Pepe v Platypus Asset Management Pty Ltd [2013] VSCA 38

3 PAM engaged Bunton & Barber, a specialist recruitment firm, to recruit appropriate people to fill new positions, including the position of senior equities analyst. One of the four potential candidates for that position was the appellant, Philip Pepe.

4 After various negotiations in February and March 2006 concerning his employment, on 14 March 2006 Pepe signed an executive employment agreement ('the EEA') and the letter, dated 9 March 2006, which enclosed it ('the covering letter'). There is no dispute that the EEA and covering letter together contain the written terms of Pepe's employment contract.

5 The covering letter contained the following paragraph ('the equity participation paragraph'):

Subject to a qualifying period of twelve months, PAM will make available to you an equity participation opportunity. Whilst the details of this opportunity remain to be finalised (the operating structure of this arrangement, taxation consequences, and our need to have a scheme which can be extended to other key staff are important design considerations) we intend to make available to you an equity stake (likely via shares however it may be via options, shares or both) 5% of the then-issued capital of PAM (as either voting or non-voting shares). The ultimate extent of any offer will be subject to your performance during this initial twelve-month period, and a vesting period of up to three years may be applied (noting however that you

will be entitled to the full economic benefit of the shares and/or options during this vesting period).

6 The EEA itself contained no reference to equity participation.

7 The EEA did contain various clauses which dealt with Pepe's entitlements upon termination of his employment contract. Under clauses 5.2 and 5.3 of the EEA, Pepe was entitled to payment of up to 3 months' pay in lieu of written notice.

8 As far as other entitlements on termination were concerned, clause 5.8 of the EEA provided:

In addition to any termination benefit payable under clause 5.2 (where applicable), on Termination of the Agreement for any reason, the Employee will be paid outstanding salary, accrued annual leave, long service leave and other statutory entitlements.

9 Clause 5.7 of the EEA provided that, in the event of termination of his employment for specific grounds (being gross misconduct, wilful neglect, fraud or dishonesty, or a criminal conviction), Pepe would not be entitled to any compensation or damages other than as specifically provided for in the EEA. Pepe was not terminated for any of the grounds specified in clause 5.7.

10 On 30 August 2007, Pepe was invited to join the Platypus Employee Share Ownership Plan ('the ESOP'). He was offered 25,000 options to acquire shares in PAM which, if exercised, represented 2.5% of the then issued capital of PAM. The exercise price was $20.58 per option. Pepe alleged that the invitation to participate in the ESOP was inconsistent with his contractual entitlements. Accordingly, he declined the invitation, and no options were allocated to him under the ESOP.

11 Pepe's employment was terminated in October 2007. He received no equity in PAM or payment in lieu thereof.

12 Pepe brought a proceeding against PAM. The nature of Pepe's case against PAM has varied over time. On the third day of the trial, Pepe amended paragraph 3 of his claim,[1] to allege a partly written and partly implied term of his employment contract, to the following effect:

(a) subject to a twelve month qualifying period, PAM would allocate Pepe shares or options (or both) of 5% of the then issued capital in PAM ('the Equity') within a reasonable time after the expiry of the twelve month qualifying period; and

(b) should PAM terminate Pepe's employment after the twelve month qualifying period but before the vesting of the Equity to Pepe, PAM would pay to Pepe the monetary value of the Equity at the time of the termination;

13 The Equity Term was alleged to be partly in writing and partly to be implied.[2] To the extent that it was in writing, it was alleged to be contained in the equity participation paragraph. To the extent that it was alleged to be implied, it was said to arise from:

(a) Changes made at a meeting on 11 March 2006 to an earlier draft of the equity participation paragraph;[3]

(b) The surrounding circumstances;[4] and

(c) The need to give business efficacy to the Equity Term.[5]

14 Pepe claimed: damages for breach of the Equity Term;[6] alternatively, rectification of the employment contract to include the Equity Term; further or alternatively, various remedies for misleading and deceptive conduct in respect of alleged representations concerning Pepe's entitlement to equity; further or alternatively, that PAM be estopped from seeking to rely on clauses 5.2, 5.7 and/or 5.8 of the EEA to prevent Pepe from enforcing the Equity Term.[7]

15 Rather confusingly, Pepe's submissions at trial and on appeal sometimes use the 'Equity Term' to refer to the written equity participation paragraph, at other times to refer to the partly written and partly implied 'Equity Term' pleaded in the claim, and at other times to refer only to the first half of the pleaded 'Equity Term'.[8]

16 After a trial which lasted for 11 days, Almond J dismissed Pepe's claims on the following grounds:[9]

(a) On its proper construction, the equity participation paragraph did not:

(i) entitle Pepe to 5% of the then issued capital of PAM at the expiration of 12 months from the date of commencement of his employment;[10] or

(ii) require PAM to pay Pepe the monetary value of 5% equity if his employment was terminated after 12 months.[11]

It only required PAM to make available an equity participation opportunity at the expiration of 12 months of Pepe's employment; [12]

(b) Nor should a term to the effect alleged by Pepe be implied from the surrounding circumstances, or from changes to the drafting of the equity participation paragraph. The suggested term was also not so obvious that it goes without saying, nor was it necessary to give business efficacy to the employment contract; it would also not be reasonable and equitable to imply it;[13]

(c) PAM's obligation to make available 'an equity participation opportunity' was not illusory.[14] However, the equity participation paragraph was too uncertain in its content to be enforced;[15]

(d) The equity participation paragraph was an incomplete agreement, to the extent that it would require a future agreement for the bargain to be enforceable;[16]

(e) The invitation to participate in the ESOP was not inconsistent with the equity participation paragraph;[17]

(f) The equity participation paragraph could not be rectified, as Pepe had failed to establish any relevant common intention;[18]

(g) PAM had not engaged in any of the alleged misleading and deceptive conduct in relation to the equity participation paragraph;[19] and

(h) Therefore, the estoppel said to arise from the misleading and deceptive conduct must fail.[20]

17 There was 'extensive conflict' in the evidence given at trial.[21] In general terms, where there were differences between the evidence of Pepe and the evidence of PAM's witnesses, his Honour preferred the latter. He variously described Pepe or his evidence as 'unimpressive and evasive',[22] 'contrived',[23] 'embellished',[24] 'overstated',[25] 'underplay[ed]',[26] 'reluctan[t] to readily concede the obvious',[27] 'less than impressive',[28] sounding 'like a prepared speech',[29] and 'inconsistent'.[30] In relation to his inconsistency, his Honour noted, for example, that Pepe 'gave four versions of what he said to Bunton [the recruitment agent] in relation to his equity interest.'[31] None of his Honour's factual findings has been challenged.

18 By notice of appeal dated 24 December 2010, Pepe appealed against Almond J's judgment. The grounds of appeal were drawn in very broad terms, which were ambiguous as to which of his Honour's specific findings were being challenged:

1. His Honour erred in finding that [Pepe] did not accrue under [the employment contract] an entitlement to 5% of the issued capital of [PAM] ('the Equity Entitlement') upon the completion of a twelve month qualifying period of employment with [PAM] ('the qualifying period'), such equity entitlement to be required to be transferred to [Pepe] within a period of three years after the qualifying period had been met.

2. His Honour erred in finding that by reason of the operation of clause 5.7 of the [EEA] between [Pepe] and [PAM], [Pepe] would be disentitled from obtaining the monetary value of the Equity Entitlement in the event [Pepe's] employment was terminated after the qualifying period but before the Equity Entitlement was transferred to him.

19 Asked to provide further details of the grounds of appeal, Pepe's solicitors said in a letter dated 17 February 2011 that:

(a) Ground 1 only asserted an error of law in the proper construction of the employment contract, in relation to the alleged 5% equity entitlement; and

(b) Ground 2 only asserted an error of law in the proper construction of clause 5.7 of the EEA.

20 The notice of appeal and letter do not otherwise challenge his Honour's findings of fact or law.

21 By notice of contention dated 17 June 2011, PAM contended that Almond J erred in holding that the equity participation paragraph was not incomplete or illusory.

22 The task of construing the employment contract primarily requires an examination of the language used by the parties in the relevant clauses (in this case, the equity participation paragraph, and clause 5.7 of the EEA). In construing those clauses, the court is entitled to take into consideration the whole of the employment contract, to determine what a reasonable person would understand by the language in which the parties have expressed their agreement.

23 There is no dispute that the court is also entitled to have regard to any changes made to the language of the clauses during the drafting process.

24 In the oft-cited High Court decision in Codelfa Construction Pty Ltd v State Rail Authority of NSW,[32] Mason J (with whom Stephen and Wilson JJ concurred) stated 'the true rule' as being:

that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract which has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties ...

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself.

25 Some cases since Codelfa[33] had suggested that it was not necessary to identify ambiguity in the language, before the court may have regard to the surrounding circumstances and object of the transaction. In Western Export Services Inc v Jireh International Pty Ltd[34] the High Court confirmed that intermediate appellate courts were bound to follow the 'true rule' limiting the admission of evidence of surrounding circumstances set out by Mason J in Codelfa, unless and until the High Court reconsidered and revised it. That rule was subsequently applied by this Court in Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd.[35]

26 Because Almond J was also considering misrepresentation and rectification claims, it was necessary for him to have regard to the content of the discussions between Pepe and the PAM representatives during February and March 2006. His Honour needed to make factual findings as to the parties' subjective beliefs and understandings, in order to consider those claims.

27 As the appeal only raises questions of contractual construction, we are concerned with the objective intentions of the parties. Accordingly, it is not necessary for us to have regard to the evidence, or his Honour's findings, as to the parties' subjective beliefs and understandings. In so far as the content of any of those discussions is admissible and relevant to the objective surrounding circumstances, it will be considered later in these reasons.

28 The contractual provisions which relate to Pepe's entitlements, including upon termination of employment, are found in both the covering letter and the EEA.

29 On 14 March 2006, Pepe signed at the end of the covering letter, to say that he understood and accepted the 'employment conditions and policies outlined in this letter and the attachments.' He also signed the enclosed EEA.

30 The introductory paragraphs to the covering letter included the following:

Please find attached an [EEA] covering the terms and conditions of your employment. Whilst [the EEA] sets out the specific terms of your employment, I have outlined below our agreed intentions in regards to key aspects of your employment, particularly concerning proposed bonuses and equity participation opportunities. This letter should therefore be read in conjunction with the [EEA]. [emphasis added]

31 The covering letter summarised the arrangements with respect to probation period, remuneration, superannuation, bonuses, equity participation (paragraph 5) and expenses.

32 Part 3 of the EEA dealt with employee benefits. Clause 3.1 provided as follows:

In consideration of the Employee carrying out the Duties, the Company shall provide the Employee with the remuneration package at the TEC and other benefits (including variable payments) as set out in Schedule 1.

During the Employment, the TEC and the amounts identified in Item 6 in Schedule 1 shall not be reduced.

33 The TEC was defined in clause 1.1(7) as the amount of the Total Employment Cost identified in schedule 1.

34 Schedule 1 contained a number of items which are potentially relevant in this appeal. Item 4, which is headed 'Remuneration Package', included base salary, superannuation, salary packaging and car parking. Item 5, which is headed 'NonSalary Benefits', and item 6, which is headed 'Variable Payments', are both shown as 'By agreement of the parties'.

The Employee agrees that the provision of any benefit in addition to Schedule 1 is totally and absolutely at the discretion of the Company, and any such additional benefit does not form part of the Employee's TEC. Furthermore, the Employee acknowledges that any communication to the Employee regarding the goals to be met to achieve any additional benefit, and any subsequent achievement of those goals, or efforts to meet those goals, shall not mean that the Employee is entitled to any or all of the additional benefit which at all times remains in the discretion of the Company regardless of the performance or conduct of the Employee. This clause applies regardless of whether the Employee is in employment or has been terminated for any reason, and for the avoidance of doubt (and without limitation) may only be modified in accordance with clause 9.4.

36 The EEA contained no reference to equity participation.

37 Specific entitlements upon termination were contained in clauses 5.2, 5.3, 5.7 and 5.8, which are set out earlier in these reasons.

38 In construing the employment contract, it is permissible for the court to have regard to changes made to the equity participation paragraph during the drafting process, as that is part of the objective framework of facts within which the employment contract came into existence.

39 PAM sent Pepe an initial draft of the covering letter and EEA on 9 March 2006. On 10 March, Pepe obtained legal advice from his solicitor in relation to those draft documents. On 11 March, Pepe met with PAM's chief investment officer, David Bryant, to discuss any issues of concern with a view to reaching agreement on the terms of Pepe's employment. A number of matters were discussed at that meeting, including termination periods, superannuation, bonuses and the equity participation paragraph. Various changes were made to both of the draft documents.

40 By the end of the 11 March meeting, Pepe and Bryant had agreed on the final wording of the contract documents, including the equity participation paragraph.

41 In so far as Almond J referred to what was said during the 11 March meeting about the changes and why they were requested, that was relevant to his Honour's consideration of the parties' subjective beliefs and understanding. It is not relevant to the construction task which we are to undertake. We are merely to consider what a reasonable person would conclude from the changes which were made to the equity participation paragraph.

42 The following paragraph incorporates both the text which was deleted at the meeting (shown with a line through it) and the text which was added at the meeting (shown with underlining):

Subject to a qualifying period of twelve months and mutual agreement, PAM intends to will make available to you an equity participation opportunity. Whilst the details of this opportunity remain to be finalised (the operating structure of this arrangement, taxation consequences, and our need to have a scheme which can be extended to other key staff are important design considerations) it is our intention we intend to make available to you an equity opportunity stake (likely via shares however it may be via options or, shares or both) of up to [of] 5% of the then-issued capital of PAM (as either voting or non-voting shares). The ultimate extent of any offer will be driven by subject to your performance during this initial twelve-month period, and a vesting period of up to three years may be applied (noting however that you will be entitled to the full economic benefit of the shares and/or options during this vesting period). Any offer will also be subject to appropriate vesting conditions and may involve non-vesting shares.

43 His Honour made the following relevant findings in relation to the drafting changes and their effect on the construction of the equity participation paragraph:

162 In my opinion, a reasonable person would understand that by using the word 'will' in the first sentence of the equity participation paragraph, PAM was obliged to make available to Pepe an equity participation opportunity after the expiration of 12 months of commencement of Pepe's employment. The words 'intends to' were deleted from the original date [sic] and replaced with the word 'will.' The parties also deleted the words 'and mutual agreement' from the first sentence. A reasonable person would understand that both these changes were made to ensure that the sentence was promissory in nature and not merely aspirational. [footnote omitted]

163 This is to be contrasted with the second sentence. In my opinion, as a corollary, a reasonable person would understand that by using the words 'we intend' (not 'we will') that PAM intends to make available an equity stake of 5% of its issued capital to Pepe, but it is not obliged to do so. Any question over whether there may have been an inadvertent failure to align the first sentence with the second can be discounted after consideration of the original draft. It is clear from the original draft ... that the parties have deliberately removed words expressing intention in the first sentence and have deliberately retained words expressing intention in the second sentence after making minor textual changes.

164 There were other changes made to the second sentence, including the replacement of the word 'opportunity' by the word 'stake', and deletion of the words 'of up to' before '5%'. These and other changes refine the description of the proposed equity participation opportunity and the content of the statement of present intention. None of these changes make the second sentence promissory.

165 In my view, the third sentence qualifies what has gone before. PAM has expressed an intention to make available an equity stake of 5% of its issued capital and the parties have agreed that the 'ultimate extent of any offer will be subject to ... performance during this initial twelve month period.' In my view, these words would make it clear to a reasonable person, if it is not already, that any offer of equity (ie the making available of an equity participation opportunity) has yet to occur and the extent of any equity offered will be determined after the expiration of the twelve month qualifying period and after taking into account Pepe's performance during the qualifying period. It follows as a matter of construction that PAM is not obliged to make available an offer of an equity stake of 5% but may offer a greater or a lesser percentage after taking Pepe's performance into account.

166 Furthermore, the parties have agreed that 'a vesting period of up to three years may be applied.' In my view this further reflects the fact that the equity participation opportunity has yet to be made available. It is self-evident that the conditions as to the time of vesting of any equity which might attach to any offer have yet to be determined or applied.

168 As I have indicated above, I agree that the changes made to the first sentence require PAM to make available to Pepe an equity participation opportunity at the expiration of 12 months of Pepe's employment.

169 In my view counsel for [Pepe] overstated the nature of that binding obligation by seeking to characterise this as 'the granting of an equity interest.'

170 Counsel for [Pepe] submitted that the second sentence, after taking account of the changes made to the text, created a clearly identifiable obligation on PAM to allocate 5% of its equity (whether in shares or options) to Pepe. I disagree. Again in my view, [Pepe] overstated the position and failed to adequately reconcile the fact that the second sentence manifestly expresses intention in contrast with the first sentence.

171 Counsel for [Pepe] submitted that the reference in the third sentence to the 'ultimate extent of any offer' being 'subject to performance' conveyed the concept that Pepe was guaranteed a 5% equity stake in PAM upon serving the qualifying period and the size of the equity stake ultimately granted could be greater than 5%, depending on Pepe's performance.

172 In my view ... [Pepe's] argument was based on the false premise that Pepe was guaranteed a 5% equity stake. Pepe was not 'guaranteed' a 5% equity stake. The obligation on PAM was only to make available an equity participation opportunity.

173 I agree ... that the reference in the third sentence to the ultimate extent of any offer comprehends the possibility that Pepe would be offered more than a 5% equity stake. But that possibility does not carry with it an obligation to do so. Further, it also comprehends the possibility that Pepe would be offered less than a 5% equity value.

44 We agree with and adopt his Honour's conclusions and reasoning in this regard, and make only a few additional observations in relation to the drafting changes.

45 Before us, Pepe does not challenge his Honour's finding that the changes to the first sentence made the sentence promissory, not merely aspirational.

46 As far as the second sentence is concerned, there is no difference in meaning between 'it is our intention' and 'we intend.' The words are not promissory. They are a statement of PAM's current intention as to a future course of action. As his Honour rightly pointed out, the parties have deliberately removed words expressing intention in the first sentence and have deliberately retained words expressing intention in the second sentence, after making minor textual changes.

47 In relation to the second sentence, Pepe argues that the change of the word 'opportunity' to 'stake', and the deletion of the words 'of up to' immediately before '5%', reveals an agreement to offer Pepe a 5% stake in the then-issued capital of PAM. However, that submission ignores several other parts of the second sentence and the paragraph.

48 In both the draft and the final versions, the first sentence and the first clause of the second sentence make it clear that what is to be offered is an 'opportunity'. By changing the words 'an equity opportunity' to 'an equity stake', in the middle of the second sentence, it clarifies the nature of that intended opportunity (namely that what would be offered was an equity interest, as opposed to some other type of opportunity). But it does not transform the second sentence into something promissory.

49 The draft version of the second sentence contained a ceiling of 5%. The removal of the words 'of up to' before '5%' simply removes that ceiling. But the changes to the second sentence must be read in the light of the related changes to the third sentence. In the final version of the third sentence, the inclusion of the word 'ultimate' before 'extent of any offer', and the inclusion of a reference to it being 'subject to' Pepe's performance, both make it abundantly clear that 5% equity is not a guaranteed or fixed amount. While PAM's current intention was to offer an equity participation opportunity of 5%, whether or not the ultimate offer would be more or less than that would depend on Pepe's performance during the initial 12 month period.

50 The amendments to the third sentence also included the introduction of the words 'a vesting period of up to three years may be applied (noting however that you will be entitled to the full economic benefit of the shares and/or options during this vesting period).' The fourth sentence (which had provided that '[a]ny offer will also be subject to appropriate vesting conditions and may involve non-vesting shares') was deleted in its entirety from the final version.

51 The fourth sentence had been non-specific about the 'appropriate vesting conditions' which would apply to any offer. The final version provided some content to those conditions, namely a discretionary vesting period of up to three years, and clarification of Pepe's entitlement to the full economic benefit in the meantime.

52 The inclusion of the reference to an entitlement to the full economic benefit was inserted for Pepe's benefit. But Pepe's submission that the parties thereby 'agreed that Pepe is protected financially if any vesting period was applied, counteracting any potentially disentitling event during the vesting period'[36] once again completely overstates the position. All that the inserted words grant is an entitlement to 'the full economic benefit' of the shares and/or options during the vesting period.

53 His Honour found that 'the full economic benefit' meant any economic benefit which might accrue to equity holders during the vesting period, including dividends, share issues and conversions, capital reductions or buybacks of shares held by the holders of vested equity, but did not mean that the holder of unvested equity was entitled to the value of the equity itself.[37] Neither the notice of appeal, nor the 17 February 2011 letter, seeks to challenge his Honour's finding as to the meaning of 'the full economic benefit.'

54 The changes made to the equity participation paragraph during the 11 March meeting do not support Pepe's argument that the paragraph should be construed in accordance with the pleaded Equity Term.

55 Pepe's case is not assisted by having regard to the relevant surrounding circumstances and purpose.

56 Pepe had pleaded that the surrounding circumstances were all of the matters pleaded in paragraphs 22 to 26 of the claim, which included several of the alleged misrepresentations. However, Almond J found against Pepe in relation to most of the allegations pleaded in those paragraphs. There is no appeal against those findings.

57 Instead, his Honour held that the following were the relevant surrounding circumstances known to the parties, and the purpose of the transaction:[38]

150 As at February 2006, PAM had been recently incorporated as a result of the joint venture between PAM Holdings Pty Ltd and Australian Unity Funds Management Limited. PAM carried on the business of equities funds management. At the time of the joint venture the underlying business contributed by the Platypus interests was small by industry standards, was growing slowly and was not profitable. With the benefit of the resources to be contributed by the Australian Unity interests including provision of additional funds under management it was anticipated that PAM would grow and become profitable. It was in this context that PAM required to fill the position of senior analyst. Pepe had qualifications suited to the proposed role, and was approached and asked whether he was interested. At the time, Pepe worked in Melbourne but wanted to move to Sydney for family and professional reasons. He applied for the position. At the relevant time, PAM did not have an equity participation scheme in place for its employees, but it intended to establish a scheme to allocate up to 20% of the issued capital of PAM to employees. On about 9 March 2006, Pepe was provided with the proposed [covering] letter and the proposed [EEA].

151 Pepe sought and obtained legal advice in respect of those documents. On 11 March 2006, Pepe and [David] Bryant [a board member of PAM], neither of whom were lawyers, met to discuss the proposed terms of Pepe's employment in an endeavour to finalise those terms. One issue of concern to Pepe at the time of the meeting was the issue of certainty in relation to the equity participation paragraph in the [covering] letter.

58 His Honour referred again to the relevant circumstances in construing the contract:

174 In my view the surrounding circumstances tend to support the construction of the clause contended for by [PAM]. There was a mutual interest in Pepe working for PAM. Pepe had qualifications suitable for the role of senior analyst which suited PAM's interests. Pepe desired to move from Melbourne to Sydney for family reasons. The joint venture between PAM Holdings Pty Ltd and Australian Unity Funds Management Limited which led to the incorporation of PAM had only recently occurred. PAM had not, at the relevant time, established an equity participation scheme for employees although it intended to do so. Obviously, PAM had not yet had the opportunity to assess the performance of Pepe in the new role.

59 Pepe has not sought to appeal against his Honour's findings that those are the only relevant surrounding circumstances and the commercial purpose of the employment contract. Accordingly, in so far as Pepe's appeal submissions refer to surrounding circumstances other than those relied upon by his Honour, it is not appropriate for us to have regard to them.[39]

60 Furthermore, a number of the factual matters to which Pepe's appeal submissions refer are contrary to his Honour's findings of fact. For example, paragraph 14(b) of Pepe's appeal submissions assert that 'the parties knew that, for Pepe, a key component of his remuneration package would be the provision of equity.' However, his Honour made no such finding. Instead, he rejected Pepe's evidence that he would not have joined PAM unless he was offered equity, and said that some of Pepe's evidence in relation to this matter 'sounded ... like a prepared speech'.[40]

61 Similarly, in so far as Pepe alleges in paragraph 14(c) of his appeal submissions that the parties 'knew he wanted certainty in respect to his equity entitlement', that is contrary to his Honour's findings. His Honour accepted Bryant's evidence that, in response to Pepe's request for greater certainty about the equity opportunity, Bryant told Pepe that he could not provide him with certainty and explained the reasons why that was so.[41]

62 In any event, the evidence regarding Pepe's claimed desires is not admissible as part of a construction exercise. Prior negotiations may be admitted to establish objective background facts known to both parties, and the subject matter of the contract. But they are not admissible to the extent that they reflect the actual expectations and intentions of the parties, or to fill a gap; they are superseded by the contract.

63 Even if regard is had to the relevant surrounding circumstances and purpose, as found by his Honour, they do not assist Pepe's suggested construction of the equity participation paragraph.

Conclusions in relation to the first ground of appeal

64 Properly construed, the equity participation paragraph did not grant Pepe an entitlement to 5% of the issued capital of PAM upon the completion of a twelve month qualifying period of employment, such equity entitlement to be transferred to Pepe within a period of three years after the qualifying period had been met. His Honour was correct to hold that the paragraph did not 'guarantee' Pepe a 5% equity stake; it only obliged PAM to offer an equity participation opportunity at the end of the qualifying period.

The second ground of appeal - clause 5.7 of the EEA

65 Pepe alleges that Almond J erred in his construction of clause 5.7 of the EEA. The nature of his Honour's alleged finding (and hence his alleged error) has been put in different ways by Pepe:

(a) The second ground in the notice of appeal asserts that Almond J found that by reason of the operation of clause 5.7 of the EEA, Pepe would be disentitled from obtaining the monetary value of the equity entitlement if his employment was terminated after the qualifying period but before the equity entitlement was transferred to him; and

(b) In the letter of 17 February 2011, which elaborates on the grounds of appeal, Pepe asserts that Almond J held that even if Pepe's construction of the employment contract was preferred, clause 5.7 would disentitle him from obtaining the monetary value of the equity entitlement if his employment was terminated after the qualifying period but before the equity entitlement was transferred to him.

66 Both of those arguments proceed on a misunderstanding of what his Honour actually said about clause 5.7. It is necessary to consider what his Honour in fact found, in order to understand why the second ground of appeal must also fail.

67 Almond J rejected Pepe's arguments as to both parts of the alleged Equity Term. First, his Honour rejected Pepe's argument that the employment contract contained a contractual term that, subject to a 12 month qualifying period, PAM would allocate Pepe shares or options (or both) of 5% of the then issued capital in PAM, within a reasonable time after the expiry of the 12 month qualifying period. That finding is the subject of the first ground in the notice of appeal.

68 Secondly, his Honour also rejected Pepe's argument that there was a contractual term entitling Pepe to the monetary value of the equity, in the event of termination of his employment after the expiration of 12 months from the date of commencement of his employment. Pepe's construction argument on this point depended on the meaning to be attributed to the following words in the equity participation paragraph: 'you will be entitled to the full economic benefit of the shares and/or options during the vesting period.'[42] Pepe's counsel had contended that the words 'full economic benefit' included the whole of the capital value of the equity, as well as dividends and increases in value from the date of commencement of Pepe's employment. After considering the expert evidence about what the words 'full economic benefit' might be understood to mean in the investment and funds management sector, or the recruitment industry, his Honour held that:

183 In my view, the expression confers on Pepe an equal entitlement to any economic benefit of equity which might accrue to equity holders during the vesting period, notwithstanding that in Pepe's case, equity which might have been allocated had not vested. This would cover dividends, and share issues and conversions, capital reductions or buybacks of shares held by the holders of vested equity. In my view it does not mean that the holder of unvested equity is entitled to the value of the equity itself. This would in its effect be equivalent to vesting the equity prior to the vesting date .... If the parties had intended that Pepe was entitled to the full value of the shares or options during the vesting period it would have been easy to say so in simple terms.

69 There is no ground of appeal challenging his Honour's finding that the equity participation paragraph did not entitle Pepe to payment of the monetary value of the equity, in the event of termination of his employment after 12 months.

70 Instead, ground 2 alleges that his Honour made a finding that clause 5.7 of the EEA disentitled Pepe from obtaining the monetary value of the equity to which he was otherwise entitled. Pepe seems to be asserting that paragraph [186] of the Reasons deals with the alleged 'disentitling effect'. But the paragraph does no such thing, being in the following terms:

Furthermore, the terms of the EEA expressly provide for entitlements on termination. These entitlements were outstanding salary, accrued annual leave, long service leave and other statutory entitlements. No reference was made to the monetary value of the equity on termination. [PAM] relies on clause 5.7 which provides that in the event of termination the employee would not be entitled to any compensation or damages other than as specifically provided for in the agreement. There is no specific provision entitling Pepe to payment of the monetary value of the equity in the event of termination under clause 5.7 nor is there any other provision to this effect in the contract documents.

71 His Honour made those observations in the course of discussing the construction of the equity participation paragraph. He was simply noting that nowhere in clause 5.7 (or elsewhere in the employment contract) was express provision made for payment of the monetary value of the equity in the event of termination under that clause; that is entirely consistent with his construction of the equity participation paragraph as not creating any contractual entitlement to equity.

72 Nowhere in the Reasons did his Honour say that clause 5.7 had a disentitling effect, such that Pepe would be disentitled from obtaining the monetary value of the equity entitlement to which he was otherwise entitled, if his employment was terminated after the qualifying period but before the equity entitlement was transferred to him.

73 It follows that the second ground of appeal must also fail.

74 The appeal will be dismissed. There is no need to consider the matters raised in PAM's notice of contention.

[1] The final pleading was the third further amended statement of claim, dated 10 September 2010.

[2] The reference to an implied term is somewhat confusing in the context of an employment contract which is pleaded in [2] of the claim as being one 'in writing'.

[3] Being the changes pleaded in [22] of the claim.

[4] As pleaded in [22]-[26] of the claim.

[5] In so far as the Equity Term is also alleged - in paragraph (b)(i) to the particulars of [3] of the claim - to be implied 'by implication of the Equity Term', the allegation is meaningless. The changes made at the 11 March meeting, and the surrounding circumstances, were relied upon in support of Pepe's construction argument, as well as in support of his implied term argument.

[6] Damages of $1,020,782.75 were claimed, being 5% of the value of PAM at the date of termination of Pepe's employment.

[7] The estoppel is pleaded in the further amended reply, dated 10 September 2010. All other relief is pleaded and sought in the claim.

[8] Being the part of the Equity Term referred to in [12(a)] hereof.

[9] Pepe v Platypus Asset Management Pty Ltd [2010] VSC 603 ('Reasons').

[19] Reasons [239], [245] and [247].

[32] [1982] HCA 24; (1982) 149 CLR 337, 352.

[33] For example, Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603; MBF Investments Pty Ltd v Nolan [2011] VSCA 14.

[34] [2011] HC 45, [3]-[5] (Gummow, Heydon and Bell JJ).

[35] [2012] VSCA 134, [50] (Warren CJ, Harper JA and Robson AJA).

[36] Pepe's appeal submissions, [24].

[39] For example, [14] of Pepe's outline alleges that the surrounding circumstances which were objectively known to the parties included: (a) The Equity Term was contained within Pepe's employment contract, which Pepe was required to sign and acknowledge as a binding agreement between the parties; (b) The parties knew that, for Pepe, a key component of his remuneration package would be the provision of equity; and (c) The parties knew that Pepe wanted certainty in respect of the Equity Term.