East Gippsland Shire Council v Strong [2001] VSC 448

Supreme Court of Victoria|2001-11-22|Before: BONGIORNO J

Contract - employment contract - construction - written contract - express terms - "cost to employer" package.

Bruce Strong is employed by the East Gippsland Shire Council at Bairnsdale as its works engineer. He is employed pursuant to a written employment contract, which, although undated and unexecuted by the Shire, is agreed by Mr Strong and the Shire to contain the terms of Mr Strong's contract. It is the effect of that contract with which this case is concerned.

Prior to Mr Strong and the Shire entering into that employment contract Mr Strong had received a letter formally offering him the position and inviting him to sign a copy of the letter if he agreed to its terms. Those terms were expressed to be subject to a contract of service being entered into between him and the Shire. The letter, which was dated 12 October 1985, had appended to it a job description and described Mr Strong's remuneration in the following terms:

"4. REMUNERATION PACKAGE The remuneration is on the basis of a 'Cost to Council' package of $42,000 per year. As well, a bonus for exceptional performance will be considered annually, of up to 10% of this package."

The letter made no reference to superannuation or to any other fringe benefits. Having regard to the phrase "Cost to Council" appearing in the passage quoted above, this is not surprising. If that letter did nothing else it set out the Shire's total liability to Mr Strong subject only to the possibility of a bonus for exceptional performance.

Mr Strong signed a copy of the letter as an acceptance of the Shire's terms and dated it 16 January 1996.

Sometime after the letter was written the figure of $42,000 referred to in it was negotiated upwards between Mr Strong and the Shire to $45,000 and it was this figure which was finally inserted in the employment contract entered into between the parties to which I have already referred.

That employment contract set out Mr Strong's remuneration and allowances in the following section:-

"4. Remuneration and Allowances 4.1 The Officer's annual remuneration and other benefits shall consist of an Executive Remuneration Package as annexed to this Agreement and marked Appendix "B". 4.2 The officer will be permitted to structure the remuneration package in Appendix "B" by means of lawful salary sacrifice. 4.3 The remuneration package will be reviewed every 12 months, and varied to take account of all of the following factors; (a) The Market (as determined by a reputable consultant) (b) Award movements in the previous 12 months (c) Anticipated award movements 4.4 At its own absolute discretion the Council may also pay a bonus to the Officer. The payment or otherwise of a bonus and the amount, if any thereof, shall be determined annually by the Chief Executive on the recommendation of the Director based on the performance appraisal of the manner and degree by which the Officer has exceeded, in an exceptional manner, the performance measurements in the attached Position Description and the Performance Action Plan. 4.5 The Council shall provide the Officer with a motor vehicle as listed in appendix "B" or another motor vehicle of similar standard for his or her unrestricted prime use and shall pay all maintenance and operating expenses in respect of such vehicle subject to: (a) the vehicle being accommodated off-street, when at the officer's residence; (b) the Officer maintaining the vehicle in a clean and tidy condition; and (c) the Officer making the vehicle available for use by others while he/she is at the Council's Municipal Offices during normal business hours. (d) Its replacement being in accordance with the Council policy. (e) The vehicle being driven only by the officer or his or her spouse or partner. Alternatively, the officer may elect, at his expense, to purchase or lease vehicles for personal and business use. 4.6 The Council shall maintain professional indemnity insurance to indemnify the Officer against any and all liability caused by or arising out of the negligent acts or omissions of the Officer in relation to the employment. 4.7 The Council shall provide the Officer with such equipment, facilities and staff as are reasonably necessary to enable him or her to perform his or her obligations hereunder."

Clause 4 refers to an attached "Appendix B". As this case turns on the construction of this appendix I set it out in full as it appears in the contract:-

Employer superannuation contributions 13.25% $5,264.90

Employee superannuation contribution 6.00% $2,384.11

FBT on Employee superannuation contribution $ 420.72

Currently, the Council does not pay sales tax on motor

vehicles. This reduces the "cost to Council" amount

for salary packages as reflected in the OCR survey. If

sales tax is imposed on Council owned vehicles, the

Council will review the impact on the salary package

1. In addition to the above remuneration package, Council will meet the

(e) Uniform Allowance in accordance with Council policy

2. Variations in mandatory superannuation contributions will be included in the remuneration package.

Although Appendix B sets out an initial remuneration package, cl 4.2 of the contract permits the employee to structure (scil. restructure) that remuneration package by means of "lawful salary sacrifice". Indeed, Appendix B itself expressly provides that the elements included in the package can be varied by the employee if it is lawful to do so.

Appendix B is structured such that the total "cost to council" base package (as it is referred to) of $45,000 includes not only the employee's contribution to his own superannuation but also the employer's contribution as well as the fringe benefits tax levied on the employee's contribution and the cost of the motor vehicle provided for his use by the Council.

At the time the contract was entered into the Shire was obliged to pay 13.25% of the employee's salary to the Local Authorities Superannuation Fund (the LASF), a fund established by the Local Authorities Superannuation Act 1988. The obligation was statutory. Hence the apportionment in Appendix B of the sum of $5,264.90 to this item, being 13.2% of the constructed figure of $39,735.10 referred to as the "salary for superannuation purposes". It is significant that this sum, as well as Mr Strong's own contribution to the Local Authorities Superannuation Fund (6% of $39,735.10 or $2,384.11) is included in the total 'base package" sum of $45,000 as is the cost of the car provided to him pursuant to cl 4.5 of his contract. All of those figures appear to have been carefully calculated to produce the total "base package" figure of $45,000."

As from 1 July 1998 the Shire's statutory obligation to contribute to the LASF became an obligation imposed by contract between it and Local Authorities Super Pty Ltd, the trustee of the LASF following a reconstitution of the fund upon the repeal of the 1988 Act. Shortly prior to this reconstitution the employer's contribution in respect of defined benefit members of the LASF had been reduced from 13.25% to 9.25% of an employee's salary but subject to further increase or decrease as claims experience on the fund might require. This reduction took effect from 1 July 1997. It was expected that the fund's future claims experience would be affected by (amongst other things) movements in employees' salaries which would, in turn, affect benefits paid to members of the fund. Members of the LASF (or at least those referred to as "defined benefit members" which included Mr Strong) are entitled, upon the happening of certain specified events, to the payment of benefits calculated by reference to their own contributions to the fund, their final salaries and their years of service in the employment of the local government authority concerned. Their benefits are not affected by the amount their employers may have paid into the fund as a percentage of their salaries during their period of employment. It was common ground both before the magistrate and in this Court that the benefits to which Mr Strong would have been entitled had the Local Authorities Superannuation Act 1988 not been repealed would have been identical to the benefits to which he is or will be entitled by virtue of the LASF trust deed to which reference has been made.

At the time Mr Strong entered into his employment contract his employer was bound to make payments to the LASF as determined by the then Local Authorities Superannuation Board pursuant to s 25 (1)(b) (iii) of the 1988 Act. This rate was 13.25% of Mr Strong's salary. When the scheme in the Act was replaced by the scheme in the trust deed the employer's obligation was imposed by Part A.20 of that deed. Clause A.20.1 provides:-

". . . each Employer must contribute to the Fund in respect of a particular Employee at any particular time the amount or rate of contributions determined by the Trustee after obtaining the advice of the Actuary, including the Unfunded Liability Amount. . . ."

The unfunded liability amount was the amount of a levy imposed upon each local authority employer by the fund in October 1997 to meet the then accrued unfunded liabilities of the fund. Circular 12/97 dated 20 October 1997 issued by the trustee, which was in evidence before the magistrate, not only notified the Shire that the ongoing contribution rate for its employees would be reduced from 13.25% to 9.25% of their salaries, effective from 1 July 1997, but also provided that in respect of each authority an unfunded liability amount determined by the trustee had to be paid by 30 June 2007. The total unfunded liability of the fund was said to be $321M which was apportioned between the various local government authorities whose employees were members of the fund. Each such authority was required to make minimum annual instalment payments in diminution of its apportioned liability such that the total amount of such liability, together with contributions tax applicable, would be paid by 30 June 2007 - ten years from the date of the imposition of the levy. Such instalment payments in respect of the LASF's unfunded liabilities were and are not referable to any particular employee, whether past or present. They are simply overheads which the Shire must meet as a consequence of conducting its operations in much the same way as it must meet its other business liabilities such as the cost of light, power, rent or fuel. Although the fact that the Shire had to meet such instalment payments was in evidence before the magistrate it was not suggested that that fact in any way affected the proper construction of Mr Strong's employment contract. The evidence was apparently lead, although of very doubtful relevance, as an explanation as to why the Shire's liability to make ongoing superannuation payments was reduced from 13.25% to 9.25% of employees' salaries.

Following the reduction in the employer's superannuation contribution payments as from 1 July 1997 the Shire continued to pay Mr Strong's salary at the same rate as it had when those contributions were 13.25%; maintaining that it was entitled to do so notwithstanding that the "cost to council" of employing Mr Strong was thus reduced below the "base package" referred to in Appendix B to his contract of employment[1]. The Shire asserted that as the benefits payable to Mr Strong from the superannuation fund in the event he became entitled to them had not changed notwithstanding its payment of a lower contribution to the LASF it should be entitled to retain the 4% of Mr Strong's salary which the reduction in its contribution represented.

It was the Shire's adherence to this position which led to Mr Strong issuing this proceeding in the Magistrates' Court at Bairnsdale.

By his particulars of claim dated 10 December 1999 Mr Strong alleged that the Shire was in breach of his contract of employment. He claimed damages for such breach; such damages being said to be the amount he would have been paid had the Shire adjusted his salary to give him the benefit of the 4% reduction in the Shire's superannuation contribution from the date on which it occurred. In the alternative he alleged breaches of the Trade Practices Act 1974 (C'th) and the Fair Trading Act 1999. These latter claims, which were dismissed by the magistrate, do not concern this appeal. Neither do any questions of quantum; the matter having been reduced to one of principle by agreement between the parties.

The magistrate upheld Mr Strong's claim; holding that his employment contract entitled him to a total package of which the employer's superannuation contribution was but one component such that if it was reduced then another component, that is to say, his cash salary, must be increased by a corresponding amount. He awarded damages in an agreed sum.

The Shire appealed the magistrate's decision to this Court pursuant to s 109 Magistrates' Court Act 1989. Such an appeal is limited to a question of law. In accordance with the rules relating to appeals from the Magistrates' Court a Master formulated questions of law to be determined from the appeal as follows:-

"(a) whether the reduction in employer superannuation contributions from 13.25% to 9.25% of the Respondent's remuneration package with effect from 1 July 1997 constituted a breach of the respondent's contract of employment; (b) if there was such a breach did such breach cause any loss to the Respondent? (c) whether the appropriate remedy for any breach was "specific performance" rather than damages ? (d) did the learned Magistrate err in holding that the appellant was not entitled to retain the benefit of the reduction in the rate of employer superannuation contribution and in concluding that the Respondent was entitled to a corresponding increase in the cash salary component? (e) whether the learned magistrate denied the Appellant "natural justice" by not permitting it to be heard on the question of the quantum of costs awarded?"

At the commencement of the appeal I was informed by counsel that the question raised by para (e) of the Master's Order was no longer a matter of contention and would not be pursued.

Whilst it may be doubted whether, strictly speaking, all of the matters raised in para (a), (b) and (c) of the Master's Order raise questions of law rather than questions of fact or questions of mixed fact and law, (see Poricanin v Australian Consolidated Industries[2]; Azzopardi v Tasman UEB Industries Ltd[3]) underlying each of them and question (d) is the undoubted question of law as to what is the proper construction of the document agreed by the parties to constitute the respondent's contract of employment: Deane v City Bank of Sydney[4]; Williams Bros v Ed. T. Agius[5]; London County Council v Henry Boot & Sons Ltd[6]. Once the legal effect of that document is expounded the correctness of the Magistrate's decision will be able to be evaluated on the basis of the very few facts required to be taken into account, all of which were, in any event, agreed between the parties.

To construe a contractual document is to ascertain and declare its legal effect. In carrying out the task of construction the Court's object is to give effect to the contractual intention of the parties expressed in the document constituting the contract.

Mr Rinaldi, for the appellant, contended that the key to the resolution of this appeal is to be found in the nature of the superannuation benefits to which Mr Strong would become entitled when he was in a position to make a claim on the LASF. A defined benefits member of the LASF (as Mr Strong apparently was) is or will be entitled to benefits from the fund calculated quite independently of the rate or amount of contributions made by his employing Authority during the period of his employment so that the 4% reduction in the rate of employer's contribution to the fund from 1 July 1997 will make no difference to Mr Strong's eventual entitlements. Thus, says Mr Rinaldi, even if the Shire is in technical breach of Mr Strong's contract he has suffered no loss as a result.

But such contentions can be made out only if Mr Strong's contract of employment is construed such that if gives him, not a total remuneration package calculated by reference to a fixed cost of $45,000, but rather a series of valuable benefits including superannuation, the cost of which from time to time may or may not add up to $45,000. The appellant's argument thus begs the question. The matter to be determined is: "What did Mr Strong agree to work for the Shire for - a package which cost the council $45,000 or a series of benefits which initially cost $45,000 but may cost more or less in the future?

Were the question of construction able to be legitimately approached in the way contended for by the Shire not only would the cost to the Shire of Mr Strong's remuneration package depend upon the rate of employer contributions to the LASF from time to time, it would also depend upon the cost of the Toyota vehicle provided for his use and the rate of fringe benefits tax imposed on his contributions to the LASF paid on his behalf by the Shire. A reduction in the cost of Toyota motor vehicles or the rate of fringe benefits tax would necessarily reduce the cost of Mr Strong's package below $45,000 unless the proper construction of his contract was that he was entitled to a total package which cost $45,000 regardless of the cost of any particular component.

Clause 4.1 of Mr Strong's contract provides that his annual remuneration shall consist of an "Executive Remuneration Package" set out in Appendix B. That appendix begins by valuing his "BASE PACKAGE" at $45,000 and then sets out its various components which have been carefully calculated to total that sum. As already noted, his salary for superannuation purposes has been calculated such that it, plus 13.25% of it, plus 6% of it, plus the amount of fringe benefits tax applicable to that 6% plus the value of the Toyota vehicle together add to the base package sum of $45,000.

Appendix B specifically permits elements in Mr Strong's package to be varied if it is lawful to do so. For example, if it was otherwise lawful, Mr Strong could increase his own contribution to the LASF to, say, 9% of his salary. This would result in the cash component of his salary being adjusted such that 9% of it together with the fringe benefits tax on that 9% together with the other components would add to $45,000. He could also add some other benefit such as the payment of school fees or health insurance premiums (if it was lawful to do so) provided the amount of those benefits (together with the fringe benefits tax payable on them) when added to the existing elements again added to a total of $45,000.

That $45,000 was to be the total cost of Mr Strong's package is further emphasised by the acknowledgment in Appendix B that there would need to be a review of the salary package in the future in the event that sales tax was to be imposed on council owned vehicles; thus making it clear that any such imposition must, in the first instance, be met out of the salary package as it stands. That is to say the base package of $45,000 would need to accommodate any tax impost until a review occurred.

Similarly, Note 2 to Appendix B provides that variations in mandatory superannuation contributions will be included in the package. This term in the contract can only be construed as requiring adjustments to the elements in the package should there be any variation in mandatory superannuation contributions required to be made by the employer (and perhaps also by the employee). Indeed, on one view, the existence of this note is, on its own, fatal to the appellant's argument. Its presence in the contract drove Mr Rinaldi to the position of having to submit that it meant that the salary package amount would itself be adjusted to take account of variations in mandatory superannuation payments. But this is not what the note says. The Shire's contention in this regard runs counter to the whole scheme of Mr Strong's contract. Note 2 provides no warrant for construing that contract such that it required initial employer's superannuation payments to be included in the total package whilst requiring the Shire to absorb subsequent increases in those payments outside the package and, presumably, outside the review process provided in cl 4.3. The plain meaning of Note 2 to Appendix B requires variations in mandatory superannuation contributions to be "included in the remuneration package". The "remuneration package" is, of course, the package described in Appendix B as being, in total, $45,000. This is so whether such variations have the effect of increasing or decreasing the Shire's liability for ongoing payments.

In light of the above I construe Mr Strong's employment contract as meaning that he contracted with the Shire on terms that his remuneration would be made up of a number of elements such that the total cost to the Shire of that package of elements would always be $45,000, or such sum as the package was adjusted to pursuant to cl 4.3. Thus, when one element was varied either upwards or downwards, another element had to be also varied to maintain the total package cost as a constant.

It follows that the reduction in the Shire's obligation to make payments to the LASF which occurred from 1 July 1997 automatically resulted in an entitlement in Mr Strong to have the salary component in his package increased such that the total cost of the package remained at $45,000 or that figure as adjusted upwards since the contract was entered into as a result of subsequent wage movements pursuant to cl 4.3.

Mr Strong sued the Shire in the Magistrates' Court at Bairnsdale for damages for breach of contract. Mr Rinaldi argued that even if the Shire had breached Mr Strong's contract of employment he had suffered no damage as a result of such breach; his ultimate superannuation entitlements being unaffected by the Shire's failure to pay the full 13.25% of his salary in contributions as required by his contract of employment. But this submission begs the question which I have now decided against the Shire. It would have had substance had Mr Strong's contract been construed in the way contended for by the Shire. Construed in the way I have construed it however Mr Strong has suffered damage, namely the loss of the increased salary he ought to have been paid since the date upon which the Shire's superannuation contributions to the LASF were reduced from 13.25% to 9.25% of his salary.

To some extent the curious way in which Mr Strong pleaded his claim as one for damages rather than for debt (as it should have been framed) encouraged the Shire in the submission to which I have referred. However, whether Mr Strong's claim is described as being strictly for a debt rather than for damages the outcome must be the same. He has been entitled to be paid an adjusted salary since 1 July 1997. As the quantum of Mr Strong's claim is not in issue in this appeal I say nothing further about it other than that the calculation of it as set out in his original particulars of claim would appear to be unduly simplistic. The reduction in the Shire's obligation to make superannuation payments in respect of Mr Strong's employment would seem to me to require a re-calculation of his package and, in particular, a re-calculation of the item "salary for superannuation purposes". However, as this matter was not debated before me I say nothing further about it.

Having construed Mr Strong's employment contract as I have done it is not necessary to embark on a detailed examination of the questions posed by the Master. It is sufficient to say that my construction of Mr Strong's employment contract coincides with that of the magistrate. He was right in the conclusions which he reached and in the orders which he made. The appeal by the Shire against those orders must accordingly be dismissed with costs.

[1] The "base package" of $45,000 referred to in Mr Strong's contract when it was entered into had apparently been adjusted upwards pursuant to clause 4.3 of the contract, due to wage movements by the time the change in the rate of the employer's superannuation contributions had occurred. Nothing turns on this increase so far as this case is concerned.

Authorities Superannuation Act 1988

Fair Trading Act 1999

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