Keycorp Limited v Michael Thomes

Keycorp Limited v Michael Thomes - [2004] NSWIRComm 376 - NSWIRComm 2004 case summary — Zoe

[4]

Practice and Procedure - Appeal - Application for leave to appeal - Unfair Contract - Senior executive - Whether there was impermissible bias on the part of the trial judge to the extent the trial miscarried - Whether pre-contractual misrepresentations rendered the contract unfair - Whether appellant had by its conduct repudiated the contract - Whether variation of contract by trial judge reflected his findings of unfairness - Respondent's entitlement to performance bonuses - Calculation of bonus entitlements - Whether notice / severance payments ordered by trial judge excessive - Leave to appeal granted - Appeal upheld - Orders of trial judge set aside - New orders made - Costs LEGISLATION CITED : Industrial Relations Act 1996 s 106 Armory v Delamirie (1722) 1 Stra 505, 93 ER 664 Bassett v Host [1982] 1 NSWLR 206 Bourke Air Charter v Easton (2001) 109 IR 443 Burwood Municipal Council v Harvey (1995) 86 LGERA 389 Cain v R (1936) 25 Cr App Rep 204 Dun & Bradstreet v Robbie (1999) 91 IR 150 Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101 Followes v Knight Frank (NSW) Pty Ltd (2003) 124 IR 206 Galea v Galea (1990) 19 NSWLR 263 GIO of NSW v Glasscock (1991) 13 MVR 521 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 Johnson v Johnson (2000) 201 CLR 488 Jones v National Coal Board [1957] 2 QB 55 Kekatos v The Council of the Law Society New South Wales [1999] NSWCA 288 King State Bank of New South Wales (No 2) (2002) 126 IR 407 Knowles v Anglican Church Property Trust (No 2) (1999) 95 IR 380 Lavings v Barclay Mowlem Construction (NSW) (2000) 99 IR 247 Nordby v Barclays Investment Service (1993) 53 IR 319 LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No.2) (1990) 24 NSWLR 499 CASES CITED : Mercer v R (1993) 67 A Crim R 91 Michael Thomes v Keycorp Limited [2003] NSWIRComm 459 Police Service of NSW v Batton (2000) 98 IR 154 Port Macquarie Golf Club v Stead (1996) 64 IR 53 R v Esposito (1998) 45 NSWLR 442 R v Gilson, R v Cohen (1944) 29 Cr App Rep 174 R v Hopper [1915] 2 KB 431 R v Mawson [1967] VR 205 R v Thompson [2002] NSWCCA 149 State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) and Others (1999) 160 ALR 588 Tokyo Network Computing Pty Limited v Tanaka [2004] NSWCA 263 Vakauta v Kelly (1989) 167 CLR 568 Vision Publishing v P K Lane Holdings (1998) 84 IR 277 Western Excavating Ltd v Sharp [1978] QB 761 Westfield Holdings v Adams (2001) 114 IR 241 Wilson and Grimwade v R [1995] 1 VR 163 Wong v State Street Global Advisors Australia Ltd [2004] NSWIRComm 212 Woods v W M Car Services (Peterborough) Ltd [1981] ICR 666 Yuill v Yuill [1945] 1 All ER 183 HEARING DATES: 09/15/2004; 09/16/2004; 12/03/2004 DATE OF JUDGMENT: 12/10/2004

[20]

10 On 10 August 2004 the appellant filed submissions as to leave to appeal that went beyond the grounds specified in the application. Reduced to their essentials, the additional matters were: 1 Whether and to what extent senior executives ought to make their own inquiries regarding relevant matters prior to accepting a senior position and whether it is reasonably open for a trial judge in a s 106 case to readily accept an applicant's assertion of "reliance" on pre-contractual misrepresentations in circumstances where the applicant is, not only by way of qualification and experience but also by virtue of extensive material accessed prior to accepting the position, more than capable to make his own assessment of the opportunity. 2 The relevance, if any, of pre-contractual misrepresentations to the fairness or otherwise of express terms as to notice/severance payments especially in circumstances where the said misrepresentations did not bear upon either security or longevity of the proposed employment relationship. That is, the appeal raises for consideration the question of the nature of the necessary connection between unfairness found and the variations made and the compensation awarded. 3 The appropriateness and proportionality of the Court, in s 106 proceedings, varying the bonus provision of a contract to ensure that a senior executive received bonuses at a level substantially higher than was provided for in the contract in the circumstances where the company had performed poorly. 4 Whether it is "just" and proportional for a senior executive with only 21 months service to receive, inter alia , a severance payment that reflects 18 months' pay calculated by reference to the maximum possible salary package available to the executive and in circumstances where that maximum available salary package had already been varied significantly by the Court (by the substitution of cash equivalent shares for the contractual provision concerning share options). 5 The circumstances, if any, wherein an employer's course of conduct over a substantial period of time can be relied upon by a disgruntled employee as constituting a repudiation of the contract by the employer especially in circumstances where the employee has affirmed the contract in spite of the alleged repudiatory conduct.

[38]

27 In answering the question as to whether the interventions by the trial judge caused the trial to be unfair Ipp AJA stated: 58 In some instances the jury could have gained the impression from the manner of questioning and the content of the questions that Kinchington DCJ was sceptical about certain aspects of the defence case. Such an attitude on the part of the trial judge is not unknown in our system and the mere fact of its existence does not give rise to an unfair trial. As with all the pertinent factors in this case, issues of degree arise. It was undesirable and inappropriate for the judge to allow his views to become apparent. But I am not persuaded that the extent to which this occurred gave rise to an unfair trial. 59 His Honour at times became impatient with counsel (both for the prosecution and the defence), and in some instances where questions were not properly asked, but where the thrust of the questions was apparent, he simply took over the questioning, apparently in a desire to shorten the proceedings. There is little to commend this practice, and occasionally his Honour's questioning worked to the prejudice of the appellant. In the particular circumstances of the case, however, I do not think that that prejudice resulted in significant unfairness. 60 The practice of the judge in, at times, bringing out the salient points of the evidence of Crown witnesses, either during the course of examination in chief or after re-examination, was highly undesirable. I accept that to an extent the appellant was prejudiced thereby, but in the particular circumstances the extent of the prejudice was not so significant as to render the trial unfair. 61 Mr Brazier objected several times to questions asked by Kinchington DCJ. He asked the judge to stop "cross-examining" on more than one occasion. His Honour considered the term "cross-examining" to be offensive and asked that it be withdrawn. At one point Kinchington DCJ explained that he had asked certain questions to clarify the evidence as he did not understand it. Despite the several objections by counsel for the appellant, the judge persisted. Indeed, it appears, at times, that an objection by counsel would incite his Honour to further bouts of extended questioning. This was plainly inappropriate. Mr Brazier, however, did not apply for the termination of the trial and the discharge of the jury on the grounds of the judge's conduct. 62 In my view, several of Mr Brazier's objections to his Honour's questioning were without substance. There can be no doubt, however, that on some occasions, as I have noted, the judge's questioning went beyond clarification of the evidence and some of his Honour's interventions should not have been made. But I have concluded that these transgressions, on balance, did not result in significant prejudice sufficient to result in an unfair trial. 63 On reading the transcript I have had real misgivings about some of the judge's questions. Nevertheless, taking into account all the matters to which I have referred, individually and collectively, I am not persuaded that there has been a miscarriage of justice. I would dismiss the appeal against conviction. Justices Sully and Bell agreed with Ipp AJA.

[39]

28 In Johnson v Johnson (2000) 201 CLR 488 the High Court considered the issue of a trial judge making a statement during the course of the trial in respect of which one of the parties took objection and applied for the judge to disqualify himself on the grounds that his remarks had given rise to an appearance of bias. The trial judge refused to do so. In holding that the judge's statement did not create an appearance of bias the majority (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ) made the following observations regarding the relevant principles to be applied: 11 It is not contended that Anderson J was affected by actual bias. It has been established by a series of decisions of this Court that the test to be applied in Australia in determining whether a judge is disqualified by reason of the appearance of bias (which, in the present case, was said to take the form of prejudgment) is whether a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial and unprejudiced mind to the resolution of the question the judge is required to decide: eg Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47; Livesey v New South Wales Bar Association (1983151 CLR 288; Vakauta v Kelly (1989)167 CLR 568; Webb v The Queen (1994) 181 CLR 41. 12 That test has been adopted, in preference to a differently expressed test that has been applied in England (cf Locabail (UK) Ltd v Bayfield Properties Ltd [2000] QB 451), for the reason that it gives due recognition to the fundamental principle that justice must both be done, and be seen to be done (cf R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 at 259 per Lord Hewart CJ). It is based upon the need for public confidence in the administration of justice. "If fair-minded people reasonably apprehend or suspect that the tribunal has prejudged the case, they cannot have confidence in the decision." ( R v Watson; Ex parte Armstrong (1976) 136 CLR 248 at 263 per Barwick CJ, Gibbs, Stephen and Mason JJ). The hypothetical reasonable observer of the judge's conduct is postulated in order to emphasise that the test is objective, is founded in the need for public confidence in the judiciary, and is not based purely upon the assessment by some judges of the capacity or performance of their colleagues. At the same time, two things need to be remembered: the observer is taken to be reasonable; and the person being observed is "a professional judge whose training, tradition and oath or affirmation require [the judge] to discard the irrelevant, the immaterial and the prejudicial" ( Vakauta v Kelly (1988) 13 NSWLR 502 at 527 per McHugh JA, adopted in (1989) 167 CLR 568 at 584-585 per Toohey J). 13 Whilst the fictional observer, by reference to whom the test is formulated, is not to be assumed to have a detailed knowledge of the law, or of the character or ability of a particular judge ( Webb v The Queen (1994) 181 CLR 41 at 73 per Deane J) the reasonableness of any suggested apprehension of bias is to be considered in the context of ordinary judicial practice. The rules and conventions governing such practice are not frozen in time. They develop to take account of the exigencies of modern litigation. At the trial level, modern judges, responding to a need for more active case management, intervene in the conduct of cases to an extent that may surprise a person who came to court expecting a judge to remain, until the moment of pronouncement of judgment, as inscrutable as the Sphinx. In Vakauta v Kelly (1989) 167 CLR 568 at 571 Brennan, Deane and Gaudron JJ, referring both to trial and appellate proceedings, spoke of "the dialogue between Bench and Bar which is so helpful in the identification of real issues and real problems in a particular case." (See also Re Lusink; Ex parte Shaw (1980) 55 ALJR 12 at 15 per Murphy J; 32 ALR 47 at 53). Judges, at trial or appellate level, who, in exchanges with counsel, express tentative views which reflect a certain tendency of mind, are not on that account alone to be taken to indicate prejudgment. Judges are not expected to wait until the end of a case before they start thinking about the issues, or to sit mute while evidence is advanced and arguments are presented. On the contrary, they will often form tentative opinions on matters in issue, and counsel are usually assisted by hearing those opinions, and being given an opportunity to deal with them. 14 There was argument in this Court, prompted by Anderson J's explanation of what he intended to communicate, about whether the effect of a statement that might indicate prejudgment can be removed by a later statement which withdraws or qualifies it. Clearly, in some cases it can. So much has been expressly acknowledged in the cases eg Re JRL; Ex parte CJL (1986) 161 CLR 342 at 372 per Dawson J; Vakauta v Kelly (1989) 167 CLR 568 at 572 per Brennan, Deane and Gaudron JJ, 577 per Dawson J. No doubt some statements, or some behaviour, may produce an ineradicable apprehension of prejudgment. On other occasions, however, a preliminary impression created by what is said or done may be altered by a later statement. It depends upon the circumstances of the particular case. The hypothetical observer is no more entitled to make snap judgments than the person under observation.

[40]

29 At [46] Kirby J identified a number of considerations that might be taken into account in determining the issue of prejudgment: 1. Appellate judges realise that most adjudicators strive to be independent and impartial and to make adjustments (so far as they can) for factors of which they are aware which might impact on their decision-making. By their training and experience, most such adjudicators are conscious of the high expectations imposed upon them. 2. Whatever may have been the tradition in earlier times, opinions favouring silence on the part of an adjudicator during a hearing ( Watson (1976) 136 CLR 248 at 294 per Jacobs J) (which is the surest means of avoiding most allegations of prejudgment) are now seen as carrying risks of an even greater injustice ( Vakauta v Kelly (1989) 167 CLR 568 at 571; cf Galea v Galea (1990) 19 NSWLR 263 at 281-282). Unless the adjudicator exposes the trend of his or her thinking, a party may be effectively denied justice because that party does not adduce evidence or present argument that could have settled the adjudicator's undisclosed concerns (cf Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145; Shapiro, "In Defense of Judicial Candor", (1987) 100 Harvard Law Review 731 at 737). A frank dialogue will commonly be conducive to the avoidance of oversight and the repair of misapprehensions. Uninformed members of the public are doubtless sometimes surprised by the robust exchanges which take place in court, especially between a judge and experienced lawyers. But judges and other adjudicators and lawyers know that such dialogue can have great value. 3. Changes that have come about in the administration of justice, including the increase in the number of trials by single judges, have also required, to some extent, an adjustment to the rules of reticence in judicial observations that may still be appropriate where trials, criminal or civil, are conducted before a jury. One of the reasons for such changes has been the desire to increase the efficient management of the trial process. Yet it is in that context that the expressions of preliminary and tentative views may sometimes appear to an outsider to indicate prejudgment. Although some adjudicators may be hard to shift from tentative opinions, lawyers know that, in most judicial decision-making, the process is a continuous one. Preliminary inclinations do change (Kirby, "Judging: Reflections on the Moment of Decision", (1999) 18 Australian Bar Review 4). 4. The adversary system depends on vigorous interaction not only between the parties and their representatives but also between the adjudicator and those persons. Where the parties are represented by trained lawyers, the latter can be taken to be aware of (and presumed, if necessary, to have explained to their clients) the character and purpose of tentative opinions that guide the direction of the trial and encourage its proper focus. No rule of law should be adopted in relation to disqualification for prejudgment which unreasonably undermines, or is fundamentally inconsistent with, that system. 5. In earlier times, great confidence was placed in the capacity of adjudicators to discern the truth on the basis of their impressions of witnesses. However, the trend of modern authority has cast doubts on that supposedly unique perceptiveness ( State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 73 ALJR 306 at 327-330 [87]-[88]; 160 ALR 588 at 615-618; Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599 at 605-606 [29]-[35]). That is why many adjudicators now rest their decisions, so far as they can, on indisputable facts, contemporary documents and the logic of the circumstances, rather than mere impressions. This is a desirable development (cf Lend Lease Development Pty Ltd v Zemlicka (1985) 3 NSWLR 207 at 210-211; Chambers v Jobling (1986) 7 NSWLR 1 at 8-10). Upon one view, the interventions of the primary judge in the present matter amounted to no more than an affirmation of his acceptance, as applicable to the trial before him, of this modern and beneficial viewpoint. 30 Having regard to the foregoing observations and findings, we have examined the whole of the transcript and, in particular, those 64 instances of intervention by the trial judge about which the appellant complained. Often, the more prudent course for the trial judge would have been to refrain from intervening in the blunt way that he did, or to frame his questions and observations with more acute consideration being given to their implications for the course of the trial. It might also be said that the trial judge intervened at inappropriate points in the taking of the evidence thereby disrupting, unnecessarily, senior counsel's cross-examination of the respondent and jeopardising the effect of that cross-examination (see Galea v Galea at 281). However, despite these indiscretions we have decided there is no sustainable basis upon which to conclude that the trial judge conveyed an appearance of bias or partiality against the appellant, either from the outset or from a particular point in the trial. In many instances we note that what his Honour was really seeking to achieve was to clarify matters for his own benefit.

[105]

90 Curtis AJ addressed the issue of shares versus options at [156]-[160] of his judgment: 156 Similarly, the transcript at 140.41 reveals that Mr Thomes knew perfectly well how an incentive scheme based upon share options operated. He had however, given earlier evidence in his affidavit that in negotiation with Mr Dumitrescu he read the words of the draft contract which spoke of eligibility to an annual performance bonus of "-up to $200,000 equivalent participation in the options program. . .". He then had a conversation with Mr Dumitrescu to this effect: Thomes: I am concerned about the loose wording in regards to the option program, and the share allocation. I want to see the Keycorp share plan and want to understand how I can achieve the payment hurdles. It is important to me that the "$200,000 equivalent participation in the options programme" represents real value to me paid in shares. I can accept payment in shares as an alternative to payment in cash. Issuing options that I will have to pay for at a later stage is not an acceptable proposition to me. Dumitrescu: Brian Clayton cannot provide a copy of the share plan, because he would have to contact the HR Manager, and of course the HR Manager does not know as yet. But Brian Clayton has assured me, the plan is straightforward, no surprises there, and you will receive a copy the moment you have started. You will receive fully paid shares, not options. The payment in shares is a true alternative to payment in cash. He also promised to find a fair solution for the performance hurdles for the 50,000 shares. 157 In that context he gave the following evidence (tpt 142.26): Q. So you do understand how stock option schemes work, correct? A. Of course. Q. Do you say to his Honour but in this case you believed insofar as your package involved stock options that it wasn't going to operate the way that I've just set out, is that your evidence? A. My evidence is that term was in one of the final drafts of the letter of offer and it didn't reflect the discussions I had with Korn/Ferry and I said, "I do not understand what options program mean", because what we discussed is that I get shares to the value of $200,000. I don't and then Korn Ferry went back to Clayton and they came back and orally and through that letter and said to me, at least that was my understanding, the option program - that's what it's called but it also provides for the allocation or the distribution of shares, and for me it's funny it didn't make sense. That's why I asked. Because options are options, I agree with you, and shares are shares, that's why I check back and say, "Hey, you said I get shares". They came back and confirmed it's shares. So funny but if that's what it is that's what it is.

[112]

95 As to the misrepresentation that the shares allocated to the respondent would be fully paid shares up to the value of $200,000, the appellant submitted his Honour was in error in that he failed to give any weight to the following matters: (a) The respondent made no complaint in his summons about the express terms of the employment contract dealing with share options which relevantly provided: "You will also be eligible for an annual performance incentive of … up to $200,000 equivalent participation in the options program depending on performance against agreed parameters." (b) The respondent's evidence as to Mr Dumitrescu's representation was that he stated, "You will receive fully paid shares, not options. The payment in shares is a true alternative to payment in cash". Mr Dumitrescu made no reference as to the value of the shares. (c) Mr Dumitrescu's comment was not a representation about the meaning of the terms of the employment contract, as the alleged representation preceded the receipt by the respondent of the employment contract in draft form that was thereafter accepted by the respondent as fairly reflecting what had been agreed. (d) When the representation was made, the respondent made it clear that he would require further negotiation in relation to the terms upon which he would be prepared to join the appellant. Indeed he stated at the time that he was "open to continue" and "I am happy to look at a final contract". (e) Clearly, on his own evidence, the respondent did not regard Mr Dumitrescu's representation as reflecting the final offer on the incentive component of the remuneration package, nor did he rely on the representation other than to confirm in his own mind that it was worthwhile for him to continue with negotiations and to review a draft contract. (f) The respondent thereafter met with Mr Clayton but at no time raised any question as to why the terms of the employment contract dealing with the share options did not reflect the understanding that he asserts was earlier reached. (g) The respondent obviously understood the difference between options and stock.

[153]

129 The General Terms and Conditions of Employment that were incorporated into Mr Thomes' contract provided for written performance reviews. The appellant failed to review in writing the respondent's performance criteria at the end of his first year of service. The letter of offer accepted by Mr Thomes provided: Performance Review: Objectives will be set for employees and their performance will be reviewed each year, on a date determined by the Company. At such reviews each employee will have the opportunity to discuss and make comments on all aspects of their employment and performance. The Company will keep written records of the reviews and employees will be invited to make written responses and address any concerns they may have in relation to their employment. 130 Whilst there was a failure by the appellant to review in writing the respondent's performance, taken in isolation it is difficult to see how such a failure could amount to repudiation of the contract. However, when it is considered that: 1 Mr Thomes' employment contract provided for him to be paid in addition to his base salary an annual incentive bonus based upon objective parameters or criteria to be agreed in advance by the appellant and the respondent; 2 The criteria having been agreed, the incentive payment for achieving those criteria was to be $400,000 made up of cash in the sum of $200,000 and the vesting of shares in Keycorp to the extent of $200,000 market value; 3 In the event and to the extent that the criteria was underachieved or overachieved the cash component of the bonus was to be reduced below or increased above $200,000; 4 At the end of each year of employment the respondent's performance criteria were to be reviewed in writing and that the respondent was to have the opportunity to discuss all aspects of that review; 5 On 5 June 2001 Mr Thomes was informed by Mr Irving his performance on all the major categories agreed with the previous chairman was unsatisfactory with the exception of the Telstra deal and informed that no bonus payment for the 2000 year would be paid additional to the $100,000 paid in advance upon his commencing employment; 6 No performance parameters had in fact been agreed with the previous chairman against which Mr Thomes' performance could have been judged unsatisfactory; 7 At the end of 2000 the respondent's performance criteria were not reviewed in writing and the respondent was not given the opportunity to discuss all aspects of that review; it was open to Curtis AJ to find that the appellant repudiated the respondent's contract of employment.

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Cases Cited (41)