time. 47 Staff J took into account a number of matters when considering the issue of notice. His Honour commented that the amount of compensation to be expected had caused him "considerable difficulty". His Honour considered what would be an appropriate period of notice by reference to the principle of mitigation. In doing so his Honour was well aware that he was required to adopt this approach. At [113] of the judgment his Honour said:

The final issue addressed by the parties concerns the question of mitigation of loss. The Court is required to consider whether and to what extent any payment, which would otherwise be made in consideration of any failure of the respondents to afford reasonable notice should be reduced in circumstances where the applicants had avoided its/his loss by obtaining reasonable alternate employment: Section 106(5) of the Act; Westfield Holdings v Adams at 275 - 276; English v Aradlay Insurance Brokers Pty Limited (2005) 145 IR 129 at 141. 48 The approach in our view properly reflects the correct approach to the issue of notice. The application of the principle of mitigation is necessarily concerned with the issue of supplementing income immediately following termination, which is, the rationale for providing for notice. 49 Nor do we see that the letter of 7 March 2002 constituted "actual notice" as contended by the appellants. The letter addressed to Mr Krauss from Mr Pitt advised Mr Krauss, in terms, that if target achievement was not met for 3 consecutive months then SA would, "...exercise its rights to terminate the contract under clause 11a". The contents of the letter effectively forewarn Mr Krauss that in the event certain conditions are not met (the achieving of sales targets for 3 consecutive months by GSI) then SA will exercise its rights to terminate under the SAA. 50 The appellants' contention that his Honour failed to take into account certain factors relevant to the issue of notice in the context of commercial arrangements does not seem to us to be borne out in the reasons for judgment. His Honour outlined the basis for exercising his discretion to vary the arrangement. His Honour also expressly stated that he proposed to have regard, in determining the issue of reasonable notice, to the principles extracted by him from several authorities including the extract from Mark Trenter. That extract referred to the observations of McHugh JA on the principles applicable to the determination of a reasonable period of notice specifically in relation to commercial transactions. Grounds 8 and 9

51 The appellants also claim that his Honour misdirected himself when considering whether to reduce compensation payable to Mr Krauss to take account of post-termination earnings, and, that his Honour erred in failing to reduce the compensation awarded to Mr Krauss to take account of post-termination earnings. 52 The evidence on this particular issue was that about two months after the termination of the SAA (which was in May 2002) Mr Krauss was employed by Ansco Holdings. In the financial year ending 30 June 2003 Mr Krauss received a net income of $32,262 from his employment with Ansco Holdings. According to the appellants this amount was "almost identical" to his income received as an employee of GSI. Mr Krauss therefore suffered almost no loss. 53 Staff J considered the application of the principle of mitigation under s 106(5) but declined to reduce the amount payable in lieu of 6 months notice because of the approach his Honour took in relation to the orders sought by the respondents at first instance, namely, that they were not, "strictly speaking, in consideration of economic loss." This approach was influenced by a comment by Walton J, Vice-President in Ross v GN Comtext (Australia) Pty Limited (2000) 107 IR 1. In that decision, Mr Ross had applied under s 106 by way of summons for relief arising from an unfair contract of employment, after his position as a business development manager with the respondent company had been made redundant. In considering the application of the principle of mitigation Walton J found that the applicant had not acted unreasonably in his attempts to obtain alternative employment in Australia; and, that the applicant had suffered financially as a result of being made redundant. In the summons for relief the applicant had sought compensation by way of a payment of 18 months notice of termination or payment in lieu of such notice. Before Walton J the applicant's case was advanced on the basis that the contract was unfair because of the period of notice given to the applicant upon termination and because of the lack of provision for severance pay. 54 In deciding not to reduce any payment ordered by reference to the application of the principle of mitigation Walton J said that the orders sought by the applicant (that is the orders for payment in lieu of notice and severance pay) were not, "strictly speaking in consideration of economic loss". The comment was made immediately before his Honour said that there was "some force" in the observation of Glynn J in Michel v Ogilvy & Mather Pty Limited at 432 where her Honour said: In my view, the concept of mitigation in relation to moneys earned after termination is not relevant in respect of this matter. What is being sought by the application is to re-write a contract to include a term ab initio that would, if actually in the contract at the time of termination, have required the payment, at that time, to the applicant of $X in lieu of a specified period of notice. Mitigation would not have been relevant then. I do not see it as relevant now.

55 As in Ross v GN Comtext, the applicant in Michel v Ogilvy was terminated from his employment after his position had been made redundant. Glynn J found in the context of considering the application of the mitigation principle that the applicant, post-termination, had made numerous applications for work but had been unsuccessful in obtaining a permanent position. Instead he had set himself up as a consultant taking temporary assignments. 56 It is against this type of factual background that the respective findings in the two judgments were made not to apply the principle of mitigation on the basis that the monetary amounts sought were not so much in compensation for economic loss or actual loss but rather were moneys payable at the time of termination, in lieu of a specified period of notice. 57 In contrast there is very little information in the judgment of Staff J as to the efforts made by the applicant to obtain reasonable alternative employment and the success of these efforts. His Honour refers on a couple of occasions to the fact that Mr Krauss obtained alternative employment with Ansco Holdings some time in July 2002 and was paid $32,262 net for the financial year ending June 2003. This income, according to the appellants, was "almost identical" to the income earned by Mr Krauss while working for the respondents. Apart from the actual income earned it is not known from the judgment if the position at Ansco Holdings held by Mr Krauss was one of comparable seniority or, offered long-term employment prospects, or, whether the position was in the applicant's usual field of expertise. All these matters are usually relevant to the application of the principle of mitigation. 58 It should be emphasised that the Court has a very broad discretion in accordance with s 106(5) to make payments (in connection with any contract varied) as the Court considers, "just in the circumstances of the case". Staff J was well aware of this. His Honour relied on a passage to similar effect in Westfield Holdings v Adam (at [134]) where the Full Bench said:

[134] The discretion conferred by s 106(5) of the Act to order the payment of money ''in connection with'' any contract declared wholly or partly void, or varied, as the Commission considers ''just in the circumstances of the case'' is wider than the power to award damages in the case of tort or breach of contract at common law. As has been discussed, the discretion conferred by s 106(5) of the Act is not restricted to awarding payment so as to compensate the applicant for actual loss suffered: see Brown v Rezitis (at 164). As earlier observed, it was said by the Full Bench in New South Wales v Health and Research Employees' Association of NSW that the existence of s 88F(2) of the 1940 Act, now s 106(5) of the current Act, ''indicates that the legislature found that common law remedies were not necessarily appropriate''. For this reason, and as earlier observed, reliance solely on common law rules as to damages may, in certain cases, be inappropriate. 59 The Full Bench in Westfield Holdings v Adams considered cases where the principle of mitigation has not been applied. Examples include where the employee has made reasonable attempts to obtain alternative employment without success or, where alternative employment was available but the employee refused to take up the employment and the refusal was reasonable in the circumstances. Later in the judgment (at [137]) the Full Bench distinguishes those circumstances where the employee has wholly or partly mitigated his or her loss by obtaining other employment or by failing to take reasonable steps to do so. In those circumstances the principle will generally fall to be applied at common law to reduce the amount that would otherwise be awarded as compensation. 60 Westfield Holdings v Adams also emphasises the distinction and the functional differences between a period of notice or payment in lieu on the one hand and a severance payment on the other. In the context of the application of the principle of mitigation the Full Bench made the observation (at [138]) that; "More complex questions are raised when consideration is given to the application of the principle of mitigation to any payment it is proposed to make in lieu of a specified period of notice or in the nature of a severance or redundancy payment". Next the Full Bench referred to disagreement in the authorities as to the purpose of a payment in lieu of notice as distinct from a payment by way of redundancy, as well as to the degree of overlap. Various definitions and judicial descriptions are also examined in relation to the two concepts. Notice provisions for example are said to, "...focus on the future of an employee and are intended to compensate, to the extent possible, for the disruption, costs and hardship caused by the periods of unemployment that commonly follow termination" (at [138]); or, "...(to) give an employee the opportunity to adjust to the change in circumstances which is to occur and to seek other employment". At [144], the Full Bench summarised the position:

[144] In our opinion, these authorities persuasively demonstrate the distinct functions to be served by awarding a payment in lieu of notice and a payment in the nature of redundancy or severance. Whilst a period of notice, or payment in lieu, is directed at supplementing the income of an employee immediately following termination, the focus of a redundancy or severance payment is to compensate an employee for the loss of non-transferable benefits and for the inconvenience and hardship imposed by the termination. This is, in our view, not merely an additional purpose, but rather the dominant function of a redundancy or severance payment. The fact that an employee may apply redundancy or severance payments to supplement the employee's income during a period of unemployment, or to support the employee and their family, does not alter the purpose of those payments being made. In many instances, an employee will, of necessity, be forced to draw on any available resources during a period of unemployment. The purpose of making a redundancy or severance payment is, nonetheless, qualitatively different to providing for the employee during this time. 61 Returning to the present proceedings the evidence taken into account by Staff J does not suggest that the alternative employment obtained by Mr Krauss following his 2 months of unemployment was not reasonable alternative employment. It appears for example that Mr Krauss' salary at Ansco Holdings was equivalent to the salary he received while employed by the respondents. This is a factor which ordinarily would attract the application of the principle of mitigation: Westfield Holdings v Adams at [145]. 62 The respondents sought orders for payment in lieu of notice. Similar orders had been sought before Haylen J in Bastian v Brent and Others (2001) 111 IR 306. On appeal the Full Bench overturned the orders made at first instance in which Haylen J had awarded the applicant a monetary amount equivalent to 10 months salary. A component of the amount included an unspecified amount in lieu of notice. This amount had been included by Haylen J after consideration of the principle of mitigation which his Honour held did not apply in the circumstances. 63 On appeal the Full bench referred to Haylen J's findings that Mr Bastian (the applicant at first instance) had taken steps following termination to avoid his loss by gaining employment but that the new employment was not at the standard previously enjoyed by Mr Bastian in his former employment. It was this evidence that Haylen J had found persuasive in deciding not to apply the mitigation principle. In finding that Haylen J's decision not to apply the principle disclosed error the Full Bench said (at [43] and [44]):

[43] In this case, we consider that there was error in principle in failing to apply the principle of mitigation. It was necessary to apply the principle in consideration of the moneys earned by the respondent after termination. Whilst it was submitted for the respondent that he was forced to take the first available job he was offered and would have preferred to wait and see what other jobs were available, the position he took up with KPMG could be considered to be reasonably comparable employment to what he would have enjoyed if he had been transferred back to Sydney to resume full time employment with the first appellant after the two year period in Singapore. We do not consider the appropriate comparison is with his Singapore package. We do not accept that the respondent was entitled to expect employment in Australia at a similar level to that he enjoyed in Singapore on a total annual remuneration package of A$415,700 plus bonuses and unless that, or something close to it, was achieved the mitigation principle should not apply. The respondent's status and remuneration package associated with the Singapore appointment was a one-off arrangement that had no relevance to employment in Sydney unless he had made such a success of the appointment that a partnership was in the offing on his return to Sydney. Such was not the case. Similarly we do not consider that the brevity of the employment with KPMG was a basis to ignore its significance for the respondent's obligation to mitigate his losses.

[44] It follows that any moneys ordered to be paid to the respondent in respect of pay in lieu of notice should have been reduced by moneys earned after termination. We agree with Haylen J, for the reasons expressed in Westfield v Adams , that any moneys ordered to be paid to the respondent in respect of redundancy should not be taken into consideration. The complicating factor here, however, is that the trial judge ordered 10 months pay for notice and redundancy and made no distinction between the two.

64 The circumstances before Staff J are sufficiently similar in terms of the termination of the SAA and the activities of Mr Krauss following termination, to warrant a similar approach in this appeal. Mr Krauss obtained alternative reasonable employment about 2 months after the termination of the agreement on a comparable salary level. In these circumstances the principle of mitigation should have been applied, absent any other countervailing features which might have justified a contrary approach. 65 In the event that we took the view that Staff J was in error in his approach to the application of the principle of mitigation, the respondents submit that any reduction of the compensation ordered by Staff J should be limited to the net earnings of GSI and Mr Krauss in the sum of $4,260.44. This sum has been calculated by the respondents in the following way:

i. From 1 July 2002 to 30 June 2003 GSI suffered a net loss in the sum of $28,131.67. This was a loss of $2,344.31 per month from 1 July 2002 until the end of the relevant notice period ordered by his Honour on 3 November 2002.

ii. From 1 July 2002 to 30 June 2003 Krauss earned a gross taxable income of $40,913.00. This was an income of $3409.42 per month from 1 July 2002 until the end of the relevant notice period ordered by his Honour on 3 November 2002.

iii. The net position is that during the relevant 6 month period to 3 November 2002, Krauss and GSI mitigated their combined loss in the relatively small sum of $4,260.44. 66 This sum represents a relatively insubstantial payment earned during the relevant period by the respondents so that it may be disregarded for the purposes of s 106(5): English v Aradlay Brokers Pty Ltd (2005) 145 IR 129 at [36]. Notwithstanding therefore that the approach taken by Staff J to the application of the mitigation principle disclosed error, we do not propose to interfere with his Honour's orders. 67 For the foregoing reasons although leave to appeal is granted the appeal is dismissed with costs. Orders

68 We make the following orders: 1. Leave to appeal is granted.

3. The appellants are to pay the respondents' costs of the appeal as agreed or as assessed; as well as the respondents' costs of the notice of motion for security for costs heard before Backman J on 28 February 2007 as agreed or assessed.

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