Downer EDI Limited v Gillies

Court of Appeal (NSW)|2012-05-25|Before: Allsop P, Macfarlan JA, Meagher JA

nternational SA (in liq) [1998] AC 20 Pearce v Foster (1886) 17 QBD 536 Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17 R v Byrnes [1995] HCA 1; 183 CLR 501 Sanders v Snell [1998] HCA 64; 196 CLR 329 Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27 Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1935) 53 CLR 618 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401 Upper Hunter District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 Vines v Australian Securities and Investments Commission [2007] NSWCA 75; 62 ACSR 1 Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 Zhu v Treasurer of New South Wales (2004) 218 CLR 530 Texts Cited: P Finn, Fiduciary Obligations (Sydney: Law Book Co, 1977) Category: Principal judgment Parties: Downer EDI Ltd (Appellant) Stephen John Gillies (Respondent) Representation: D F Jackson QC, J C Giles (Appellant) D L Williams SC, R C Beasley SC (Respondent) Corrs Chambers Westgarth (Appellant) DibbsBarker (Respondent) File Number(s): 2007/265271 Decision under appeal Court or tribunal: Supreme Court Citation: [2011] NSWSC 1055 Date of Decision: 9 September 2011 Before: Rothman J File Number(s): 2007/265271

JUDGMENT

ALLSOP P: The controversy between the appellant, Downer EDI Ltd ("Downer") and the respondent, Mr Gillies, concerns the circumstances of the cessation of Mr Gillies' employment with Downer in August 2007. Mr Gillies was Downer's Managing Director and Chief Executive Officer, and had been so for 10 years. Before that Mr Gillies had been a senior employee for 9 years (from June 1988). Downer is, and was during the relevant events, a public company listed on the Australian Stock Exchange.
Mr Gillies sued Downer in the Supreme Court for breach of his contract of employment and for payment of sums due to him under the contract. Mr Gillies was successful, the Court entering judgment for $7,341,711.27 plus costs (including a partial indemnity costs order). See Gillies v Downer EDI Ltd [2011] NSWSC 1055.
For the reasons that follow the appeal should be allowed in part in accordance with the disposition of issues summarised in [9]-[10] below.
Analysis commences with the terms of Mr Gillies' contract which was contained in a letter dated 31 May 1997. Relevantly it stated as follows: "Further to our discussions and reflecting the change in management and ownership structure this letter is to continue the terms of your appointment as Chief Executive Officer and Managing Director. These terms are being clarified in consideration of your agreement to continue working for the Downer Group on the terms set out in this letter. 1.Position and Location The position is Chief Executive Officer and Managing Director reporting to the Company's Board of Directors, Downer Group Limited, with executive responsibility to Mr Tom Lau (Chairman). This position is based in Sydney. You will be responsible for and continue to provide management directions for and to overview financial, administration and operational matters throughout the Company's activities (including subsidiaries, associated and related Companies). Obviously the position requires a significant degree of direction and involvement in relation to the other key members of your management team."
Clause 2.1 identified remuneration as $400,000 per year. This was increased from time to time. "... 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.) ... 4.Termination of Agreement 4.1Your 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. ... 9. Incentive/Bonus Scheme 9.1In 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. ... 11.Company Motor Vehicle The Company will provide a vehicle for your sole use and meet running costs. Currently your entitlement is to a BMW 5 Series. 12.Terms and Conditions This letter sets out all remuneration and terms and conditions of your employment unless agreed otherwise in writing from time to time by the Chairman of the Company and yourself subject always to the approval by the Remuneration Committee of the Board of the Company, if and when one is constituted."
There was no issue on the appeal about the relationship between cll 2.2 and 9. The primary judge dealt with this at [16]-[19] of his reasons. Subject to the contract Mr Gillies was entitled to the bonus in cl 9.1.
There was also no issue that the Executive Share Option Plan referred to in cl 2.2 did not operate. In its place there came to be a so-called "Phantom Option Scheme" ("POS"). This was the payment of a bonus calculated on a basis equivalent to the benefit under the option plan. It was contained in an addendum to a letter dated 23 October 2001, signed by Mr Lau, the then Chairman of the Board. The letter contained the following: "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."
It is unnecessary to refer to most of the addendum. There was no issue on appeal as to how much Mr Gillies was entitled to under the POS, if he was entitled to payment. The two issues concerning the POS were: first, whether the POS had come into effect; and, secondly, if it had, whether Mr Gillies was employed when he exercised his rights. In respect of this second issue cl 2(g) of the addendum was relevant: "A notice of bonus election may only be given by the Executive whilst the Executive is employed by Downer."
There were five groups of issues on appeal: (a)first, whether the POS had been ratified, and became binding and effective; (b)secondly, what was the effect of what occurred in early August 2007 in respect of the ending of the employment relationship between Downer and Mr Gillies; (c)thirdly, and related to (b), if the POS was binding and effective whether Mr Gillies was employed when he made his election; (d)fourthly, whether Mr Gillies engaged in serious misconduct during his employment, such that by cl 4.3 or the general law, he had no right to amounts claimed under cll 4.1 and 4.2; and (e)fifthly, whether Mr Gillies was indebted to Downer in respect of a loan for a car.
The primary judge found favourably to Mr Gillies on all these issues. For the reasons expressed below, the issues in (a), (b), (c) and (e) should be resolved in Mr Gillies' favour and those in (d) in Downer's favour.

The ratification of the POS

The background to the POS was set out by the primary judge at [68]-[69] of his reasons: "[68]The 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. [69]Mr 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."
The live contention between the parties was whether the addendum had been ratified by the remuneration committee. The primary judge's findings are set out at [71]-[79] of his reasons, as follows: "[71]On 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. [72]As 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. [73]At 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. [74]Minutes 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. [75]That 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. [76]Further, 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. [77]Further, 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. [78]Against 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. [79]Further, 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."
The challenge was to the factual finding of ratification.
Mr Lau (who as Chairman was a member of the Remuneration Committee) could not recall (one way or another) any resolution. Mr Kent, who had primary conduct of the task, was not called. Mr Gillies, however, stated in an affidavit sworn 15 March 2010 at paragraph 34: "I recall that on or about 19 February 2002, I had a conversation with Michael Kent, a member of the Remuneration Committee and the Board, at a Remuneration Committee meeting, where he said to me words to the following effect: 'The Remuneration Committee has approved the phantom option arrangement but has asked for some further legal advice from Corrs as to whether it breaches listing rules and whether [it] is necessary to disclose the phantom option arrangement to the market. Although the original advice that was provided by Corrs says that it does not need shareholders' approval, I would like a simple advice as to whether disclosure is necessary to the market.'"
In the absence of controverting evidence, the finding by the primary judge of the conversation at [76] of his reasons is not open to challenge.
There was documentary substantiation providing the basis for a clear inference that ratification occurred. (a)On his copy of the letter of 23 October 2001, Mr Bruce, the Chief Financial Officer ("CFO"), at the Remuneration Committee meeting of 19 February 2002 wrote: "Remuneration Committee meeting held 19.2.2002 Purpose. To ratify attached amendment to employment contract." (b)In his affidavit sworn 12 March 2010, Mr Bruce gave evidence as to what occurred at and after the meeting at paragraphs 67 to 70, as follows: "[67]Following the February 2002 board meeting, a meeting of the Board Remuneration Committee was held to ratify the amendment to Mr Gillies' contract of employment. My recollection was that I attended this meeting of the Remuneration Committee. Annexed and marked 'Z' is a copy of a letter dated 23 October 2001 to Mr Gillies, which was a covering letter to the addendum to Mr Gillies' employment contract. I recognise the handwriting on that copy as my handwriting and the handwritten words are: 'Remuneration Committee Meeting held 19.2.2002 Purpose. To ratify attached amendment to employment contract.' [68]This handwritten annotation was made by me, shortly after the commencement of the meeting of the Remuneration Committee on 19 February 2002. [69]I recall that during the February meeting of the Remuneration Committee, the phantom options were granted to Mr Gillies, but that the Remuneration Committee wanted to obtain legal advice to ensure that this grant did not require disclosure to the market. I recall that Michael Kent was the member of the Remuneration Committee who was most concerned to obtain this advice. I was directed by the Remuneration Committee to obtain the necessary legal advice. For that purpose, I engaged Corrs Chambers Westgarth to provide the legal advice. [70]My recollection is that this legal advice was received and forwarded to the members of the Remuneration Committee on or around 21 March 2002, completing the process. Annexed to this affidavit and marked with the letter[s] 'AA' is a true copy of the fax header prepared by Ms Kathryn Moore, who was my PA at the time. I do not recall receiving any response to the legal advice from any of the members of the Remuneration Committee." The annexure AA was a memorandum to Messrs Lau, Gillies, Kent and Roche (apart from Gillies, all being members of the Remuneration Committee) that stated: "As requested at the Remuneration Committee meeting following on from the February 2002 board meeting, I have obtained legal advice from Corrs Chambers Westgarth. Attached for your review are copies of such advice." The advice was not put into evidence. (c)Mr Bruce thereafter did calculations from time to time to determine the cost to Downer of the POS. (d)At the termination of Mr Gillies' employment, a draft deed of release was prepared which referred to the existence of the POS. It was not suggested at this time (August 2007) that the arrangement did not exist. (e)Mr Lau and Mr O'Callaghan (then the Chairman) discussed the existence of the POS and Mr O'Callaghan made a note of the discussions.
Against that, it is said that when asked in July 2003 by the Remuneration Committee for a copy of Mr Gillies' terms of employment, Mr Bruce did not disclose the addendum. He explained this in his evidence. He considered the POS as a "stand alone arrangement".
There was no specific entry in Downer's books of the POS obligation. That is as may be, but it would only reflect on the understanding of those responsible for that, Mr Bruce particularly. The evidence was clear and accepted (see the primary judge's reasons at [76]) that Messrs Lau, Gillies and Bruce thought that ratification had occurred. Of course, their view is not decisive, but it is some evidence that matters had occurred that were necessary for that view to be held: Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at [298]-[300].
It was submitted that if the advice that was sought concerned disclosure to the market, such advice had already been received. In January 2001, Corrs had advised by letter as follows: "In our view, the grant of 'phantom options' would not infringe any specific Listing Rules. However, you should be aware that the ASX could take the view that such arrangements do constitute the grant of a 'security'. We are aware that similar arrangements have been entered into in the past and we are not aware that the ASX has taken action in relation to these. You might draw some comfort from this. However, we do not know whether the ASX is aware of such arrangements. Presumably the existence of such arrangements will in due course become public as it is likely that such arrangements (if with a director) will need to be referred to in a company's annual report." Assuming that the later advice (from the same solicitor) was to the same effect, and that there was no reference to the POS in the annual reports then, it was submitted, the arrangement could not have been agreed to. The lack of disclosure in the annual reports may or may not have been an illustration of poor governance. It does not, however, overcome the weight of the balance of the evidence that ratification occurred. In coming to that conclusion, the operation of Jones v Dunkel [1959] HCA 8; 101 CLR 298 employed by the primary judge, about which complaint is made by Downer, can be put to one side. Without it, there is ample evidence to support the primary judge's conclusions, which have not been shown to be wrong. Indeed, the evidence is such as to lead me to the very same conclusion.
This ground of appeal fails.

What occurred in early August 2007?

It is first necessary to appreciate that the events of early August 2007 and the central issue arising from them - the date of Mr Gillies' termination - do not depend upon the question as to whether Mr Gillies had misconducted himself in years past. The facts that gave rise to the assertion that he had done so were learnt about by Downer after August 2007. Those matters will in due course be important to consider in relation to the legal effect of what occurred in early August. For the present, focus will be upon what happened in early August concerning termination of Mr Gillies' employment.
The primary judge dealt with the termination of employment at [119]-[148]. He concluded that Mr Gillies' employment was not terminated until 9 August 2007, after he had made his election for the purpose of the POS. The facts are not substantially in dispute; rather, the dispute concerns what flows from their assessment and characterisation.
In August 2006, Downer announced a profit downgrade for the year ending 30 June 2006. In late July 2007, further downgrading of profits occurred.
On the morning of 1 August 2007, a meeting of non-executive directors took place. At that meeting there was a clear expression of lack of confidence in Mr Gillies. The primary judge described this meeting at [126]-[127] of his reasons, as follows: "[126]Prior 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.' [127]Whatever 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.'"
In the evening of the same day (1 August), the full board met. The primary judge described what happened at [120]-[125]: "[120]On 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.' [121]Mr 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.' [122]Mr 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].) [123]There 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. [124]The 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.' [125]The 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."
What is clear is that Mr Gillies did not resign. Downer submitted that the objective effect of the events described by the primary judge was termination of employment. It was submitted that "stepped down", being the phrase in the press release, was a euphemism for dismissal. Mr Gillies asked to stay in order to make the announcements, but this was refused. He was to obtain permission to come on to the premises. Mr Gillies' contract of employment was as Managing Director and Chief Executive Officer. Thus, it was submitted that to tell him that he ceased to be such was to terminate his employment.
It is undoubted that the Chairman and Deputy Chairman wanted Mr Gillies gone from the board and gone from the position of Managing Director. The relevant consideration to tell the market was that Mr Gillies was leaving, that he was no longer acting as Managing Director and Chief Executive Officer and that someone else was fulfilling those duties. The usual euphemisms and platitudes were used. Mr Gillies recognised he had to go, but he expressly did not resign. It is critical that there was no express statement that his employment was terminated from that instant.
It can be accepted that what was occurring was the ending, in a practical sense, of the role of Mr Gillies as Managing Director and Chief Executive Officer. That is what was crucial to have the market appreciate. That Mr Gillies no longer fulfilled the role or duties of Managing Director and Chief Executive Officer was the reality and was what the market was told. Nevertheless, a relationship of employment had existed. I see no act or statement that terminated that employment relationship. None of the events contemplated by cl 4.1(a), (b) or (c) occurred on 1 August. The primary judge so found at [145]. Mr Gillies' evidence of what occurred was that Mr O'Callaghan asked him to "step down": see the primary judge's reasons at [120]. At paragraphs 65, 66 and 68 of his affidavit, Mr Gillies gave the following evidence: "[65]At no time during this conversation did Mr O'Callaghan advise me that my employment had been terminated, either with immediate effect, or on any other basis. [66]Further, at no time during this meeting did I agree that my employment would come to an end either on or from 1 August 2007, or from any other date. At the time I was conscious of the existence of the 'phantom option[s]' arrangement and did not want to do anything that would prejudice my right to exercise them. ... [68]Following the conversation referred to in paragraph 64, I left the room in which the meeting was held and left the building located at level 3, 190 George Street, Sydney. At no stage did anyone ask me to hand in my security pass or my company mobile phone." Neither Mr O'Callaghan nor Mr Jollie gave evidence.
The effect of what was said, including how it was said, can be seen in the attitude and appreciation of those present at the conversation. Mr O'Callaghan and Mr Jollie had recorded in the minutes that Mr Gillies "had agreed to resign immediately as a director of the company" (emphasis added). That was the reality. Mr Gillies knew that he no longer had any authority as managing director; but he said he was not resigning. That can be taken as his attitude to his employment. He was aware of his rights under the POS. He recognised, nevertheless, that henceforth he would not be the managing director and chief executive. In that sense the minute was accurate. He agreed to stand down as such. His note read: "clearly you want me to stand aside". He did not demur to this. Given his awareness of his rights under the POS, his reference on the day to relying on his contract would have been quite different if he thought his contract of employment had been terminated instanter.
Further, both the media release and the board minute refer to a consultancy for a further three months. There was no suggestion, at the time, of the need for further documentation of a new contract. What was said and what was not said and done in this respect is consistent with employment with the company continuing with altered capacities from managing director to consultant.
The evidence of what occurred on 1 August 2007 does not reveal a termination of Mr Gillies' employment.
As the primary judge found at [133] of his reasons: "No 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."
Correspondence ensued. The primary judge described the relevant communications and events at [137]-[142] of his reasons: "[137]On 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. ...' [138]Prior 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. [139]On 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 . ...' [140]On 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.' [141]The 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. [142]I 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." [emphasis in original]
No challenge was made to the primary findings therein. I agree with the conclusions drawn by the primary judge from these facts.
Thus, I reject the appellant's contention that Mr Gillies could not exercise his rights under the POS when he did.

The car loan

Clause 11 of Mr Gillies' contract entitled him to a vehicle provided by Downer for his sole use, together with all running expenses. The vehicle, or its standard, was identified as a BMW 5 Series. The vehicle was not provided. Mr Gillies did not consider provision of the vehicle appropriate and he did not seek a vehicle until 2004. In 2004, Downer paid $342,000 for a Series 7 BMW for Mr Gillies. Downer claims that this was a loan to Mr Gillies and reclaims the money together with interest. Mr Gillies' case was that the loan was on a non-recourse basis and, having returned the car in August 2007, he was not personally liable on the loan.
The primary judge set out at [110] and [112]-[114] of his reasons the evidence of Mr Gillies, of Mr Bruce and of documents as follows: "[110]In 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.' ... [112]In 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].) [113]According 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. [114]On 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."
No witness gave evidence to the contrary. Mr Gillies and Mr Bruce were accepted by the primary judge as honest witnesses. That finding was not challenged on appeal.
The primary judge accepted the structure of the arrangement as deposed to by Mr Gillies and Mr Bruce.
Downer relies on a letter of Mr Gillies of 4 May 2004 (referred to by the primary judge at [114] of his reasons), which relevantly contained the following: "In addition, during 2004, the company 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."
The argument was that the letter does not refer to any non-recourse nature and, appearing complete on its face, should be taken to be the contractual arrangement, making the surrounding conversations irrelevant. Reference was made to State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 191-192 and Branir at 505-509 [280]-[293]. Alternatively, if the agreement were said to be partly oral and partly written, the oral part would contradict this writing and should be ignored: Hoyt's Pty Ltd v Spencer [1919] HCA 64; 27 CLR 133 at 143-144.
The flaw in these submissions is that the document does not on its face purport to be a binding agreement or part of a binding agreement. The letter is to be understood as a brief record of what was discussed and approved with the remuneration committee. Mr Gillies' evidence was that the phrase "secured against my assets" embodied the arrangement of the non-recourse loan. In the context of Mr Gillies' and Mr Bruce's uncontested evidence, the letter is an ambiguous and incomplete recording of an agreement that was made between Mr Gillies and the company. Given that Mr O'Callaghan was party to the conversation there could be no doubt that he understood the cryptic reference to security in the letter.
This ground of appeal fails.

The conduct complained of

The following analysis is predicated on the assumption that misconduct under cl 4.1(c) is serious misconduct equivalent to that justifying summary dismissal at common law.
Each year a bonus would be declared in favour of Mr Gillies. No money was at that time paid to him; no tax was deducted. The sum, together with accumulated bonuses, stood as a credit to Mr Gillies in a so-called "retained bonus account", although there was no separate account. The sums involved, totalling $2,355,875, were: 1998:$150,000 1999:$187,500 2000:$187,500 2001:$243,750 2002:$243,750 2003:$341,250 2004:$502,125 2005:$500,000
The board was informed of the practice of retention and payment at the request of Mr Gillies. No complaint on appeal was made of this practice, though at the trial it had formed part of the criticism of Mr Gillies. Complaint on appeal was made, however, of the payment of large sums of money to Mr Gillies in the following circumstances.
As at 12 August 2005, there stood to the credit of Mr Gillies in the retained bonus account $999,998 being the above amounts less an amount of $8,419 that had been paid to him by June 1999 or 2000 and less $4,083 tax thereon.
On 12 August 2002, Mr Gillies requested the Chief Financial Officer, Mr Bruce, to pay him $450,000 which Mr Gillies used to pay the deposit on a Riviera boat.
A month later, on 12 September 2002, Mr Gillies repaid that same amount to Downer.
Four days later, on 16 September 2002, Mr Gillies requested Mr Bruce to pay him $1,200,000 which he used to pay the balance of the purchase price of the boat.
Downer's case was that these payments, if referable to the retained bonus account left Downer in this position: first, Mr Gillies owing Downer $200,002, being the exceeding of the nominal amount in the account (after the replenishment of $450,000); and, secondly, Downer having an unfunded taxation liability for both the sums of $450,000 and $1,200,000 at Mr Gillies' marginal rate of taxation.
In October 2002, November 2002 and January 2003, Mr Gillies made payments totalling $800,000 to Downer, in amounts of $250,000, $450,000 and $100,000, respectively.
In November 2003, Mr Gillies caused Downer through Mr Bruce to pay him $20,000.
It will be necessary to return to the detail and characterisation of these payments in due course, but Mr Gillies characterised these payments as "drawings" or an "advance" on the retained bonus account, and not loans. Mr Bruce's characterisation appeared to be that they were loans.
A second course of conduct that was complained of was that on four occasions between 13 December 2006 and 17 July 2007, Mr Gillies caused Downer, through Mr Bruce, to make short term unsecured interest free loans to him totalling $758,437 to facilitate the purchase of an investment property in New Zealand. The payments were made on 13 December 2006 ($175,439), 31 January 2007 ($494,019), 7 February 2007 ($43,783) and 17 July 2007 ($45,196).
The sums were repaid on 15 December 2006 (after two days), 5 February 2007 (after 5 days), 7 February 2007 (on the same day) and 18 July 2007 (after one day). Each of the repayments were by cheque drawn on the account of Mr and Mrs Gillies.
During the period 1999 to 2007, there were other "withdrawals" made by Mr Gillies. They are identified in part of a joint expert's report extracted by the primary judge at [36] of his reasons. None of the other withdrawals are the subject of complaint. Each had tax withheld from the payment.
At [34] of his reasons, the primary judge described the net effect of all transactions as follows: "The 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."

The findings of the primary judge

Mr Gillies, Mr Bruce and Mr Lau gave evidence. Mr Gillies and Mr Bruce were cross-examined as to their credit. The primary judge, however, rejected Downer's attack on their credit and reliability, finding at [42]-[43] of his reasons: "[42] ... 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. [43] To 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."
The primary judge recognised, however, at [44] of his reasons that the resolution of the controversy did not depend wholly on the acceptance of the oral evidence: "The 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."
At [45]-[47] of his reasons, the primary judge elaborated upon his findings concerning their credit, as follows: "[45] Downer'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. [46] Downer 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. [47] I 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."
At [48]-[54] of his reasons, the primary judge referred to a number of factors to support his finding that Mr Gillies' background as an accountant did not make it glaringly improbable that he failed to appreciate any failure to comply with Australian tax law and the balance from time to time of his retained or accrued bonus pool: he had been a senior executive and CEO for over 20 years and had not worked as an accountant in that time; when he had been an accountant he had worked in New Zealand, not Australia; he was entitled to assume that his employer (Downer) would attend to any tax implications and to rely on Mr Bruce to tell him of such matters and of the balance of his account; and he displayed an attitude as not concerned with precise aspects of his financial affairs.
At [55] of his reasons the primary judge concluded that the utilisation of Downer's credit facilities (in respect of the purchase of the New Zealand property) was not inappropriate or improper. His Honour said at [55]-[56]: "[55]Sixthly, 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. [56]By 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."
In relation to Mr Bruce's credibility, the primary judge dealt at [57]-[58] with the lack of disclosure to the Board of the advances, saying: "[57] In 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. [58] Given 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."
The primary judge also found at [65]-[67] that in the circumstances the inference was that if the Board had been aware of the transactions concerning the retained bonus account and the New Zealand property it would not have objected to them.
At [80]-[85] of his reasons, the primary judge made a number of more precise findings about the operation of the "bonus pool". The terms of the arrangement concerning the bonus pool or retained bonus pool were found at [82] by the primary judge to be as follows: "(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."
As to disclosure, the primary judge found at [83] that Mr Lau knew from a short discussion with Mr Gillies that Mr Gillies would delay payment of his bonuses. There was no finding, however, of any disclosure to the board as to the operation of the arrangements; but his Honour did find (at [57], see above) that the operation of the arrangement was disclosed to the auditors by the making available of Mr Bruce's spreadsheet and ("it seems") to the audit committee of the board of Downer. His Honour said that there was no attempt to conceal the arrangements that were made.
As to the recording of the arrangements concerning the bonus pool, his Honour found at [84] that they should have been recorded, but found: "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."
The primary judge also made particular findings about the advance of the $1.2m in September 2002. This was seen by his Honour as an exception to the arrangement because of the overdrawing (by $200,002) of what stood to Mr Gillies' account. The primary judge found implicitly this to have been an error by Mr Bruce, saying at [85] of his reasons: "[85] The 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'."
At [86]-[94] of his reasons, the primary judge considered the tax implications of what he had found. His Honour concluded, though not on a final basis, that no tax liability by way of PAYG deduction accrued by the advances or loans to Mr Gillies. This, his Honour said, was in accordance with the views of the expert witnesses, if the arrangement was a loan arrangement as found by his Honour. Nor was such a loan arrangement a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Cth) applied. With the possible exception of the overdrawing by the advance of $1.2m in September 2002, the primary judge concluded that fringe benefits tax did not arise, as there was a commercial basis for the lending: the lack of interest charged to Mr Gillies was in exchange for the utilisation by Downer without cost of funds standing to his bonus account. To the extent that Mr Gillies received a benefit from the overdrawing until a repayment occurred, this was for one month only and arose from a misunderstanding of the balance accrued. If this was a breach, his Honour found that it was neither carelessly nor deliberately occasioned.
At [95]-[107] of his reasons the primary judge considered whether Mr Gillies had engaged in any misconduct or breached his duties to Downer. The essential elements or considerations informing his Honour's conclusion that there was no misconduct or fraudulent activity entitling Downer to dismiss him under cl 4.1(c) were as follows: (a)Mr Gillies was honest in his conduct. He relied on Mr Bruce (who was also honest). Mr Bruce was Downer in this context. Such mistake as was made as to the overdrawing in the $1.2m advance in September 2002 was honestly made and corrected when pointed out. (b)It was unnecessary to determine finally whether the arrangement caused Downer to accrue an unfunded liability for PAYG tax, though his Honour's view was that it did not. The arrangement was accepted as appropriate by Downer (Mr Bruce). Acceptance of the arrangement is not misconduct. The primary judge recognised (at [96]) that the submission as to the tax liability was put as an alternative to dishonesty. (c)Mr Gillies was neither careless nor unreasonable in assuming that no PAYG liability arose prior to drawdown of the bonus as remuneration, rather than as a loan. This was in part a conclusion drawn from the expert evidence. (d)The amounts involved relative to his remuneration or the business of Downer were not significant. (e)If the Board had been informed it would have approved the transactions. (f)There was no evidence of loss to Downer. (g)The Board approved of the postponement of Mr Gillies taking his bonuses. Mr Gillies entered an arrangement with the responsible officer of Downer as to how to utilise the bonus account and made enquiries as to its current balance. There was no failure to take reasonable steps to enquire further. (h)Mr Gillies did not receive a benefit from deferral of bonus payments, no "conflict of interest" arose and he did not exploit his position as CEO for personal gain to the detriment of shareholders. He was honest and diligent. (i)As to the POS, the primary judge referred to the possible breach of duty in the failure to report the existence and amount of the POS in the annual report. If this was a breach, the primary judge said that it was the responsibility of others.
In reaching the above conclusions, the primary judge recognised that Mr Gillies' conduct had to be assessed by reference to his obligations under the Corporations Act and that a failure to notify a company's board of management or its chairman of dealing with the company's assets would or may be misconduct or inappropriate. His Honour made reference in this context to the Corporations Act, s 180; Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 466; Vines v Australian Securities and Investments Commission [2007] NSWCA 75; 62 ACSR 1; Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [7178] et seq; Australian Securities and Investments Commission v Nealey [2011] FCA 717; and Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287.

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

It was not in dispute that the assessment and characterisation of Mr Gillies' conduct was to be undertaken in the legal and factual context of his employment as the Managing Director and Chief Executive Officer of a listed public company. In particular, in this respect, what Mr Gillies personally believed was honest and appropriate is not determinative of the case. The primary judge concluded that Mr Gillies acted honestly; he also found him to be an honest witness. The same can be said of Mr Bruce.
Whilst the honesty and credit of both Mr Gillies and Mr Bruce were challenged, strongly, at the trial, on appeal no challenge was made to the subjective personal honesty or honesty of the evidence of both Mr Gillies and Mr Bruce. Challenge was made, however, to the characterisation of the conduct, relevantly of Mr Gillies, as proper and objectively honest.
The legal framework in which Mr Gillies' conduct is to be judged is that provided for in the Corporations Act, in particular ss 180 (care and diligence), 181 (good faith) and 182 (use of position) and chapter 2E (related party transactions). Without setting out those provisions in detail, Mr Gillies was obliged to exercise his powers and discharge his duties with a reasonable degree of care and diligence in Downer's circumstances (s 180), in good faith (including honestly) in the best interests of Downer and for a proper purpose (s 181), and he was obliged not to use his position improperly to gain an advantage for himself or to cause detriment to Downer (s 182). Further, by his position as a director of a public company, Mr Gillies was a related party of Downer (s 228). As such, for Downer to give Mr Gillies a financial benefit (as described in s 229), unless the benefit was remuneration (s 211) or the amount was below that prescribed by regulation, being $5,000 (s 213), the approval of Downer's members was required. By s 229, one example of giving a financial benefit was giving the related party (Mr Gillies) finance or property.
Section 180, in its terms, is to be analysed objectively. Both ss 181 and 182 are also to be determined objectively: R v Byrnes [1995] HCA 1; 183 CLR 501 at 514-515 and Doyle v Australian Securities and Investments Commission [2005] HCA 78; 227 CLR 18 at 28-29 [35]-[37]. By "objectively" is meant the standards of conduct that would be expected of a person in the position by reasonable persons with knowledge of the duties, power and authority of the position, and the circumstances of the case, including the commercial context: Doyle at 28 [35].
Fiduciary duties in equity also applied to Mr Gillies and the conduct of his work as Managing Director and Chief Executive Officer.
The ultimate issue is, of course, misconduct of sufficient seriousness to warrant summary dismissal. As Downer accepted in its submissions, not every breach of a director's duties will warrant summary dismissal. Nevertheless, in a contract of employment of a Managing Director and Chief Executive Officer, the performance of such obligations owed under statute and equity can be seen as germane, indeed central, to the assessment and characterisation of the conduct and of the seriousness of any misconduct. No one submitted to the contrary.
The circumstances of Mr Gillies with Downer included the matters that shareholders were told by the annual reports. The Concise Annual Report of 2002 dealt with corporate governance at page 38 in a manner reflected in annual reports of other years. Under the heading "Stewardship, accountability, control", there appeared: "The Board believes in providing quality leadership to drive operational culture and in embracing the highest standards possible in corporate governance." Under the heading "Code of conduct", there appeared: "Downer EDI recognises the need for Directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity." Under the heading "Employee Code of Standards", there appeared: "The company has introduced a code of standards for all of its employees to assist them [to] maintain the highest standards of integrity and honesty in the day to day performance of their jobs and in any situation where their actions could influence the reputation of the company. In particular, the company requires employees to: ·comply with the law; ·act honestly and with integrity; ·not place themselves in situations that result in divided loyalties; ·use the company's assets responsibly and in the best interests of the company; and ·be responsible and accountable for their actions."
Brief cross-examination occurred by reference to such entries in the annual reports. Mr Gillies accepted the principles in the annual report. These entries exemplify the standard required by statute and equity.
Mr D L Williams SC, who, with Mr R S Beasley, appeared for Mr Gillies, sought to emphasise a number of matters against which the assessment of Mr Gillies' conduct should be judged. Mr Gillies had been employed for 20 years. Under his stewardship as Managing Director and Chief Executive Officer, the turnover of Downer had grown from $145m in 1997 to $5.4b in 2007. Downer had grown into a multinational company. Mr Gillies was a diligent and hardworking executive who was not one to claim financial advantage. In the late 1990s, he had not sought to dispute a sizeable underpayment of his salary. He agreed in 2000 to the board's request of him not to exercise options, but to enter the POS. From 1997 to 2004, he did not take advantage of his right to a car provided for under cl 11 of his contract. He often did not take annual leave. In 2004, he had accrued untaken annual leave amounting to 100 days or $386,300 (before tax). These were matters, it was submitted, which showed that Mr Gillies over a long period placed Downer ahead of his own financial interests.
It can be accepted that these matters assist in assessing the likely personal honesty of Mr Gillies. Downer, however, abandoned fraud and actual dishonesty on appeal. These matters do not, however, take the matter very far to the extent that the conduct itself is to be characterised objectively.
With the exception of one aspect, the parties were not in dispute as to the proper test for the assessment of whether conduct was sufficiently serious to warrant summary dismissal. In Concut Pty Ltd v Worrell [2000] HCA 64; 176 ALR 693 at [25], the plurality referred to, amongst other cases, Pearce v Foster (1886) 17 QBD 536 at 539, Blyth Chemicals Ltd v Bushnell [1933] HCA 8; 49 CLR 66 at 72-73 and 81-82 and Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 at 34-35 and 45-46. From these cases, it can be taken that the conduct must be incompatible with the due or faithful discharge of the employee's duty or inconsistent with the relationship of trust and confidence between employer and employee. Repugnance between the conduct and the relationship must be found. As the plurality noted at [26], referring to Prof. Finn's work Fiduciary Obligations (Sydney: Law Book Co, 1977) at 267, these formulations of the contractual duty are a re-expression of equitable obligations. The expression of the matter thus recognises that, to a significant degree, the assessment or characterisation of the conduct is to be made objectively: see especially Malik v BCCI at 35 and 47.
The dispute between the parties was as to the weight to be given to the subjective honesty of Mr Gillies. Some of Mr Gillies' submissions appeared to place it as a determinative factor. To the extent that the submissions went that far they should not be accepted. Subjective honesty and motive may, no doubt, be relevant. Downer's submissions recognised that. The relevance of subjective belief and motivation will depend, however, upon the nature and character of the acts in question. If, for instance, as in Blyth Chemicals, conduct was capable of an innocent construction compatible with the relationship, as well as being capable of a construction that was incompatible with the relationship, the "motives and intentions" of the employee may become "all-important": Blyth Chemicals at 82. On the other hand, where the conduct is not capable of an innocent construction, such as an employee taking a secret commission, the Court may be of the view that evidence of the belief of the employee that he saw nothing wrong with this would not be taken as relevant: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 at 369. As in the assessment of impropriety for the purposes of ss 181 and 182, the standard of conduct is imposed by the courts as that which would be reasonably expected in the relationship in all the circumstances. The place of subjective honesty will depend upon the nature of the conduct and all the circumstances. But there is no haven for the morally obtuse: Doyle at 29 [37].
The impugned conduct is constituted by the payments for the boat and the New Zealand foreign currency transactions. They will be dealt with in turn.

The boat payments

The primary judge identified the arrangement having the effect set out in [82] of his reasons. The difficulty with limiting the characterisation of Mr Gillies' conduct to the arrangement so neatly encapsulated is the evidence of Mr Gillies.
The genesis and foundation of the arrangement was the retention of the bonuses by Downer. That was not the subject of criticism on appeal. It was not, and cannot be construed as, the payment of the bonus and the lending back of moneys. Such would have required PAYG tax to be deducted. The bonus was accrued as of right in some fashion short of being vested in possession, and Downer was relieved of the cost of paying the bonus and the associated PAYG tax. It is unnecessary to discuss further the true nature and character of these mutual rights and obligations.
In 2002 and 2003, Mr Gillies received sums set out above from Downer. He did not view these as loans; he viewed them as "advances"; he relied on his subordinate to attend to any tax questions, of which he was ignorant. He treated his accrued, but unpaid, bonuses as entitling him to advances up to the gross amount of the bonuses, notwithstanding what must have been the obvious fact that he was entitled only to receive the bonuses net of tax (at the highest marginal rate of taxation).
If, as Mr Bruce treated them and as the primary judge found, the advances were loans, they were related party transactions under s 229(3)(a) and required disclosure and shareholder approval, unless they could be characterised as remuneration for s 211.
If, as Mr Gillies seemed to think (though less than precisely, since he just relied on Mr Bruce to deal with the details) these were not loans, but advances on the bonus, which only had to be paid back at his discretion, it is difficult to understand how a person of Mr Gillies' background and experience could not have appreciated that he was taking the bonuses such that tax was or was likely to be payable. It is also difficult to understand how he could think in those circumstances that he was entitled to the gross amount of the accrued bonus. Yet, that is what he honestly believed as found by his Honour.
Further, in taking the $1.2m he overdrew even the gross amount by $200,000. He says he did not know this, and relied on his subordinate.
Acceptance of all this evidence reveals a Managing Director and Chief Executive Officer who takes very large sums of money from the company under his stewardship under arrangements with his subordinate, not understanding the legal and tax implications of what he is doing and relying on that subordinate to document it appropriately (which is done in a manner inconsistent with his understanding) and to tell him that his request was greater than any possible entitlement (either as a loan or as an advance against the gross amount).
Further, though the evidence is that over the whole period 2002 to 2007, Downer suffered no detriment, for a considerable period after September 2002 Mr Gillies had a borrowing or advance significantly greater than his net entitlement to bonuses.
This was justified contemporaneously by Mr Gillies, and by the primary judge, by the so-called commerciality of the lack of interest on the advance and the lack of interest on the retained bonuses. At one level of commercial abstraction that can be justified, but the bonus deferral was at Mr Gillies' request, apparently for his own imprecisely formulated taxation reasons. No interest was payable by Downer to Mr Gillies because no loan had been made by Mr Gillies.
Mr Gillies was unable to give any satisfactory explanation as to how he thought he was entitled to the gross amount and how he thought he was entitled to be in receipt of funds (that were not a loan) without Downer incurring a tax liability. He relied on Mr Bruce to tell him when some aspect of the arrangement had taxation consequences.
Some of the difficulties with any clear coherent characterisation of the relationship can be seen in the following evidence of Mr Gillies at black appeal book pp 68, 69, 70, 71, 74, 75, 77 and 78: "Q.You describe the payment as an advance on your bonus account? A.Yes. Q.What do you mean by that? Do you mean it is a loan by the company to advance money that you would be entitled to get at some time in the future? A.It's an advance. ... Q.Can you just help me. 'Advance'. When you got the $450,000 did you understand that carried with it an obligation by you to repay that money to Downer at some point in the future? A.No. Q.So it was yours to do with as you liked? A.Within reason. ... Q.So you had an entitlement to draw money out of the bonus pool, that was your understanding? A.Yes. Q.Is that what you mean when you say 'so I took an advance on the bonus pool' or do you mean something different? A.No, I had funds advanced from [sic: to] me from the bonus pool. Q.Does 'advance' mean nothing different than the monies were paid to you? A.Yes. Q.So the bonuses then had been transferred from the company to you? A.Yes. Q.... surely you appreciated at that point that tax was then payable on the $450,000? A.As I said earlier, no. ... Q.... did you turn your mind to it at the time? In other words, did you think about it? A.Probably not, to be honest. Q.Did you speak to Mr Bruce about whether any consequences from a taxation point of view would occur as a result of you being paid the $450,000? A.I don't recall, no. Q.May I take it - tell me if this is not fair - from some of your earlier answers that a reason why you say you thought that the tax liability wasn't triggered was because you paid the money back on 12 September? A.Yes. ... Q.At that time you did not believe you had a legal obligation to pay Downer $450,000, did you? A.No. ... Q.Did you turn your mind, in mid-2002 and in particular August when the $450,000 was withdrawn, [to] how much that considerable pool of money was? A.I knew roughly how much money was there. Q.You knew roughly how much money was there?A.Yeah. Q.Did you think to yourself is there more or less than $450,000 before the $450,000 was paid? A.It was certainly more than $450,000 there. Q.You know that now because you have reviewed all the records, but my question was at the time did you think to yourself well, is there $450,000 there? A.Yes. Q.And you were certain there was?A.Yes. Q.Can you tell us what thought process or steps you took to come to that conclusion? Did you check any documents? A.No, I checked with Geoff Bruce that there was sufficient funds there and I asked for the advance. Q.What did you say to him, do you remember?A.'I'd like to take an advance against my bonus pool.' ... Q.Let me come to the point. On 15 September 2002 you told Mr Bruce to withdraw $1.2 million from that account so you could buy the boat, didn't you? A.Yes. Q.It is obvious now, isn't it, that in fact you overdrew whatever your entitlement might have been to get funds out of that account by about $200,000, isn't it? A.With the process that's occurred, yes, I'm now aware of that. Q.It does follow from that, doesn't it, that on 15 September 2002 you did take $200,000 of Downer's money to which you had no entitlement, without the authority of anyone other than yourself. That's fair, isn't it? A.That would have been the case, yes. Q.Is your explanation for why that does not amount to misconduct that at the time you did not appreciate that fact? A.Correct. Q.Can I ask you this question, then: What steps did you take to satisfy yourself that there was $1.2 million available to you in the bonus fund? A.I checked with Geoff Bruce. Q.What do you say you said to Geoff Bruce to check that fact? A.I explained to him that I needed to make a payment to complete the purchase of the boat and I wanted to drawn down 1.2 million from the bonus pool and 1.2 million was provided. I was advised, though, that given this would exhaust the bonus pool we would need then to sort out the taxation on the bonus. Q.Are you saying Mr Bruce said well, that will exhaust the bonus pool, do you? A.Well exhaust, it would use up the bonus pool, yes. Q.You certainly knew that it would more than use up the bonus pool, that you were taking money that you were not entitled to? A.I wasn't aware of that at the time. ... Q.Just tell me a little bit more about this discussion with Mr Bruce. It was in relation to the $1.2 million drawdown and he said something to the effect you and he would need to sit down and work out the taxation consequences, is that right? A.He basically advised me we would need to work out the tax component attached to the bonuses and, as I started to say earlier, on the schedule there is reference to a cheque that I drew July 2004 which I believe was in fact squaring away and settling all of the taxation attached to bonuses from years 1998 through to 2004. ... Q.And you understood at the time the $1.2 million was drawn down that that obligation on Downer was triggered so that as at September 2002 Downer had an obligation to remit a portion of the retained bonus funds to the deputy commissioner to be credited against your tax, correct? A.I understand that now but at the time I relied on Geoff Bruce to in fact make the calculation and in fact the amount of 83,616 was advised to me from Geoff. Q.$83,000?A.$83,616. Q.That all happens in 2004. Can I just ask you to focus on the discussion you had with Mr Bruce in or about September 2002? A.Yes. ... Q.I think you have also told us that Mr Bruce told you that in withdrawing $1.2 million the fund was exhausted? A.That was the word I used, yes. Q.That was certainly your understanding, there was no money left in it? A.Pretty much, yes. Q.It followed from that that you well understood that as at September 2002 Downer had a liability to remit group tax in relation to the retained bonus fund and yet the entire retained bonus fund on a gross basis had all been paid to you? A.Yes." The apparent clarity of the last answer as to knowledge of tax in relation to the bonus upon the withdrawal of the $1.2m must be read with the further answers given very shortly thereafter at black appeal book pp 79 and 80, which answers both threw into doubt as well as confirmed his appreciation of the liability of Downer to tax after the withdrawal of the $1.2m. "Q.Tell me if I have got this wrong. I thought you agreed that on the withdrawal of $1.2 million at the latest Downer did have the obligation then? A.Yes, but I relied on the CFO in terms of keeping the payroll records and keeping a tab of the bonus pool. Q.You knew the bonus pool was exhausted because the man whose job it was to ... keep a tab on it had told you so, correct? A.Yes. Q.You knew there was nothing left in the bonus pool, it had been wiped out? A.I knew there was little in the bonus pool, yes. Q.Exhausted would tend to suggest nothing, wouldn't it?A.Yes. Q.In fact, you knew you were actually $200,000 overdrawn?A.I understand that to be the case now. Q.You say you didn't think that at the time?A.Yes. Q.You knew that Downer now had the taxation liability which it had to fund from some other source? A.I didn't consider that at the time. Q.But you knew all of those facts, didn't you? You did know that the bonus fund had been exhausted? A.Yes. Q.You did know that on payment out of the $1.2 million Downer had an obligation to remit group tax relative to that $1.2 million? A.Yes. Q.And you knew that that obligation on Downer occurred at the time the $1.2 million was paid to you? A.Yes. Q.And you knew that ordinarily Downer would pay that money out of the bonus pool? A.Yes. Q.But you knew there was no money left to do that?A.Yes. Q.And so therefore you did know that Downer had that liability and would have to fund it from another source, didn't you? A.As I said, at the time I didn't consider that. ... Q.So you paid 250 in October, 450 in November and 100 in January, if this document is to be accurate? A.Yes. Q.We will take this up with Mr Bruce but I think there is a very good basis to put that in fact the 450 coming in in October '02 is the 450 that actually came back on 12 September, but I will take that up with Mr Bruce. HIS HONOUR: 12 September '02. WITNESS: My recollection of the two amounts I paid shortly thereafter, as I say, one for 250,000 and one for 100,000. Q.Thank you. You understood you were repaying that amount to do what, to top up so the bonus pool was once again in credit in your favour? A.I was putting money back into the bonus pool and relying on Geoff Bruce to calculate the tax. Q.Putting money back into the bonus pool for what purpose, so that Downer could pay the tax? A.Yes. Q.You don't suggest you were putting money back into the bonus pool to make good the extra $200,000 that you took out? A.No, no. Q.Because even in November, December do you say you still hadn't considered whether there had been enough money in the account? A.That's correct, yes. Q.Did you turn your mind as to whether that $100,000 and $250,000 would be enough to allow Downer to pay its tax liability? A.No."
From the above, it is tolerably clear that after the $1.2m payment, Mr Gillies did appreciate that tax was payable on the exhausted bonus pool. He did not regard it as a loan arrangement. His consideration was largely restricted to relying upon Mr Bruce, but he paid money back into the pool in 2002, 2003 and 2004 to bring the account back into what he thought was regularity, taking into account tax payable by Downer on these sums.
Mr Bruce regarded the starting point of the arrangement as being akin to an interest free loan from Mr Gillies to Downer. This provided the foundation in his view for moneys to be lent to Mr Gillies at no interest. Mr Bruce was aware that if Mr Gillies had received his bonus advances and then lent them back, tax would have to be remitted at that point. Mr Bruce's evidence was that the moneys paid to Mr Gillies were loans, secured over his entitlement to call on the bonus account. There was no separate record of such a loan, other than the running account on an Excel spreadsheet that was viewed by the auditors on at least two occasions.
Mr Bruce did not attempt to keep the arrangement secret from the auditors, but his disclosure was reactive to their questions. At black appeal book pp 187, 188, 189 and 190, his evidence was: "Q.And what you told them was the same thing that you understood the directors were aware of, that is Mr Gillies had not drawn-down or taken his bonuses in particular years and that they were building up in a particular account, correct? A.Yes. Q.That's what you told them, yes?A.I didn't refer them to the directors. Q.But you told the auditors: Look, he doesn't take his bonuses in the given year, they just remain with the company and they are building up in this accrual account, correct? A.Yes. Q.And what had happened, someone at the auditors had noticed the amount in the accrual account, saw it was getting bigger and bigger and said: What's this; correct? A.Correct. Q.Because the accrual account amounted to a liability of the company to Mr Gillies, that's how it had to be accounted for, didn't it? A.Correct. Q.And when they said, well, how do we work out how much is in the accrual account referable to Mr Gillies? You said, 'Well just go to the annual reports because each year it tells you how much bonus he has got. You just add them up to whatever a point in time and that's how much is in there', that's what you told them?. A.Correct. Q.That's what they were satisfied about, correct?A.Correct. Q.What you didn't mention to them was that there was another arrangement in place whereby Downer was lending money to Mr Gillies secured over his entitlement to call on the bonus account, correct? A.That would be correct, yes. Q.You didn't mention that to them, did you?A.No. Q.And one of the reasons you didn't have to mention that to them is that nowhere in the actual accounts of Downer was there ever recorded an asset of Downer being the debt due to it from Mr Gillies; that's right, isn't it? A.Not separately. Q.When you say 'not separately', what do you mean by that, you are not suggesting it was netted off in some way? A.I am not suggesting it was netted off in some way. I am suggesting the entries were resident in the same account. Q.Resident in the same account?A.Yes. Q.What does that mean, we have seen an example of the accrual account, itself, it just has a lump sum of bonuses accrued, correct? A.It shows entries over time into the accrued bonus account. Q.We are not talking about the Excel spreadsheet, are we?A.No. ... Q.What I am suggesting to you is when you explained the state of affairs to the auditors, you didn't say: And by the way, from time to time money is taken by Mr Gillies, but we don't treat that as him taking money out of his bonus account, we treat that as a loan secured over his right to take money out of the bonus account. You just didn't mention that to the auditors, did you? A.No, I didn't. ... Q.Why do you say you didn't mention that part of the arrangement to either any of the directors or the auditors? A.In relation to the auditors, the auditors came to me and asked me specific questions in relation to their audit of an account balance. I responded to their questions and provided them with the information that they requested. ... Q.That's your explanation for why you didn't mention that part of the arrangement to the auditors. What is your explanation, if any, for why you didn't mention that part of the arrangement to any member of the board, other than Mr Gillies? A.No intentional thought not to or to speak to members of the board about it. Q.Did you think it was none of their business? A.I had no intentional or unintentional thought at the time about it. I mean, your question I can't answer because it didn't come into my mind at the time. Q.Didn't it cross your mind then when you noticed that what was happening was that Downer was lending money to a Mr Gillies on an interest free basis; you say on commercial terms. Let's assume that, that that would form part of his remuneration arrangement and had to go through the remuneration committee and be properly approved? A.Obviously [it] did not."
The primary judge found at [57] that "it seems" that the arrangements for payment were disclosed to the audit committee of the board. This finding was challenged in argument. Mr Williams SC accepted that it could only be an inference. There is no foundation for any such inference. It cannot be concluded that there was any disclosure of the arrangement to any board member.
Mr Bruce's explanation of the $1.2m payment and the $200,000 shortfall was that when the payment was made he thought (from his memory) that there were sufficient (gross) funds to "cover the draw-down", but that when he prepared the reconciliation in preparatory work for the annual accounts he noticed the shortfall. Whether or not this should be taken into account in the characterisation of Mr Gillies' conduct is discussed below. It is sufficient to note at this point that the management of large sums of money and their payment to the Managing Director and Chief Executive Officer was carried on by Mr Bruce without any precision and exactitude, indeed laxly (accepting, at all times, his honesty).
Mr Bruce's evidence about the value of the "security" of the retained bonuses (recognising that Mr Gillies was only entitled to the bonus net of tax) was also less than satisfactory at black appeal book pp 193, 194, 196 and 197: "Q.The minute you did that reconciliation you noticed that however one characterised the transaction whereby Mr Gillies had got $1.2 million, he couldn't have been entitled to at least about $200,000, correct? A.Correct. Q.And that's because if he was actually taking out money from his accrued bonus account, he had taken out $200,000 more than what was there? A.Yeah, I don't think it was $200,000 but if you round it up to the nearest 100,000 it is probably $200,000, yes. Q.There was a bigger problem if that was the correct characterisation of the transaction because, of course, he had received all of his bonuses on a gross basis when in fact he was only entitled to them on a net basis. So he was way overdrawn, if that was what had happened, correct? I appreciate you don't accept that that's the proper analysis. A.Well, I don't accept it as a proper analysis, based on your analysis, yes. Q.And if we accept your analysis that it was a loan secured over his entitlement to call on the accrued bonuses, then the security came up short; didn't it? A.For a short period of time, that would be correct, yes. Q.That the security came up short, didn't it?A.Of the accrued bonus pool, yes. Q.What other security do you suggest was part of this arrangement? A.Mr Gillies had at that time owing to him substantial annual leave entitlements and those annual leave entitlements, if required, could have been used to expunge that difference. Q.You know that would be a breach of whichever law says a person is not entitled to take their annual leave entitlements in cash? A.I actually believe that there are certain circumstances where it can be taken in cash or part thereof. Q.Please then finish your answer, was there anything else?A.That's all. Q.Do you remember when you had the conversation with Mr Gillies that there was actually a discussion about his accrued holiday entitlements being part of what was secured? A.No, not at that time. Q.So it is an absolute nonsense to suggest that part of the arrangement between Downer and Mr Gillies was that Mr Gillies had pledged his entitlement to receive holiday pay as part of the arrangement, correct? A.I think what my point is is that, despite the fact it has gone into deficit, the company wasn't exposed on a net basis. HIS HONOUR Q.You mean as a matter of practicality?A.As a matter of practicality, yes. NEWLINDS Q.Because you formed the view that Mr Gillies was good for the money, isn't that right? A.Not necessarily good for the money but on the net basis Downer continued to owe Mr Gillies monies. Q.And, regardless of whatever the legal position was, you would ensure he wasn't paid those monies while he was in notional deficit? A.Correct." The cross-examination then further explored at black appeal book pp 197, 198 and 199 the question of Mr Gillies being limited in any draw down to the net amount of the bonus. "Q.Let's go back to the conversation you say you had with Mr Gillies. Was there any discussion between the two of you as to in what circumstances and when Mr Gillies would have to pay the money back? A.In my affidavit-- Q.Please, is the answer yes or no? Did you discuss with Mr Gillies the circumstances and timing of when he would be obliged to pay the money back? A.A specific time frame to repay those monies, no. ... Q.He said, 'I intend to repay some of his over the next few month but not all'? A.Mm-hm. Q.What do you say the arrangement was whereby Mr Gillies could be compelled by Downer to repay the balance? Do you have any idea? A.I think if he was compelled to pay it he would have had to pay it at the time he was compelled to pay. Q.And when would that be? What was the promise he made about repayment? Did he make one, other than to repay some of it over the next few months? A.No. Q.You didn't turn your mind at the time at all to when he'd have to repay this money, did you? A.No. Q.And you also didn't turn your mind to this question, did you? The concept of his entitlement to receive the accrued bonuses being used as security on a gross basis is a nonsense, isn't it? A.I don't believe it was a nonsense, no. ... Q.You do see what I am saying, don't you, Mr Bruce; you see the problem? You understand the problem that I have pointed out, don't you? A.Yes. Q.... the problem is Mr Gillies, on any view of the world, at no time had an entitlement to draw down the entire gross amount that stood to his credit in the bonus account? HIS HONOUR: You mean as a bonus? NEWLINDS Q.As a bonus. That's right, isn't it? A.If he drew it down as a bonus then group tax would have had to have been paid on the bonus drawn down. Q.At the top marginal rate I am assuming?A.That would be correct, yes. Q.That would be what you would assume, yes?A.Yes. Q.Therefore, the security you say was in place to protect Downer's position was, at least to the extent of whatever the top marginal rate was at that time, illusory, wasn't it? A.No. Q.How can you possibly say that? A.The arrangements which were in place were an advance of funds. We have gone through that. The advance of those funds there was an intention for Mr Gillies to repay an amount, the $450,000 that was advanced to him repaid. 1.2 million that was advanced to him, which he repaid $250,000 tranche and $100,000 tranche. What the real issue is is at some stage that arrangement should have been brought to a close and that arrangement wasn't brought to a close. In other words, I should have said to Mr Gillies, 'Do you intend to make any further repayments and if not we should deal with the position in the accrued bonus accounts.' I didn't do that. Q.... When you acknowledge, as you must, that the security was only as good as the net amount that Mr Gillies could receive from the bonus account as bonuses and the proposition that this loan was secured to whatever was the total gross entitlement is illusory, isn't it? A.In answer to your question, to the extent that no further repayments were made by him that would be correct. Q.So, on any view of it, the security that you say you put in place to protect Downer' interest wasn't equivalent to the amount that was being borrowed by Mr Gillies. That's right, isn't it? A.I don't know there is a right or wrong answer to that. ... Q.But you really know you have to put that to one side and test the proposition at the point in time when the money is lent, don't you? A.I suppose so. Q.It is not a question of supposing so. It is blindingly obvious, isn't it? Isn't it? A.I can see your point. Q.You really don't stand by the proposition that you considered this at the time and consider it now to be a transaction on commercial terms, do you? A.I do believe it was a transaction on commercial terms. Q.So it is partially unsecured loan, interest-free, debatable as to when it is repayable. That is what it is, isn't it? A.I suppose in hindsight, yes. Q.But at the time you knew that, surely?A.At the time I believed that the security was appropriate."
Full account should be taken of the findings of subjective honesty of both Mr Gillies and Mr Bruce in the analysis as to whether there was serious misconduct on Mr Gillies' behalf. That said, the facts should be looked at objectively in order to assess how a reasonable employer of a managing director and chief executive officer, in the circumstances, would have viewed them. In those circumstances, it is not essential, or even appropriate, to choose one precise legal characterisation of the transactions, as the primary judge did at [82] of his reasons. Neither the approach to the matter by Mr Bruce, nor the findings of the primary judge accorded with Mr Gillies' understanding, nor did they accord with any clear factual foundation in conversation or writing. What they did accord with was the only available coherent arrangement that would not involve a crystallisation of Downer's responsibility to remit tax to the Australian Taxation Office referable to the bonuses. It was an available construction placed on facts which had occurred that may have avoided the taxation consequences just referred to, but made the transaction a related party financial benefit (unless it could be construed as remuneration) and apparently only justified by an inadequate and undocumented practical security and an interest set off not based in any definite arrangement.
Mr Gillies' understanding of his justification for being paid large sums of money by the company of which he was the Managing Director and Chief Executive Officer was entirely lacking in proper justification. He asked for money; was paid it; and relied on Mr Bruce. He took no step to acquaint himself with the basis of his entitlement to draw money at will and in what amount he was entitled. He did not make it his business to appreciate how his subordinate, Mr Bruce, viewed the matter (as a loan) and did not make it his business to ensure that all appropriate steps were taken either to seek approval for the moneys as a loan or to see tax paid if it was the taking of the bonus or to satisfy himself of the appropriateness of some innominate, intermediate concept of an "advance".
The above does not involve the attribution directly to Mr Gillies of the inadequacies of Mr Bruce's own handling of the arrangements. Rather, as Managing Director and Chief Executive Officer of a listed public company, Mr Gillies took large sums of money from the company paying scant attention to the legalities and legal consequences of the payments either through properly acquainting himself with those matters or satisfying himself of the basis of his subordinate's satisfaction with the arrangements.
This led to the consequence that the company's money was advanced to him in amounts for a time beyond his gross entitlement to bonuses, and for a longer period of time beyond his net entitlement to bonuses, without any documentation other than a running sheet kept by the Chief Financial Officer, pursuant to an oral arrangement not disclosed to the board, between the Chief Executive Officer and his immediate subordinate, the Chief Financial Officer, whereby as and when moneys were desired by the Chief Executive Officer for private purposes he would be supplied with them, by the company. In due course, and from time to time, the Chief Executive Officer would, at his discretion, pay money to the company to replenish the bonus account, recognising, as he did, that the company would, at some point, be responsible for payment of tax on the bonuses. The Chief Executive Officer and the Chief Financial Officer had diametrically opposed (honest) beliefs as to the character of the transactions. Both, however, recognised in 2002 that the exhaustion of the bonus pool by the $1.2m payment raised questions of the tax responsibility of the company, which were not reconciled or addressed (albeit inadequately) for over a year.
Looking at the matter thus, and even taking into account notions of setting off interest and the cashing in of moneys for untaken annual leave, the position of Downer has been compromised and subjected to the risk of loss and criticism. If Mr Gillies' attitude to the arrangement was to govern its legal characterisation, it would have been difficult to resist the conclusion that taxation returns for tax from the bonuses should have been made. At least for a period of over a year, Downer was left unfunded for such liability absent further bonuses or the arrogation to Downer of annual leave payments accrued to Mr Gillies. There was also the risk, on this hypothesis, of the damage to Downer's reputation by any assertion of tax irregularity by the Australian Taxation Office. Also, Downer was subjected to a degree of financial risk from the arrangement whether it was the taking of the bonus or a loan. Further, if it was a loan, no attendance was paid to the nature of the arrangement as a related party transaction. The risk of the damage to Downer's reputation for corporate governance so clearly trumpeted in the annual report was clear. These risks of financial harm and reputational damage in the eyes of the regulator and the market by questionable taxation treatment of money taken by the Chief Executive Officer were self evident. Further, the example it set to lower employees about lax governance could only damage Downer and increase the risk of poor governance throughout the organisation.
The board of Downer could properly have taken the view that the conduct could not be tolerated and was incompatible with due and faithful discharge of Mr Gillies' duties and was seriously inconsistent and incompatible with his duties as the most senior executive in the company. This would be particularly so because Downer could have taken the view that in all the circumstances a serious lack of care had been revealed in respect of transactions that were improper or not for a proper purpose, that detriment had been caused to Downer and that Mr Gillies had breached at least ss 180 and 181 and arguably s 182 of the Corporations Act. These views could have been taken because, looked at objectively, the conduct was to be so characterised and there had been breaches of ss 180 and 181 and arguably of s 182. Without repeating what is in [103]-[107] above, there was a failure by Mr Gillies to discharge his duties with a reasonable degree of care and diligence (s 180), or for a proper purpose (s 181). The question of breach of s 182 is, of course, to be assessed objectively and recognising the found subjective honesty of Mr Gillies. The use he made of his position was objectively improper in that there was an improper purpose of the use of Downer's funds (albeit under some honestly assumed claim of right) for his personal use, without any appropriate or clear foundation, exposing Downer to risk of damage and contravention of tax and corporations statutes. This is to be characterised as improper use of position to gain an advantage (the use of Downer's funds), though perhaps not to cause detriment (even though detriment can be seen to have been caused in the nature of risk to the corporation). Findings as to ss 180 and 181 and the underlying conduct are ample to found the conclusion that there was serious misconduct for the purpose of "misconduct" in cl 4.1(c).
Mr Gillies argued that the following particular considerations militated against such conclusions. I have already dealt with the finding that Mr Gillies was honest in a subjective sense in what he did. I have also already referred to his history of service to Downer. It was submitted that the net effect of the transactions was not to cause any loss to Downer. That can be accepted if one restricts loss to actual financial loss to Downer. If notional interest is charged to Downer for Mr Gillies leaving his bonuses with Downer, Downer is said to have received a benefit. That, however, is not to the point. First, there was no arrangement for interest. Secondly, the arrangement was at the request of Mr Gillies. Thirdly, the risk of damage both financial and reputational from the entering of such arrangements was real. Fourthly, the character of the transactions and the lack of regularity are not outweighed by the fact that actual financial loss was not caused.
It was submitted that there was an honest error with one transaction (the overdrawing of the $200,000), and that this can be excused because Mr Gillies relied on Mr Bruce. What I have already said at [92], [95], [101], [104], [105] and [106] above is an answer to this.
It was submitted that if the board had been told about the arrangements it would have approved them. That is a conclusion that is open to serious doubt. How could any board have approved an arrangement of such an indeterminate character the terms of which were both unclear (vide the different understandings of Mr Gillies and Mr Bruce) and either liable to have raised irregularities in the company's taxation affairs or the requirement for related party disclosure. It may well be that the board would have approved a properly documented related party loan with disclosure to shareholders or the re-ordering of Mr Gillies' remuneration arrangements to include a loan facility, but that is quite different from the board approving the ill-defined and objectively inappropriate arrangements. Further, what this particular board would do is not necessarily to the point. The relevant question is whether the Downer board could, in all the circumstances, have regarded the conduct as inconsistent and incompatible with his duty as the managing director and chief executive officer. The answer to that question is, yes, because it was of that character. If this particular board had viewed the conduct as satisfactory that might reflect on the board, rather than ameliorating the quality of Mr Gillies' conduct.
It was submitted (and found by the primary judge) that Mr Gillies was only relying on Downer's own conduct, through Mr Bruce. Thus, it was said his conduct was reasonable. Mr Bruce was Mr Gillies' immediate subordinate. Mr Bruce had no authority to make personal loans to Mr Gillies. It is a misconception to analyse Mr Gillies' conduct by saying he was dealing with Downer and Mr Bruce was there to look after Downer's interests. Such only emphasises the personal interest of Mr Gillies in his own dealings with Downer. In any event, the characterisation of Mr Gillies' conduct commences with the recognition that he was Downer - its managing director and chief executive officer. His conduct was not reasonable, though he was subjectively honest.
The entry into and participation in these arrangements was serious misconduct on the part of Mr Gillies for the purposes of cl 4 of his employment agreement.

The New Zealand foreign currency transactions

The nature of the conduct is set out at [63]-[64] above. It was common ground that these were short term interest free loans made by Downer, through Mr Bruce engaging the foreign currency desk, for the personal and private benefit of Mr Gillies.
The facts were not in dispute. On 13 December 2006, Mr Gillies was in New Zealand and telephoned Mr Bruce saying that he had just bought a property at auction, that he needed to pay a deposit immediately, and that he had inadequate funds in his New Zealand bank account. He asked for NZ$200,000 to be sent to him, saying "I will give you a cheque for the Australian dollar equivalent as soon as I am back in Australia." The request was effected through Downer's Treasury Department, the transaction being authorised by Mr Reichler who was at the time the CFO, Mr Bruce having taken up a position as "Finance Director". Mr Reichler reported to Mr Bruce. Mr Gillies paid the equivalent sum in Australian dollars two days later.
In the following month (on 31 January 2007), Mr Gillies was to pay for the property that he had contracted to buy at auction. Once again Mr Gillies rang Mr Bruce from New Zealand, this time asking for NZ$548,163.69, saying "I will give you a cheque for the Australian dollar equivalent once I am back in Australia." Mr Bruce authorised the payment. On 5 February a cheque for the equivalent sum in Australian dollars was given to Downer by Mr Gillies.
The following month (on 7 February 2007) Mr Gillies requested Mr Bruce to effect a payment of NZ$50,000 to his New Zealand bank account. Mr Bruce did so and on the same day Mr Gillies provided Downer with a cheque for the equivalent sum in Australian dollars.
On 17 July 2007, Mr Gillies asked either Mr Bruce or two officers in the Treasury Department to transfer NZ$50,000 to his New Zealand bank account. Mr Bruce authorised the payment. On the following day, 18 July 2007, Mr Gillies provided Downer with a cheque for the equivalent sum in Australian dollars.
In paragraph 48 of his affidavit sworn 12 March 2010, Mr Bruce explained these transactions as part of a "practice of Downer to allow its senior employees in certain circumstances to utilise, for personal purposes, the treasury function from time to time on the basis that the employee bore all of the costs associated with the treasury transaction." He gave two examples in paragraphs 49 and 50. The first was a senior employee residing in New Zealand who was relocating to Australia as Deputy Chief Executive Officer, who sold his residence in New Zealand and was allowed to use the treasury function "to hedge his exposure to currency fluctuations". Mr Bruce gave no details. It does not appear that this would have been any more than buying Australian dollars. The second was a New Zealand senior employee. Mr Bruce's evidence was that she "made use of Downer's treasury function in the middle of 2007." No other detail was given. Neither example illustrated a short term unsecured loan in foreign currency.
In cross-examination, Mr Bruce was unable to recall any other examples of the "practice". Mr Bruce accepted, however, that he could offer no other example where senior employees were allowed to take Downer's money in foreign currency for short term loans. Mr Bruce accepted that they were short term interest free loans, but at the time he did not see them as such.
The primary judge dealt with this at [55]-[56] of his reasons (see [63] above).
The findings in [55] were erroneous. There was no practice proved of permitting employees to take interest free loans. Utilisation of a treasury function is one thing, in particular if related (as the two examples were) to employment; taking short term loans in large amounts for entirely private reasons is another. The fact that Mr Gillies was at the very top of Downer's staff was hardly a reason to sanction such an unauthorised short term loan, indeed it was a reason not to make it. That Mr Gillies had New Zealand connections is not relevant. That no actual loss occurred is irrelevant. There was no actual loss occurred is irrelevant. There was no evidence of any disclosure of these loans.
At [66] of his reasons, the primary judge found that had the board been aware of these transactions it would not have objected to them. For the reasons discussed earlier in relation to the boat payments, that is not to the point. The question is whether the board of Downer could have reasonably viewed this as serious misconduct.
Mr Gillies in his affidavit (paragraph 89) said that "[f]rom time to time Downer permitted its senior employees to utilise Downer's treasury function to make payments in foreign currency". In terms this was not evidence of any practice of making unsecured loans to employees. However, in cross-examination, Mr Gillies gave an example of a loan or extension of a loan to an executive without insisting an interest. In cross-examination, Mr Gillies accepted that the loans were not authorised (other than by him).
I cannot agree with the primary judge's view that the arrangement was neither inappropriate nor improper. There was no satisfactory evidence of any practice of lending foreign currency interest free to employees. It was on its face the managing director dealing with the company's funds for his own private purposes by the making of a related party benefit (unless it be characterised as remuneration, which it is difficult to do).
If the New Zealand payments stood alone, it may be that the board, taking into account Mr Gillies' honest belief that he was entitled to do this as part of some ill-defined and undocumented practice, could come to the view that dismissal was not warranted. Taken, however, with the bonus account and the payments related thereto, the New Zealand payments, inappropriate and improper in themselves, reinforce the conclusion that Mr Gillies' conduct as Managing Director and Chief Executive Officer was inconsistent with and repugnant to his duties as the most senior executive in the company.

The contractual consequences of the finding of serious misconduct

The consequences of this finding depend upon the proper construction of the contract.
Mr Gillies submitted that any finding of serious misconduct has no effect upon his entitlement to the payment in lieu of notice made by Downer under cl 4.1(b) or the additional benefits under cl 4.2, because his termination was not "effected" for the purposes of cl 4.3 under cl 4.1(c), but rather under cl 4.1(b).
Downer submitted that even though it acted as a matter of historical fact in August 2007 under cl 4.1(b) or, at least, that as a matter of historical fact that it did not act under cl 4.1(c), it is entitled, upon discovery of the facts to rely upon termination for serious misconduct whether under cl 4.1(c) or the general law to deny Mr Gillies such entitlements as he claims.
Clause 4 identifies circumstances in which the employment may be terminated: resignation on notice, termination on notice, termination by payment in lieu and termination for misconduct. The word "misconduct" in cl 4.1(c) in its context is to be construed as serious misconduct that would entitle the employer to dismiss summarily. Looking at the matter thus, the scope of cl 4.1(c) is co-extensive with the entitlement to dismiss at common law for misconduct or dishonesty.
Clause 4.2 addresses the circumstances in which a further payment may be made in addition to a payment in lieu of notice. Clause 4.3 addresses the circumstances in which termination payments are not payable. It is to be noted that cl 4.3 refers to "termination payments". These clauses, and the whole of cl 4, should be understood against the background of the common law of contract as it may be applicable to a contract of employment. One well-known feature of the common law is that a contracting party who gives a reason for a contractual position being taken (such as termination) does not by the giving of that reason (which may be wrong) deprive itself of a justification which existed, whether known of or not at the time: Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 at 377-378 and cases there cited; approved in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 262 (Mason CJ with whose reasons Deane J, Dawson J and Toohey J agreed) and 274-5 (Gaudron J) and Concut at [27]-[29].
The principle enunciated in Shepherd v Felt and Textiles often operates when a contractual act sought to be justified cannot be so justified on the ground contemporaneously relied upon, but can be so justified on a ground then existing but not known about: see for example British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 at 70-71; and see the discussion of principle by Devlin J in Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401 at 443-446 approved by Mason CJ in Sunbird Plaza at 262.
It was submitted by Mr Gillies that the principle in Shepherd v Felt and Textiles was restricted to circumstances where the act purportedly taken under the contract required other justification to be valid. In support of this contention the decision of Vickery J in Hodgson v Amcor Ltd [2012] VSC 94 at [1602]-[1614] was cited. In that case, Vickery J said at [1612]: "Second, the Shepherd principle in its broader form, in my opinion, cannot be applied, in effect, to convert a termination undertaken on one basis, namely a contractual termination in this case, to a termination on another basis, namely a summary dismissal. This is so, even though facts have now come to light which would have justified the summary dismissal of Hodgson as at 11 August 2004. The Shepherd principle does not go so far."
In support of that reasoning, Vickery J relied on the reasoning in Bell v Lever Brothers Ltd [1932] AC 161 and in particular the passage from Lord Atkin's speech which Vickery J set out at [1614]: "The reasoning in Bell v Lever Brothers Ltd provides support for this approach by analogy. The case concerned the avoidance of agreements for failure to disclose past misconduct and the recovery of monies paid thereunder. Lord Atkin, in his distinguished speech said this: 'If he gives his cook a month's wages in lieu of notice can he, on discovering that the cook has been pilfering the tea and sugar, claim the return of the month's wages? I think not. He takes the risk; if he wishes to protect himself he can question his servant, and will then be protected by the truth or otherwise of the answers.'"
This passage from Lord Atkin's speech is not, however, determinative. As Gleeson CJ, Gaudron and Gummow JJ pointed out in Concut at 701-703 [31]-[38], Bell v Lever Brothers was concerned with whether an agreement was void for mistake and the question of non-disclosure.
As a matter of principle and authority, the limitation on the principle should not be accepted. There is no reason in principle for Shepherd v Felt and Textiles to be confined to supporting as justifiable acts done under contract which are not valid without further justification from the facts not previously known. In principle, it should equally extend to adding a further basis for justification of the act if that further basis has separate relevance. So to approach the matter accords with the approach to the availability of damages for loss of bargain even if the contract be terminated in the exercise of a contractual power: Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; 157 CLR 17 at 31; and Sunbird Plaza at 260-262. Of course, whether or not the two contractual bases can operate concurrently or severally will be affected by the terms of the contract.
As a matter of authority, the principle was expressed by Mason CJ in Sunbird Plaza at 262 in a fashion not so limited: "Shepherd v Felt & Textiles of Australia Ltd stands as authority for the general proposition that a termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance." The absence of substance of the ground actually relied on was not expressed by Mason CJ as a necessary element of the principle, but one circumstance in which the principle remains applicable. This is reinforced by the phrase "any ground that was valid". See also the expression of the matter by Dixon J in Commonwealth Homes and Investment Co Ltd v MacKellar [1939] HCA 34; 63 CLR 351 at 378.
To the extent that the principle was limited to supporting otherwise unjustified acts by the Court of Appeal in England in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27 at [44] approved in Cavenagh v William Evans Ltd [2012] EWCA Civ 697 at [41], this Court is bound by the wider expression of the principle in Sunbird Plaza.
That said, how a contract operates both by reference to its own terms and to the general law of contract will depend upon the content and meaning of the contract.
If, as Mr Gillies submitted, cl 4.3 is to be limited to where the termination is contemporaneously "effected" as a matter of historical fact under cl 4.1(c), the contract would bear a meaning that the termination payments referred to in cl 4 (both three months' salary and additional benefits) would be payable under the contract. For Downer's contractual obligation in that respect to be defeated would require the operation of either another distinct provision of the contract or of a principle of law cutting back or destroying an accrued contractual entitlement of Mr Gillies. It was this very consideration with which the English Court of Appeal was dealing in Cavenagh. Mr Cavenagh claimed moneys payable under his contract of employment when he was terminated. Known to him, but not to his employer, was the fact that he had engaged in gross misconduct that would have justified the employer in summarily dismissing him without compensation.
The reasoning of Mummery LJ with which both Tomlinson LJ and Hallett LJ agreed was that the general law did not release the employer from its contractual liability. One important element to that reasoning was that the principle from Boston Deep Sea Fishing and Ice Co v Ansell (being that enunciated in Shepherd v Felt and Textiles) was limited in the manner just mentioned. The second important element to the reasoning was that the employer had elected to act under a provision creating a legal right in Mr Cavenagh. Election, however, is a doctrine founded upon knowledge of the facts that give rise to inconsistent rights or remedies: Khoury v Government Insurance Office (NSW) [1984] HCA 55; 165 CLR 622 at 633-634; Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; 182 CLR 26 at 30.
It is unnecessary, however, to explore Cavenagh any further or to explore the operation of the general law upon the contract construed such that the word "effected" in cl 4.3 is limited to its past participial meaning contended for by Mr Gillies. If that textual construction of cl 4.3 were to be adopted, the question would arise whether the contract had excluded by necessary implication common law rights of dismissal, the principle in Shepherd v Felt and Textiles and the principle that such summary dismissal involves immediate dismissal without compensation: Blyth Chemicals Ltd v Bushnell at 72. Clear words are needed to rebut the presumption that a contracting party does not intend to abandon contractual rights implied by law: Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 585; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Concut at 699-70 [23]. No such clear words can be discerned here.
Clause 4.3 should be construed both in the context of the common law, including the principle in Shepherd v Felt and Textiles, and in accordance with honest commercial common sense. One aspect of common sense would be the obvious fact that serious misconduct of an employee is sometimes not discovered for some time. A business contract, otherwise tolerably straightforwardly drafted, to be understood as permitting an employee to obtain contractual benefits on termination on one basis of no misconduct when, unknown to the employer, serious misconduct has occurred, which if appreciated, would have denied the contractual benefits, might give pause for thought. If the words are reasonably capable of conforming to a regime consistent with the parties' rights being resolved by reference to the true position, they should be given that sensible meaning. Here, cl 4 as a whole and the text of cl 4.3 support a meaning to the word "effected" in cl 4.3 broader than the historical fact of what happened.
Clause 4.3 should be construed where it uses the word "effected" as including in its meaning effected as a matter of law, that is, by reference to the legally available support or justification for the termination that was effected. Accordingly, cl 4.3 would operate in circumstances where, after a termination under 4.1(b) (that is, the act of termination by payment in lieu of notice), Downer became aware of circumstances that would have entitled it to terminate under cl 4.1(c) and to dismiss summarily. In such a circumstance, for cl 4.3 to engage with a termination payment under cl 4.1(b), "effected" must be wider than a description of an historical fact. For cl 4.3 to be addressing termination payments under cl 4.1(b), "effected" must be wide enough to include effected in law as justified. The acting to terminate otherwise than under cl 4.1(c) does not disentitle or debar Downer, if it later discovers facts amounting to serious misconduct, from relying on them to assert that the termination was thereupon justified and took effect in law thereupon (thus was "effected") as one based on the found misconduct. Thus, by the words of cl 4.3, no terminaton payments in cl 4 were payable. Given that the words "not be payable" refer to moneys paid to effect a termination under cl 4.1(b), their meaning is clearly that such moneys were not liable to be paid. In such circumstances, reading cl 4 as a whole, the moneys paid on 9 August were not liable to be paid, were not payable, by reason of cl 4.3. I have read the reasons of Meagher JA in this respect, agree with him and acknowledge his assistance in the expression of this part of these reasons.

Conclusion

For the above reasons the board of Downer was entitled to consider that Mr Gillies had engaged in serious misconduct and to rely upon that to justify the termination on 9 August.
This conclusion does not operate to terminate the employment prior to the date on which termination occurred, 9 August 2007. The contrary was not argued.
Downer is not liable to pay benefits under cl 4.2 and was not liable to pay the moneys under cl 4.1(b).
The above represents, my understanding of the limits of the debate before this Court. The parties indicated that they would bring in short minutes reflecting the Court's reasons.

Orders

In these circumstances the parties should bring in short minutes to reflect these reasons and submissions to deal with costs. The orders that I would make are: 1.Appeal allowed in part. 2.Set aside the orders of the Supreme Court made on 9 September 2011. 3.Within 14 days the appellant file agreed orders disposing of the appeal, or in lieu of any agreement, the appellant and the respondent file draft short minutes that each contends should be made together with submissions of no more than three pages in support thereof, including as to costs in the Supreme Court and in the Court of Appeal.
MACFARLAN JA: I agree with Allsop P and also with the additional observations of Meagher JA.
MEAGHER JA: I agree for the reasons given by Allsop P that the primary judge was correct to conclude that Downer did not terminate Mr Gillies' employment with effect on and from 1 August 2007. It follows, Downer not submitting otherwise, that Mr Gillies' employment was terminated, as the primary judge found, on 9 August 2007 when Downer made a payment in lieu of notice in accordance with cl 4.1(b): [142], [146], [148], [152]. Because the contract expressly provided that it could be terminated by the making of such a payment, there was no breach of contract involved in Downer terminating in that way: cf Sanders v Snell [1998] HCA 64; 196 CLR 329 at [16].
Downer argues that because Mr Gillies engaged in serious misconduct which justified his being summarily terminated under cl 4.1(c), cl 4.3 applied with the consequence that Mr Gillies was not entitled to any payment under cll 4.1(b) or 4.2. In response Mr Gillies says that his employment was terminated under cl 4.1(b) and not cl 4.1(c) and that cl 4.3 only applies where the termination is in fact "effected under cl 4.1(c)".
These arguments require close consideration to the terms of cl 4 and in particular cl 4.3. Clause 4.1 provided that Mr Gillies' contract of employment could be terminated on three months' notice given by Mr Gillies (cl 4.1(a)) or by Downer (cl 4.1(b)). It also provided that the contract could be terminated with immediate effect either by Downer making a payment in lieu of three months' notice (cl 4.1(b)) or giving notice that the contract was terminated with immediate effect (cl 4.1(c)). Clause 4.1 also entitled Mr Gillies to resign for either of two reasons, in which event he was entitled to receive a "termination payment" in an amount equal to a payment in lieu of three months' notice.
Because cl 4.1(c) enables summary termination, the word "misconduct" is to be construed as referring to serious misconduct which would, under the common law, entitle an employer to dismiss summarily. There is then a question as to whether a termination with immediate effect under cl 4.1(c) can subsequently be justified by reference to misconduct or fraudulent activity which was not known at the time of termination. Under the common law the validity of a summary dismissal can be supported by any legal justification which in fact existed at the time of termination and irrespective of whether that justification was known or relied upon: Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 at 371, 373, 377-378; Commonwealth Homes and Investment Co Ltd v MacKellar [1939] HCA 34; 63 CLR 351 at 378; Concut Pty Ltd v Worrell [2000] HCA 64; 176 ALR 693 at [29]. The language of cl 4.1(c) is not in terms restricted to misconduct or fraudulent activity which is known at the time of termination. Nor does it require that the notice specify the conduct or activity relied upon at the time of termination. There is no reason not to read cl 4.1(c) as applying to any prior misconduct or fraudulent activity, whether known or unknown, at the time of termination. To construe it in that way reflects the position as it would be under the common law and accommodates the reality (illustrated by cases such as Shepherd and Concut) that misconduct or fraudulent activity may be discovered subsequently.
In addition to a "termination payment" in lieu of three months' notice which may be paid under cl 4.1(b) or upon a resignation by Mr Gillies, cl 4.2 provides for an additional termination payment. Under the terms of cl 4.2 that benefit is payable upon any termination. However, the entitlement to each of these payments is subject to cl 4.3.
Under the common law an employee is able to be dismissed without notice or compensation for serious misconduct: Blyth Chemicals Ltd v Bushnell [1933] HCA 8; 49 CLR 66 at 72-73. Clause 4.3 is directed to circumstances in which there has been misconduct or fraudulent activity on the part of the employee. Again, there is no reason to construe the reference to "your misconduct or fraudulent activity" in cl 4.3 as restricted to conduct or activity of which the employer was aware before the employment was terminated.
It is significant that the subject matter of cl 4.3 is the "termination payments" referred to in cl 4. Those payments are not limited to a payment under cl 4.2. They also include a payment under cl 4.1(b) or calculated in accordance with that provision. Whereas a payment under cl 4.2 is likely to be made after the date of termination, a payment under cl 4.1(b) is made at the time of termination because it is the fact of payment, and not the giving of any notice, which is the act by which the contract is brought to an end under the second limb of cl 4.1(b).
Clause 4.3 provides that such payments "will not be payable" in any case where the termination "is effected under cl 4.1(c)" due to misconduct or fraudulent activity. In the first phrase "payable" is used in the sense liable to be paid, or due. Construed in that way it is capable of applying irrespective of whether a termination payment has been made or not. The ordinary meanings of the past participle "effected" include brought about, accomplished, achieved, or produced. However, there are difficulties with construing this second expression as referring to whether the termination was as an historical fact "effected" under cl 4.1(c). First, if the expression is read as requiring for the operation of cl 4.3 that Downer in fact have acted to terminate Mr Gillies under cl 4.1(c), cl 4.3 would have little, if any, operation with respect to termination payments made under cl 4.1(b), or calculated in accordance with that provision. For those payments to have been made, Downer must have acted to terminate Mr Gillies under cl 4.1(b) or Mr Gillies must have resigned. Secondly, such a construction would deny cl 4.3 any efficacy in the face of unknown prior misconduct except where Downer had terminated under cl 4.1(b) for misconduct which, as matters turned out, it could not subsequently prove or was not sufficient to justify summary termination. Thirdly, such a construction would result in an employee whose prior misconduct was not discovered or disclosed being in a better position in relation to entitlements to termination payments than one whose misconduct had been discovered or disclosed.
When construing a provision such as cl 4.3, the language used is to be given its ordinary meaning unless there is some contrary indication in the 1clause or otherwise within the contract. In the face of such a contrary indication, it is permissible to depart from that ordinary meaning to avoid inconsistency. Ultimately, the construction to be preferred is one which gives a congruent operation to the clause and which, in a context such as the present one, makes commercial sense and reflects what honest businessmen would understand the words to mean: Cohen & Co v Ockerby & Co Ltd [1917] HCA 58; 24 CLR 288 at 300 (per Isaacs J); Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1935) 53 CLR 618 at 636 (per Rich, Dixon, Evatt and McTiernan JJ); Upper Hunter District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437 (per Barwick CJ); Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 (per Gibbs J); Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [16] (per Gleeson CJ, McHugh, Gummow and Kirby JJ); Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at [83] (per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).
The introductory words to cl 4.3 make clear that it was intended to apply to Downer's liability in respect of termination payments made under cl 4.1(b) and therefore in circumstances where the ground relied upon for termination may not have been cl 4.1(c). Clause 4.3 was also intended to be applied taking into account misconduct or fraudulent activity which may not have become known until after the actual termination. The requirement for the application of cl 4.3 is whether "the termination is effected under cl 4.1(c)". Whether that requirement is satisfied is concerned with whether, by reference to subsequent as well as prior knowledge, the termination which has occurred was justified in law, and in that sense can be said to have been effected, under cl 4.1(c).
Adopting that construction, the clause applies to termination payments made under cl 4.1(b), and in circumstances where Downer has acted under that sub-clause, where the termination was legally justified under cl 4.1(c) due to misconduct or fraudulent activity. On that construction, if Mr Gillies' conduct was "misconduct or fraudulent activity" justifying summary termination, cl 4.3 applies and Downer was not liable to make any payment in lieu of notice under cl 4.1(b). Nor is it liable to make any payment under cl 4.2.
This outcome turns on the construction of cl 4.3. The present case is not like Cavenagh v William Evans Ltd [2012] EWCA 697 where an express contractual power to terminate without notice had been exercised and the employer sought subsequently to deny liability to pay the amount due in lieu of notice on the basis that it had become aware of prior gross misconduct which it would have relied upon to dismiss the employee summarily. Nor are the circumstances of this case the same as those considered by Vickery J in Hodgson v Amcor Ltd [2012] VSC 94 at [1611]-[1615]. In neither of those cases was there a clause such as cl 4.3 which affected the entitlement of an employee to enforce contractual entitlements or retain benefits received pursuant to them.
I agree with Allsop P for the reasons he gives that Mr Gillies conduct was sufficiently serious to justify summary termination of his contract.
I also agree for the reasons his Honour gives that the primary judge did not err in concluding that the phantom option agreement was ratified by the remuneration committee of the Downer Board and that the primary judge did not err in concluding that the loan made to Mr Gillies and applied in 2004 to purchase a motor vehicle was made on the basis that it was secured "against the motor vehicle" and was "non-recourse" in the sense that Mr Gillies was not personally liable to repay that loan.
For these reasons I agree with the orders proposed by Allsop P.

Amendments 20 May 2016 - paragraph [142] - changed "intends" to "does not intend" 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: 20 May 2016

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