Plaintiff v Defendant

2 Pilkington justified its dismissal of Mr Howard by relying on three instances of disobedience of a lawful instruction or direction. The direction was said to require Mr Howard to repay a new low interest loan from Pilkington by fixed monthly instalments calculated to an assumed retirement date. He would not be permitted to accelerate repayments as he had done with previous loans.

3 Pilkington submitted that the direction was constituted or evidenced by a conversation between Roger Leeming, then Chairman and Managing Director of Pilkington, and Mr Howard in late August 2004 together with eight emails, and in particular one from Mr Leeming to Mr Howard dated 2 September 2004. Pilkington submitted that the existence and terms of the direction was the central issue in the case. It submitted that Mr Howard's disobedience was not inadvertent, but wilful.

4 The issues for determination in this proceeding are as follows:

(a) was Mr Howard given such a direction by his employer;

(b) if so, did Mr Howard wilfully disobey the direction;

(c) did Pilkington acquiesce in or condone Mr Howard's conduct; and

(d) if Pilkington breached its contract of employment with Mr Howard when dismissing him on 2 November 2008, to what damages is Mr Howard entitled.

5 Mr Howard negotiated his employment with Brian Young, managing director of Pilkington. On 9 September 1991 Mr Young made a written offer of employment to Mr Howard. The salary package offered was valued at $154,000, excluding company car and bonus. It could be structured as Mr Howard pleased.

6 Mr Howard was also offered a low interest loan "equal to 100% of your salary, interest on which will be based annually at 50% of the Commonwealth Bank Housing loan rate". The benefit to Mr Howard of the low interest loan was valued at $7,800, excluding fringe benefits tax. That amount reflected the anticipated saving on the interest cost for one year.

7 Mr Howard said that the offer made on 9 September 1991 was not entirely consistent with his discussions with Mr Young. There was a subsequent letter to Mr Howard, dated 18 September 1991, in which Mr Young referred to "our discussion yesterday" and confirmed Mr Howard's entitlement to be appointed to the Pilkington board within 12 months, subject to satisfactory performance; and to a salary increase during his first year of employment, dated back to the time of commencement of employment. In paragraph 4 of his letter Mr Young said,

I confirm that the amounts set out in paragraphs 1 and 2 of my letter of 9 September, 1991, are worth $15,840 on an after tax basis.

The amount of $15,840 is the sum of the interest saving of $7,800 and the value of a second motor vehicle.

8 Mr Howard placed reliance on the reference to the value of the low interest loan, expressed to be upon a basis "excluding FBT" found in the letter of 9 September 1991 and a statement in the confirmation letter of 18 September 1991 that the approximate value of the benefit was calculated "on an after tax basis". He claimed a right to repay the loan by way of amounts deducted from his salary before tax. That practice, known as salary sacrificing, has the effect of transferring the tax obligation onto the employer who would become obliged to pay fringe benefits tax on the value of the benefit to the employee.

9 Mr Howard also claimed an entitlement to more than one loan. He claimed to be entitled to redraw further loans up to the level of his salary as his salary increased. He also claimed an entitlement to accelerate repayment of the loan.

10 The consequential financial burden on Pilkington of making a low interest loan and Mr Howard's claimed repayment entitlements had four possible components. First, an opportunity cost incurred by charging only 50% of the current interest rate. The interest saving to Mr Howard was initially calculated to be $7,800 per annum. Secondly, fringe benefits tax payable on the benefit to Mr Howard by charging him less than the bank rate. Thirdly, fringe benefits tax payable on the repayment amount deducted from Mr Howard's salary before tax. Fourthly, the impact on Pilkington of accelerating repayments. Such a practice would lead to a corresponding and perhaps unpredictable increase in the tax burden imposed on Pilkington in the year of repayment.

11 Following his appointment Mr Howard, as he was entitled, requested a loan to the value of his salary. He was initially informed that the sum of $715 would be deducted from his salary each month commencing on 1 March 1992. The loan was to be secured by an Executive Loan Agreement and a caveat lodged against Mr Howard's home. A draft agreement was sent to Mr Howard but not finalised until 1993. In the draft agreement the loan was for a period of 10 years.

12 On 13 February 1992 Mr Young confirmed to Mr Howard that he was eligible to take out "a low interest loan", that the interest charged would be 5.5% and that the loan was to be repaid over a period of 23 years in monthly instalments or on leaving the employment of the company. Mr Young's memorandum noted that monthly repayments were $914.18. The earlier reference to $715 per month appears to represent interest only.

13 In February 1992 Pilkington advanced $143,000 to Mr Howard. Mr Young left it up to Mr Howard to determine what he would repay each month. Mr Howard agreed to repay $1,083 per month, or $13,000 per annum. An Executive Loan Agreement, recording the loan obligation, was eventually signed on 21 October 1993. The repayment obligation under that agreement was $914.18 per month. By reason of the manner in which interest was calculated, repayments would change as interest rates changed.

14 On 16 April 1992 Mr Young informed Mr Gulam Dharann, an officer in the finance department of Pilkington, that Mr Howard's salary was $143,000 per annum, effective from 1 January 1992 and that,

it is agreed that $13,000 will be salary sacrificed to repay the low interest loan.

There is no evidence of any discussion or negotiation between Mr Howard and Mr Young leading to the agreement referred to in the memorandum to Mr Dharann.

15 Within 12 months from the commencement of his employment, subject to satisfactory performance, Mr Howard was entitled to be appointed to Pilkington's board. By January 1993 Mr Young had been replaced by Geoff Marshall. In November 1993 Mr Howard was informed that Pilkington would not be making any new board appointments. As a consequence, Mr Marshall agreed that Pilkington would make compensatory payments to Mr Howard of $15,000 on 1 April 1994 and $10,000 on 1 April 1995. The payments were expressed to be subject to tax. Mr Howard said that he obtained permission from Mr Marshall to apply the compensation in repayment of the loan but did not take up that opportunity.

16 Mr Howard continued to make loan repayments of $1,083 per month until October 1998 when he refreshed his loan by borrowing a further $87,876.32 from Pilkington to bring his loan up to the level of his salary which was by then, $179,500. The circumstances in which the loan was refreshed or redrawn are unclear. For reasons I will express below I am of the opinion that Pilkington might rightly have refused to allow Mr Howard to redraw the loan to the level of his salary, but it did not. Although Mr Howard was one of the three most senior executives in Pilkington it is not as if his redrawing a loan of that magnitude went unnoticed.

17 Mr Howard suggested that Mr Marshall had approved the redraw but could not point to any documentary evidence of approval. He said he did not think it was necessary. He said that the process by which advances were made was with the approval or under the management of Nick Brennan and later Bruce Witherington, who occupied the position of Legal Manager and Company Secretary. Mr Howard was senior to both men in the company hierarchy.

18 On 23 April 2001 Mr Howard wrote to Mr Witherington requesting an increase in his loan repayment from $13,000 to $20,000 per annum. Mr Howard's email made specific reference to salary sacrifice. From May 2001 until March 2002 a monthly deduction of $1,666.67 was made from Mr Howard's salary. The increase in repayments corresponded with an increase in Mr Howard's salary from $197,000 to $206,850 per annum.

19 In April 2002 Mr Howard's salary increased by $10,343 to $217,193 per annum. On 2 April 2002 Mr Howard wrote to John Lambe, Human Resources Administration Manager, and Gerard McGregor, Superannuation and Payroll Manager, asking that they arrange to salary sacrifice his salary increase to repay his loan. Mr Lambe reported to Mr Howard. Mr McGregor was also a subordinate of Mr Howard. No approval was sought from the Chairman who, at that time, was Mr Leeming. Mr Leeming's title was President, Building Products Australasia and Country Manager Australasia. He was a Director and Chairman of Pilkington from August 1997 until his retirement on 31 March 2006.

20 On 12 July 2002 Mr Howard sent a memorandum to Mr Leeming. He said:

As you would be aware, I currently have an Executive Housing Loan from the company.

The outstanding balance of this loan is approximately $139,000.

The loan is given on the basis (that it) can be taken up to the amount of the salary of the Executive.

I seek your approval to redraw and upgrade my current Executive Housing Loan by an amount of $90,000.

21 The memorandum made provision for an approval by Mr Leeming who indicated his approval by signing the memorandum. Although the request was accompanied by an assertion by Mr Howard that he was entitled to redraw an amount to bring the loan up to the level of his salary. Mr Howard conceded that approval was required. Approval would not have been required if Mr Howard was contractually entitled to redraw and upgrade the loan as he proposed. Nevertheless, Mr Leeming's approval is important because it was given and he did not demure from Mr Howard's assertion of entitlement. There is no evidence of Mr Leeming making any inquiry or conducting any investigation into the validity of Mr Howard's assertion.

22 Between August 2002 and April 2003 Mr Howard continued to repay the loan by means of salary sacrifice, in monthly instalments of $2,528.59. In May 2003 he requested an increase in his monthly repayments to $9,861.26. Mr Howard said he believed that he had made the request to Mr McGregor.

23 Under his contract of employment Mr Howard was entitled to benefit from the Management Incentive Plan (MIP) under which annual incentive bonuses were awarded to senior management. The bonus payments could be substantial. In June 2003 an incentive bonus of $65,158.00 was approved for Mr Howard. Pilkington expressly authorised employees to take the bonus in any one of three ways: (1) as salary; (2) purchase of shares in Pilkington under an Executive Share Ownership Scheme; or (3) salary sacrifice into superannuation. Mr Howard maintained that under his terms of employment he was entitled to take the bonus as salary and apply it in reduction of his loan. In that way he could salary sacrifice the whole amount.

24 The letters of appointment made no mention of any such right and it was not authorised by the conditions imposed by Pilkington on the manner in which the incentive bonus payments may be taken or applied by the employee. Mr Howard's letters of appointment made it clear that any such incentive scheme was subject to change from year to year. While there may have been an expectation of a bonus of a certain magnitude it was not guaranteed. Pilkington could and did impose conditions.

25 On 19 June 2003 Mr Howard sent an email to Mr McGregor requesting that his bonus of $65,158.00 be applied in reduction of his loan; and salary sacrificed. The email concluded, "Please implement". The financial impact on Pilkington of that instruction by Mr Howard was substantial. Once implemented, Pilkington would bear the burden of paying fringe benefits tax on that amount in addition to the increased monthly debt repayments of $8,903.26.

26 The instruction from Mr Howard to Mr McGregor came to the attention of Mr Witherington, who sent an email to Mike Powell, the Finance Director of Pilkington. Mr Witherington estimated the net cost to Pilkington of Mr Howard's salary sacrifice to repay his loan, including his incentive bonus, was $162,879.00. In his email to Mr Powell, Mr Witherington said:

As this sacrifice (apparently allowed through his contract of employment) is from pre-tax earnings a debt waiver fringe benefit arises and the company picks up the cost of the tax on this benefit; as it does on all fringe benefits for all employees. It is a company paid tax.

27 A few days later, on 26 June 2003, Mr Powell sent an email to Mr Leeming drawing to his attention that,

due to RHH salary sacrificing - the on-cost to the company (in FBT) is approx a hit of $100k per annum.

Have discussed in brief with Russell to make him aware of cost to company.

28 On 27 June 2003 Mr Leeming responded to Mr Powell:

We should discuss.

Russell does have a peculiar arrangement with his home loan, negotiated when he started. We need to be clear that he can link MIP with home loan (if that has an effect?), and we can demand a reasonable approach (eg if it is the accelerated repayment which causes the enormous cost, we may have to change his mind).

29 Thus, by the end of June 2003 Mr Leeming, Mr Powell and Mr Witherington at least were fully aware of Mr Howard's assertion of his entitlement to salary sacrifice loan repayments, to redraw his loan and to salary sacrifice as much of his salary and incentive bonus into loan repayments as he chose. They also knew the financial impact upon Pilkington. It does not, however, appear that anyone sought to clarify the validity of Mr Howard's claimed entitlements, review his terms and conditions of employment or seek to discuss the matter with Mr Howard except to inform him of the cost to the company.

30 Mr Howard accepted, in his oral evidence, that Mr Powell had expressed concern to him but denied that he had provided any figures such as those set out by Mr Witherington in his email. It would be surprising if Mr Powell had not been quite graphic and specific in expressing his concerns and informing Mr Howard of the costs to Pilkington. Mr Powell and Mr Witherington were not called to give evidence.

31 Mr Howard reported to Mr Leeming. He said that Mr Leeming had copies of his personnel file in his office, including his letters of appointment. When asked whether he had discussed his entitlements with Mr Leeming, Mr Howard was no more specific than to say that he had conversations with Mr Leeming "over the course of my employment about my ability to salary sacrifice". That may be so and one might expect that Mr Howard drew Mr Leeming's attention to the memorandum of instruction from Mr Young authorising the salary sacrifice of loan repayments in 1992. Mr Howard did not, however, contend that he had any discussion with Mr Leeming about his entitlement to salary sacrifice the bonus payment in June 2003.

32 Mr Leeming gave evidence. He said, by reference to the emails, that he most probably initiated a conversation with Mr Howard informing him that he did not believe that the way he was using the executive loan facility was appropriate given the impact on Pilkington's financial affairs, particularly on overheads. He said "I don't recall any specific conversation but I think I probably did". This was symptomatic of Mr Leeming's recollection.

33 In any event, the approach taken by Mr Leeming, as recorded in his email of 27 June 2003, appeared to proceed on the basis that Mr Howard's claim to his entitlements was soundly based. It would be necessary to "change his mind". Mr Leeming did not say whether he reviewed Mr Howard's terms of employment before responding to Mr Powell. What he said in that email may be interpreted as confirmation to Mr Powell that Mr Howard was correct in his assertion that he was entitled to salary sacrifice whatever he wished in reduction of his loan which was being refreshed or redrawn as his salary increased.

34 With the assistance of his bonus and the increased monthly instalments, Mr Howard repaid his 2002 loan in September 2004. An email from Mr Witherington to Mr Howard dated 23 January 2004 confirmed a new interest rate and that, on current repayments, his loan would be repaid in September that year. The email was copied to Mr Leeming who responded to Mr Witherington with a question, "does this mean our overheads go down for the second half year?". Mr Leeming sent a copy of his email to Mr Powell. Mr Witherington responded on 30 January 2004 informing Mr Leeming (with a copy to Mr Powell) that Mr Howard was thinking about redrawing a loan "so for 04/05, I budgeted a similar scenario to what we will experience for 03/04". There is no doubt that Mr Howard's intention and its consequences was well understood by Mr Leeming, Mr Powell and Mr Witherington.

35 Even at that time, with the prospect that Mr Howard would repeat what had gone before, there is no evidence of Mr Leeming, Mr Powell or Mr Witherington taking a step to clarify Mr Howard's terms of employment or challenge his practice. They appear to blindly accept that he was entitled to do as he pleased in relation to drawing new loans and repaying the loans by means of salary sacrifice in whatever amounts and however rapidly he pleased. Mr Leeming and Mr Powell had the status in Pilkington to enquire into the validity of Mr Howard's asserted entitlements and to challenge him about them. Why they did not do so at this time is remarkable.

36 The letters of appointment do not, in my view, confer upon Mr Howard a right to salary sacrifice the loan repayments. The value of the benefit calculated in the first letter, and described as "after tax" in the second letter, refers to the value of the low interest rate. The reference to "after tax" is no more than an acknowledgement that Pilkington would pay the fringe benefits tax liability and Mr Howard would be relieved of that liability. The liability was confined, in my view, to tax on the benefit of a reduced rate of interest. It did not extend to any tax liability on the payment by Mr Howard of interest or instalments of capital. Nothing is said in the letters to convey an expectation or entitlement to have repayments deducted from salary before tax, so that Pilkington would assume an additional tax burden. Nor, in my view, do the letters confer an entitlement on Mr Howard to more than one loan.

37 In addition to the letters of appointment, Mr Howard relied upon custom and practice as the basis of his entitlement, including a letter from Mr Young to a finance officer confirming his agreement to Mr Howard salary sacrificing $13,000 per annum. Whilst there were some other executives who were entitled to a low interest loan, only Mr Howard claimed an entitlement to salary sacrifice accelerated repayments including his incentive bonuses. Mr Howard also claimed an entitlement to redraw the loan. Thus, any reliance on custom and practice would seem confined to Mr Howard's custom and practice.

38 The interpretation Mr Howard placed on the terms of his contract of employment was arresting because, if correct, he would have been entitled to repay his first loan at an accelerated rate and replace it with a new loan, equal to 100% of his salary, and repay that loan as quickly as possible, and so on. He could, if he wished, obtain and repay a new loan each year, thus avoiding personal income tax on the whole of his salary and impose a corresponding obligation on Pilkington to pay a very substantial amount of fringe benefits tax, as well as incurring the opportunity cost on the reduced interest component of the loan. In my opinion such an outcome was not intended by the parties to the contract of employment. His letters of appointment do not support any such entitlement, expressly or by implication. The contract of employment did not, however, prevent Pilkington from approving a new loan, salary sacrificed repayments or accelerated repayment.

39 It is common ground that Pilkington was entitled to give Mr Howard a lawful direction and that wilful disobedience of such a direction may constitute grounds for summary dismissal.[1] In my opinion it would have been lawful for Pilkington to impose conditions on the repayment of any new loan and to direct Mr Howard that he was not to salary sacrifice repayments or limit such repayments to a prescribed schedule.

40 Before reviewing the evidence relied upon by Pilkington to justify its dismissal of Mr Howard, it is convenient to discuss the relevant legal principles to be applied to the facts. The requirements for summary dismissal are well understood.

41 To justify summary dismissal, the employee's conduct must be incompatible with the due and faithful discharge of duty or destructive of the necessary confidence between employer and employee. The conduct must also be sufficiently serious to amount to repudiation or renunciation by the employee of the contract. In Concut Pty Ltd v Worrell[2] a majority in the High Court held,

1. In Pearce v Foster, Lord Esher MR stated it to be a "rule of law" that "where a person has entered into the position of servant, if he does anything incompatible with the due or faithful discharge of his duty to his master, the latter has a right to dismiss him". In Blyth Chemicals Ltd v Bushnell, in the course of considering the position of the respondent, who was the manager of the appellant's business, Starke and Evatt JJ said:

"As manager for the appellant, the respondent was in a confidential position. And it is clear that he might be dismissed without notice or compensation if he acted in a manner incompatible with the due and faithful performance of his duty, or inconsistent with the confidential relation between himself and the appellant."

In the same case, Dixon and McTiernan JJ said:

"Conduct which in respect of important matters is incompatible with the fulfilment of an employee's duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground of dismissal."

1. 26. Contractual obligations and fiduciary duties have different conceptual origins, "the former", in the words of McLelland J, "representing express or implied common intentions manifested by the mutual assents of contracting parties, and the latter being descriptive of circumstances in which equity will regard conduct of a particular kind as unconscionable and consequently attracting equitable remedies". Formulations of the obligations of an employee in terms such as those in Pearce and Blyth Chemicals may be understood, Professor Finn has pointed out, as the re-expression of equitable obligations in terms of implied contracts. If so, the importation is well established and beneficial, and nothing turns upon it for present purposes.

42 Kirby J identified acts of dishonesty or similar conduct destructive of the mutual trust between the employer and employee as constituting exceptional circumstances justifying summary dismissal. He said,[3]

It is, however, only in exceptional circumstances that an ordinary employer is entitled at common law to dismiss an employee summarily. Whatever the position may be in relation to isolated acts of negligence, incompetence or unsuitability, it cannot be disputed (statute or express contractual provision aside) that acts of dishonesty or similar conduct destructive of the mutual trust between the employer and employee, once discovered, ordinarily fall within the class of conduct which, without more, authorises summary dismissal. Exceptions to this general position may exist for trivial breaches of the express or implied terms of the contract of employment. Other exceptions may arise where the breaches are ancient in time and where they may have been waived in the past, although known to the employer. Some breaches may be judged irrelevant to the duties of the particular employee and an ongoing relationship with the employer. But these exceptional cases apart, the establishment of important, relevant instances of misconduct, such as dishonesty on the part of an employee like Mr Wells, will normally afford legal justification for summary dismissal. Such a case will be classified as amounting to a relevant repudiation or renunciation by the employee of the employment contract, thus warranting summary dismissal.

43 In Adami v Maison, Gavin, Duffy and Starke JJ formulated the following test:

The question is whether the company was entitled to dismiss him for that breach. Was the plaintiff's conduct such as justified the company in determining, and treating as at an end, his contract of service with it? "If there is a distinct refusal by one party to be bound by the terms of a contract in the future, the other party may ... treat the contract as at an end. ... Short of such refusal, ... the true principle to be deduced from all the cases is that you must ascertain whether the conduct of the party who has broken the contract is such that the other party is entitled to conclude that the party breaking the contract no longer intends to be bound by its provisions. This part of the rule was laid down by Lord Blackburn" in Mersey Steel and Iron Co. v. Naylor, Benzon & Co., "where he says the rule of law is that where there is a contract between two parties, each side having to do something, if you see that the failure to perform one part of it goes ... to the foundation of the whole, it is a good defence to say, I am not going to perform my part of it when that which is the root of the whole and the substantial consideration for my performance is defeated by your misconduct" (Rhymney Railway v. Brecon &c. Railway).[4]

44 Wilful disobedience of a lawful order may justify summary dismissal. There are circumstances in which a refusal to perform a duty or comply with a direction need not be wilful if the conduct amounts to a renunciation of the contract. In Adami v Maison Isaacs ACJ said,

An order that is not so clearly implied or expressed as to be free from doubt has been left so by the act of both parties. A refusal to comply with it, if the employee, regarded as a reasonable man with knowledge of all the circumstances, may reasonably and does honestly contest it, is not, if respectfully communicated, a wilful disobedience of a lawful order, which by reason only of "wilfulness" entitles the employer to penalize the employee. The employee is there, to the knowledge of his employer, only acting in defence of his supposed rights - that is his only intention and purpose. He is not wilfully insubordinate. Other grounds may justify a rescission, as, for instance, the importance of the refusal apart from wilfulness or its effect on the general condition of the employer's business. That, however, concerns the second ground alleged here.

2. Refusal to perform duties. - I state first the relevant principle, which, indeed, has already been indicated. It is incontestable that any conduct of an employee which is not merely inconsistent with some particular obligation involved, and possibly not striking at the root of the matter, but which is inconsistent with the relation established, is a just cause for the employer's termination of that relation. Habitual neglect or a definite refusal of a general kind to pursue the employer's lawful policy of business would afford such justification. That is what has happened here. The direction as to Saturday afternoons was not an isolated order but was part of a business policy. The nature of the business was such that it was clearly within the contemplated scope of the employer's rights to select Saturday afternoons as a means for popularizing or extending the business. The refusal of the appellant to give his personal services and his determination to substitute another to take his place was an important and a definite and constant refusal to carry out the duties which, on a considered construction of the contract and circumstances, were, in my opinion, personally undertaken by the appellant in clause 4 of the agreement. He there undertook not only the "full control of the staff" but "the general supervision of the business" subject to the board of directors. That "control" and that "general supervision" might reasonably be directed by the company to include his presence at the hall and, inter alia, the checking of receipts. A general and total refusal of these duties after their specification was, whether the appellant was insubordinate or not, and whether "wilful" or not, a refusal which, by reason of the importance of the duties involved and the extent of the refusal, amounted in law to a renunciation entitling the employer to terminate the contract. For this purpose the letter of 6th July 1923 affords no answer. Under the second branch it is no longer, as it was under the first, a matter assumedly unimportant to the employer, or merely a question of the design and purpose of the employee. The effect of the refusal on the employer's business, and, therefore, its relative importance in the whole contract, are relevant considerations. Therefore, even putting aside "wilfulness" altogether, the legal effect of the refusal is to control the business, and that, in the absence of some provision in the law or the contract, is inconsistent with the general relation of employer and employed.[5]

45 Pilkington's case is narrowly defined. It relied upon three acts of disobedience of a lawful direction. The direction is primarily constituted by Mr Leeming's email of 2 September 2004, placing a limitation on Mr Howard's ability to salary sacrifice loan repayments. Mr Howard was to repay the loan by fixed instalments. He would not be permitted to accelerate repayments and, consequently, not permitted to salary sacrifice his incentive bonus. The acts of disobedience relied upon by Pilkington took place on 5 April, 15 June and 25 August 2006.

46 I accept that if such a direction was given, wilful disobedience would justify summary dismissal. That much appears to be common ground.

47 Mr Howard submitted that the email of 2 September 2004 was not in the nature of a direction but was the commencement of negotiations which resulted in Mr Leeming's approval of one further low interest loan with the right to salary sacrifice repayments without restriction.

48 Mr Howard further submitted that if and insofar as the email of 2 September 2004 was held to constitute a direction, Pilkington acquiesced in or condoned his conduct with full knowledge so as to disentitle it from relying upon that conduct to justify his dismissal. While acquiescence or condonation was not pleaded, the case was conducted on the basis that it was a live issue. Relevant evidence was adduced and submissions made on behalf of Mr Howard without objection.

49 In Rankin v Marine Power International Pty Ltd[6] Gillard J provided a helpful statement of the legal principles to be applied when an employer is taken to have condoned, waived, acquiesced in or decided not to rely upon an employee's conduct to terminate the contract of employment such as to disentitle the employer from later relying upon that conduct to justify summary dismissal. His Honour said,

1. An employer who has full knowledge of the misconduct of an employee, and who makes a decision to continue to employ the employee, cannot at a later date, unless of course other facts come to his knowledge, dismiss him summarily on the basis of the employee's known misconduct. It is said that the employer has waived his right to dismiss the employee summarily, and thereby condones the misconduct.
2. In Phillips v Foxall (1872) LR 7 QB 666, Blackburn J said, at p.680 -

"Now the law gives the master the right to terminate the employment of a service on his discovering that the servant is guilty of fraud. He is not bound to dismiss him, and if he elects, after knowledge of the fraud, to continue him in his service, he cannot at any subsequent time dismiss him on account of that which he has waived or condoned. This right the master may use for his own protection."

1. It is noted that his Lordship used the words "elects", "waive" and "condone" as meaning the same thing. There has been much written in the past 100 years concerning those three expressions in the law, and it is not for me to add to the material, on what each word means and their application. It is clear that no such waiver, condonation or election can take place until the employer has full knowledge of the misconduct. Hence, it must follow that an employer would not be held to have condoned the wrongdoing, where he believed the employee's denial and subsequently found out the truth. See Federal Supply Co v Angehrn (1910) 103 LT 150 (PC).
2. In that case, the Privy Council said, at p.152 -

"The word 'condonation', though used in some of the authorities cited by most distinguished judges, is not quite happily chosen. In the cases of Phillips v Foxall and Boston Deep Sea Fishing and Ice Company, so much relied upon by the respondents, the word is used as applicable to a case where a master with full knowledge of a servant's misconduct continues to retain him in his, the master's, service. It is likened to the case of a man who, knowing he has a legal right to do either of two things, determines or elects to do one of them in preference to the other, and also likened to the case of a man who, knowing that a forfeiture has been worked, and that he has the legal right to take advantage of it, deliberately abandons that right - that is, waives the forfeiture. In these cases, however, to which 'condonation' is compared, the burden of proving that the election had been made or the forfeiture was waived would rest upon him who relied upon the one or the other, and so it is with condonation. The master must be fully aware that the servant has by his misconduct forfeited the right to be continued in his master's service, which is the correlative of the master's right to dismiss him, before he can be held to have waived that forfeiture."

(Emphases added).

1. No effort was made by his Lordship to distinguish between the three concepts.
2. Consistent with the authorities, the plaintiff, who relies upon condonation in the present proceeding, would have to prove -

(i) that the employer had full knowledge of the employee's misconduct;

(ii) that with that knowledge, the employer retains the employee in his service;

(iii) that having made the election, he deliberately abandons his right to summarily dismiss the employee.

50 Mr Howard also alleged a breach of duty by Pilkington, by its failure to warn him in 2006 that it did not accept the legitimacy of his claimed right to accelerate repayments and to salary sacrifice his incentive bonuses. Mr Howard submitted that as a consequence of that breach Pilkington was unable to rely upon the alleged acts of wilful disobedience to justify his summary dismissal.

51 There is authority to support the existence of an implied duty of good faith binding the conduct of parties to an employment relationship and a duty not, without reasonable cause, to do anything likely to damage or destroy the relationship of confidence and trust between employer and employee.[7]

52 Mr Howard further submitted that insofar as his conduct, relied upon by Pilkington to justify dismissal, may be construed as a breach of a direction it was not wilful and therefore could not justify summary dismissal.

53 Mr Howard submitted that his summary dismissal by Pilkington was a breach of his contract of employment and claims damages for the amount he would have earned had the contract continued in accordance with its terms. The period of notice required for the termination of Mr Howard's contract of employment was not specified by his contract or prescribed by any legislation or industrial award or agreement. The length of notice required is to be implied. It seems common ground that the period is "reasonable notice". Mr Howard submitted that 12 months was the appropriate time. Pilkington only faintly submitted that a shorter period was appropriate.

54 The content of reasonable notice is to be determined as at the date when notice is given, not when the contract is entered into, although the preceding employment history is not irrelevant.[8] Macken et al list pertinent considerations.[9] In Rankin v Marine Power International Pty Ltd[10], Gillard J said,

1. In determining what is a reasonable period in respect to an employee, it must be steadily borne in mind what the primary purpose of giving a period of notice is. It is to enable the employee to obtain new employment of a similar nature. Some types of employment are readily available, whilst others are not. Those who are at the top or near the top of their chosen fields, invariably have very few opportunities to obtain similar employment and hence, the period of notice is usually many months to in excess of a year.
2. In Australian Blue Metal Ltd v Hughes (1963) AC 74, Lord Devlin, tendering the advice of the Judicial Committee, said at p.99, in discussing the termination of a commercial agreement -

"The implication of reasonable notice is intended to serve only the common purpose of the parties. Whether there need be any notice at all, and, if so, the common purpose for which it is required, are matters to be determined as at the date of the contract; the reasonable time for the fulfilment of the purpose is a matter to be determined as at the date of the notice. The common purpose is frequently derived from the desire that both parties may be expected to have to cushion themselves against sudden change, giving themselves time to make alternative arrangements of a sort similar to those which are being terminated."

(Emphasis added).

1. Factors that have been taken into account vary, according to the circumstances, but the nature of the employment, the degree of responsibility and the required dedication to the job usually result in a longer period of notice being reasonable.[11]

55 In August 2004 Mr Howard spoke with Mr Leeming about a new loan equal to his current salary of $237,841. On 27 August 2004 Mr Howard sent an email to Mr Leeming:

As discussed I want to extend my current home loan back up to my current salary. Can you please approve.

56 Within eleven minutes of his request Mr Leeming responded by email:

Given my understanding that this is within your contract terms and conditions. Approved.

57 Mr Leeming went further. He apparently spoke with Mr Witherington about the need for a new loan agreement with appropriate security. This may have been a topic discussed with Mr Howard. The email from Mr Leeming to Mr Howard was, not surprisingly, copied to Mr Witherington and Powell. In a separate email dated 27 August 2004 Mr Witherington wrote to Mr Powell:

Spoke to Roger and said that we should get fresh loan agreement in place with appropriate security. He said Russell would have no issue with that.

I again explained the impact of Russell's repayment of the loan over the ensuing months. Roger said that he has seen the contract condition where Russell can take up the loan. The salary sacrifice condition is not something that I have seen, but I assume it is there.[12]

58 Mr Leeming accepted, although without any specific recollection, that he would have had the conversation with Mr Witherington mentioned in the email. I infer that Mr Leeming had seen the appointment letters. It would be curious if he had not. Mr Leeming gave his approval in the knowledge of the financial impact on Pilkington and fully aware of Mr Howard's claimed right to salary sacrifice and accelerate loan repayments. A few days later Mr Leeming had second thoughts, but only after an email from Mr Powell. On 31 August 2004 Mr Powell wrote:

Roger,

With reference to the attached email correspondence I feel I must record my position on this matter as follows:-

I have not had the benefit of seeing the contract, as you will have, or discussing it in detail with Russell and therefore cannot support the renewal of the loan for the purposes intended.

This practice is highly irregular within my experience in the company due to the nature upon which the loan impacts upon the individual's tax cost and the company's cost.

My understanding is that the loan available, was to achieve funding at beneficial rates. It is not intended and never was, to be a method the majority of salary being paid tax free ie the substance of the intent, is a loan and not a medium for tax repayments.

If the loan is to be agreed, then I think you should be considering:

(i) Look at limiting the level of salary at time contract was written - is the contract explicit to the limit?

(ii) Look at how many times it was really expected to be drawn forward/redrawn. A loan of this size is not usually intended to be redrawn and paid off in such a short space of time.

(iii) If approved we will need security prior to drawdown.

(iv) As a last resort if this is approved we should clearly state that this will be the last time it will be honoured.

This facility would also hit debtors and profit.

Mr Powell plainly equated a new loan with accelerated, pre tax, repayments.

Mike,

I will talk to you on this.

Whilst I find it distasteful I do feel that it is in line with his conditions of employment and therefore he can do it. The alternative would be to negotiate a new contract, which could be at least as expensive.

I would like to understand better what has happened in the last couple of years, with Russell's paying down the loan and now renewing it, which may not be quite so appropriate (although I know that this is because of changed circumstances, not playing the system). I may need to set some rules for this.

Could you please outline what has happened and the impact on the company (and on Russell).

We will discuss.

Rog.[13]

60 On 1 September 2004 Mr Witherington sent an email to Mr Powell setting out the cost to the company of Mr Howard's Executive Loan. In the 2003/2004 financial year the cost was $156,872. On the same day Mr Powell sent an email to Mr Leeming informing him that the extra cost to the company of Mr Howard's higher repayments was approximately $130,000 and that the extra benefit to Mr Howard was exactly the same.

61 This was not the first time the attention of senior executives at Pilkington focussed on the financial significance of Mr Howard's practice of redrawing his loan, salary sacrificing repayments and accelerating repayment. The topic had been the subject of discussion in June 2003. Even so, no one appeared to question Mr Howard's claimed entitlement. On the contrary, Mr Leeming, to whom Mr Howard reported and who claimed familiarity with Mr Howard's "conditions of employment", confirmed Mr Howard's contractual entitlement to redraw a loan and salary sacrifice repayments. Mr Leeming also confirmed that belief in his oral evidence; and in the email dated 2 September 2004 - the first of eight emails upon which Pilkington relied as constituting the lawful direction to Mr Howard.

62 At the time of sending the crucial email dated 2 September 2004 Mr Leeming was in the United Kingdom. He wrote,

Russell,

Sorry to do this remotely, but just in case this is moving in my absence, when you renew the home loan we need to agree a fixed, reasonably long, repayment schedule.

Whilst I am aware that it is driven by changing circumstances, we cannot have a repeat of the accelerated repayment of last year which had a significant effect on the business.

It is only because of the changed circumstances that I am allowing what looks on the surface like a very strange use of the facility - rapid repayment followed by renewal.[14]

This email was said to constitute the primary source of the direction. Pilkington submitted that it unambiguously imposed a constraint on Mr Howard. The loan was to be repaid by regular instalments until his anticipated date of retirement and repayment must not be accelerated. Such a restriction would also impose a prohibition on Mr Howard applying incentive bonuses as tax free loan repayments.

63 Mr Leeming gave evidence that having regard to the content of his email dated 2 September 2004 it was very likely that, shortly before sending the email, he had a conversation with Mr Howard on the subject, but no specific recollection of such a conversation. He said,

I think we would've discussed the fact that the repayments would need to be on a long term basis and that would secure the fact that it was the last loan.

Pilkington relied on that conversation as forming part of the direction to Mr Howard. Mr Leeming's evidence about such a conversation was at best a reconstruction of what he thought would have been said.

64 Mr Howard, on the other hand, denied that a conversation took place shortly before 2 September 2004 to the effect that the loan was to be the last advance or that he would be required to repay the loan by agreed monthly instalments. Mr Howard did, however, accept that he had a discussion with Mr Leeming in November in which he agreed with Mr Leeming that the proposed redraw of a loan would be his last. He said,

Mr Leeming and I had a discussion in November and we were talking about the terms of my contract and one of the things I said to him was that I was aware that he was concerned about the - taking out a loan, the rapid repayments, the FBT exposure, and so I proposed that the best way to handle the situation was that I would have one final loan from the company, that I would accept it to be a final loan, therefore the FBT exposure to the company should be known and fixed so that it did not matter whether the loan was paid over two years, three years or five years.

65 Mr Howard said that Mr Leeming indicated his agreement to possible future accelerated repayments by saying "yes, we'll make it your last loan".

66 Pilkington emphasised the second paragraph of Mr Leeming's email of 2 September where he said, "we cannot have a repeat of the accelerated repayment of last year..." as a firm instruction that accelerated repayments would not be allowed. This interpretation of the email was put to Mr Howard in the following terms:

Counsel: I want to suggest to you that that was an instruction to you in clear and unequivocal terms that in the future there was to be no repeat of the accelerated repayments of your executive loan.

Witness: No.

Counsel: You say again that you had subsequent discussions with Mr Leeming in which he no longer insisted that you could not accelerate repayments?

Witness: He agreed with me that by making this my last loan the FBT liability to the company was known and the words I used, which he agreed to, was that it did not matter whether the loan was repaid within one, two, three or 10 years.

67 Mr Howard insisted that he did not agree with Mr Leeming or anyone else that he would not be entitled to accelerate repayment of the new loan. Nevertheless, Mr Howard engaged in discussions with Mr Witherington to agree upon a repayment schedule. Following receipt of Mr Leeming's email of 2 September 2004, Mr Howard sent an email to Mr Witherington,

Bruce,

As this has to be repaid by the time I leave the company, assuming I leave at 60/62 yrs and a CBA interest rate of 6%, what amount do I need to salary sacrifice? What do you need me to sign?

68 This is the second email relied upon by Pilkington to support the direction. As with the other six emails following Mr Leeming's email of 2 September 2004, I do not understand Pilkington to contend that it constitutes or even forms part of a direction; rather, Pilkington contends that it evidences conduct that is consistent with the direction, confirming the character and status of Mr Leeming's email of 2 September 2004 as an unambiguous direction.

69 A further email in this category is Mr Witherington's response to Mr Howard at 7.17 pm on 2 September 2004.

Russell,

With an advance to salary $237K you would need to pay off $2,831 per month to clear the loan at age 62. CBA interest rates assumed to be 6% (for your loan 3%).

The appropriate loan documentation has not been investigated yet.

Regards

Bruce.

70 Mr Powell was following the email traffic. He received a copy of Mr Leeming's email dated 2 September 2004, as did Mr Witherington. Shortly afterwards Mr Leeming sent a confidential email to Mr Powell. Mr Leeming told Mr Powell,

I am looking to set up, say, a five year payment plan, which would hopefully address most of the issues you raised... is something like a five year plan the best for the business?

Mr Powell was obviously pleased with the outcome and responded to Mr Leeming,

I think we have some progress though again I have been copied by Bruce only. Russell has asked Bruce to look at what payments would need to be made to repay the loan by the age of leaving the company at 62.

71 On 16 September 2004 Mr Leeming wrote to Mr Howard confirming his salary increase to $237,841. On the same day Mr Russell sent an email to Mr Witherington. Pilkington rely on this email to support the direction.

Bruce,

Please arrange to clear loan at age 60. It appears interest rates will go up so assume an interest rate of 7.5% (3.75%).

Thanks

Russell.

72 Mr Witherington responded by informing Mr Howard of the amount required to repay his new loan by age 60. Mr Witherington also said that he would arrange for appropriate loan documentation from Allens Arthur Robinson, Pilkington's solicitors, covering repayment, term, security and other matters.

73 On 11 October 2004 Mr Witherington sent an email to Mr Howard, with a copy to Mr Leeming, in the following terms:

Russell,

I have received the approval for the payment of your new loan re-draw (237K) but would like to get the loan documentation from AAR and have this signed off by Roger and yourself before making the payment if that is okay.

Regards.

That email is another in the group relied upon by Pilkington to support the direction to Mr Howard. There was no specific mention of a schedule of payments although it was clear that Mr Witherington intended to have the loan fully documented before the advance was made, as might be expected in the circumstances.

74 In October or early November 2004 Mr Witherington instructed Pilkington's solicitors to prepare draft loan documentation. A draft loan letter was mentioned in an email from Mr Witherington to Mr Howard on 3 November 2004. Mr Witherington appeared to be Pilkington's representative providing instructions to its solicitors. Pilkington relied upon the last paragraph of the email to support the direction. Mr Witherington said,

AAR have asked whether it would be possible to see the relevant section of your contract dealing with the loan facility. Is that possible?

75 On 23 November 2004 Pilkington's solicitors wrote to Mr Witherington, following a telephone conversation, attaching a revised version of the loan letter with a covering email from Mr Malinas. The draft loan letter is important because it includes a proposed amendment, consistent with Mr Howard's belief about his entitlement. The amendment was apparently conveyed to Pilkington's solicitors by Mr Witherington.

76 Mr Witherington sent the email and attachment to Mr Howard for his consideration. He also sent it to Mr Leeming.

77 Prior to amendment, paragraph 5 of the draft loan letter had been in the following form:

Repayment of principal and interest must not exceed [*insert amount] per month (cap).

In the new draft, circulated on 24 November 2004, the following amendment was included:

Notwithstanding the cap set above, nothing will prevent you from making additional payments from the proceeds you receive from any management incentive payments in any given year.

In his covering email Mr Malinas drew attention to the amendment. He said,

You asked me to draft a clause which permits Russell to make additional payments to a maximum of the amounts he may receive under any management incentive program. Of course, a provision of this nature makes a cap on repayments largely redundant.

78 Mr Leeming opened the email but said that he had no recollection of reading it. Mr Howard gave evidence that he was never provided with a final version of the loan letter to sign and did not sign any such agreement. Mr Leeming knew the impact of Mr Howard's proposed new loan on Pilkington. He was kept informed about the preparation of the loan letter and I have no doubt that he read the email from Mr Witherington on 24 November 2004 including the covering letter from Mr Malinas and the draft loan letter with the proposed amendment.

79 Mr Howard said that his conversation with Mr Leeming at about this time superseded negotiations over the terms of the loan agreement. That was the conversation in which, according to Mr Howard, he agreed that it would be his last loan and Mr Leeming accepted that, as Pilkington's liability was fixed, it would not matter how quickly the loan was repaid.

80 Mr Howard agreed that discussions about the terms of the proposed new loan continued until early December, although he denied any agreement to repay only by way of fixed instalments. Mr Howard characterised the repayments in the draft schedule as a minimum. Mr Witherington prepared a schedule of repayments which he sent to Mr Howard on 30 November 2004. That document was attached to an email from Mr Witherington to Mr Howard of the same date. The document is entitled "Russell's final loan repayment schedule to age 60 advance on 1 Dec." The attachment is a spreadsheet setting out loan repayments of $3,843.91 per month to age 60. Pilkington submitted that this document represented the final position agreed to by Mr Howard in compliance with Mr Leeming's instruction of 2 September 2004.

81 Also on 30 November 2004 Mr Witherington wrote to Mr Leeming:

Roger,

Russell has advised of repayment as at age 60...

I will get Jim Minkou to put a caveat on Russell's house to the full value of the loan.

I will get loan letter "rejigged" for you to sign.

FYI

The loan is expected to be made tomorrow (1 December). Is this OK by you?

Mr Leeming replied the following morning. His reply read, "OK". The loan funds were advanced without Mr Leeming or Mr Howard signing a loan letter.

82 One explanation for Mr Leeming having approved the drawdown of the loan on 1 December 2004, without signing, or at least insisting that Mr Howard sign an acceptable loan letter, is that shortly before he approved the drawdown he and Mr Howard had the conversation Mr Howard maintains took place, resulting in, at least, tacit acceptance by Mr Leeming of Mr Howard's asserted right to rapid repayment.

83 The evidence concerning Mr Howard's version of his conversation with Mr Leeming in November 2004 is not altogether satisfactory. Mr Howard's evidence of Mr Leeming's agreement or approval is ambiguous. According to Mr Howard, approval is derived from Mr Leeming's apparent acceptance of the proposition that because Pilkington's liability was fixed it did not matter how rapidly the loan was repaid. Mr Leeming denied having a conversation with Mr Howard in which he indicated acceptance of such a proposition. Mr Leeming said it did matter.

84 Mr Leeming's evidence of his conversation with Mr Howard over the terms of the new loan are equally unsatisfactory. He reconstructed conversations. He had no specific recollection of what was said or when. I have no doubt that he did his best to recollect. He was an honest witness. He was truthful when qualifying his evidence by reference to what he thought might have been said. I accept that Mr Leeming and Mr Howard did have a conversation in which it was agreed that the 2004 loan would be Mr Howard's last. The question is when.

85 Mr Leeming accepted that Mr Howard had told him at some time between September and November that he would agree to the proposed advance being his last and that once drawn the fringe benefits tax liability would be fixed. Mr Leeming did not, however, accept that Mr Howard told him that it did not matter whether the loan was repaid in two, five or 10 years because it would not change the liability to fringe benefits tax. Mr Leeming said that he would have remembered such a comment because it did matter to Pilkington. He said that "the whole point of the payment schedule was to have a predictable FBT for the whole of the period". He said that "it was important that we had a smooth payment of that FBT liability". Mr Leeming would not concede the possibility that he was mistaken in his recollection on that point.

86 I think it is probable that Mr Leeming would have reacted as he said had Mr Howard asserted in unambiguous terms, that it did not matter whether payments were accelerated or not. It was plain to all that to accelerate payments would have a material impact on Pilkington's overheads. That was a concern shared by Mr Leeming. But what is surprising is that Mr Leeming expressly approved the drawdown of the loan in circumstances where the loan documentation was incomplete and unsigned. Mr Howard's evidence that Mr Leeming accepted his right to accelerate payments is the most compelling explanation for Mr Leeming's actions. Although Mr Leeming understood the significance to overheads and the consequences to Pilkington, I am persuaded that in a conversation with Mr Howard in late November 2004, shortly before giving his approval to the drawdown, Mr Leeming accepted that Mr Howard had the right to rapidly repay the new loan.

87 I find that in late November 2006 Mr Howard and Mr Leeming discussed Mr Howard's asserted right to accelerate repayments and his incentive bonus. The outcome of that conversation left Mr Howard with the belief that he could continue to accelerate repayments one last time. Mr Leeming was no doubt concerned at the potential impact on Pilkington but did nothing to stop Mr Howard from doing what he, Mr Leeming, believed Mr Howard had the right to do. That is the reason, in my view, why Mr Leeming did not insist upon the execution of the loan letter, with a capped schedule of repayments, prior to authorising the drawing down of the loan. Negotiations over that loan letter, were, as Mr Howard said, overtaken by the conversation.

88 I find that when expressly authorising the drawdown, Mr Leeming was well aware of the course proposed by Mr Howard - to accelerate repayment. By authorising the drawdown of the loan Mr Leeming approved that course, if he had not already done so during his conversation with Mr Howard.

89 In my opinion the conversation and emails relied upon by Pilkington as evidence of a direction to Mr Howard do not have that character. Pilkington submitted that Mr Leeming's email of 2 September 2004 is unambiguous in its character as a direction and that Mr Howard's emails and responses evidence his acceptance of the constraint on his ability to accelerate and salary sacrifice repayments of the new loan.

90 Had Mr Leeming regarded his email of 2 September 2004 as a direction to Mr Howard he would almost certainly have confirmed to Mr Howard, in their discussions concerning the financial impact on Pilkington of the new loan arrangements, that repayments must not be accelerated. The proposed amendment to the draft loan agreement was plainly inconsistent with such a direction. Had the email of 2 September 2004 been understood as a direction to Mr Howard the proposed amendment would not have been tolerated; Mr Witherington would not have communicated the amendment to Pilkington's solicitors; and Mr Leeming would not have given his "OK" to the drawdown unless and until Mr Howard signed a loan agreement in a form acceptable to Pilkington.

91 In my opinion, Mr Leeming, like Mr Howard, did not regard the email of 2 September 2004 as more than the opening of negotiations to try to reach agreement on a repayment schedule. Mr Leeming believed that Mr Howard was entitled to the new loan and had a right to rapid, salary sacrificed, repayments. When read objectively, in context, the email does not present as more than the opening of negotiations, with Mr Leeming expressing a desire to minimise the impact on Pilkington of what he thought was Mr Howard's entitlement.

92 Having reached the conclusion that Mr Leeming approved Mr Howard's right to accelerate and salary sacrifice repayments, and that the direction relied upon by Pilkington did not have the character of a direction to Mr Howard that required obedience, Pilkington's justification for their dismissal of Mr Howard fails. Notwithstanding those conclusions, it is desirable that I recite the facts and circumstances which occurred after the drawdown of the loan on 1 December 2004 and make relevant findings in relation thereto.

93 Between December 2004 and March 2006 Mr Howard made monthly repayments of $3,843.91 in conformity with the loan schedule prepared by Mr Witherington.

94 Between the time the loan was drawn down on 1 December 2004 and the first act of alleged disobedience, change was underway at Pilkington. Some of the proposed changes would impact upon Mr Howard. He perceived a down grading of his role and responsibilities. The anticipated change caused Mr Howard to discuss his redundancy with David Vernon-Smith in October 2005. Mr Vernon-Smith was Group Director of Human Resources.

95 Mr Howard proposed to Mr Vernon-Smith that it would be financially beneficial to Pilkington to change his position description, replacing it with positions to be occupied by persons of less seniority. Such a change would mean, according to Mr Howard, that his position would become redundant and he would be entitled to compensation under Pilkington's redundancy policy. In the context of Mr Howard's salary sacrificing history, the proposal might have appeared opportunistic, even provocative. Mr Vernon-Smith replied by asking for details of the cost to Pilkington. Mr Howard responded on 23 November 2005 that it would be $423,000 or perhaps $482,000 depending upon the approach taken to the calculation. In his email to Mr Vernon-Smith, Mr Howard mentioned his loan balance noting, "I do have the capacity to pay back at a faster rate which would decrease the loan amount". Mr Howard was not embarrassed to assert his entitlement to his superior.

96 On 1 April 2006, Laurence Kruger replaced Mr Leeming as President at Pilkington. The planned transition was known to Mr Howard in advance, provoking him to send Mr Kruger a copy of his redundancy proposal on 16 January 2006. Mr Kruger did not respond to Mr Howard's proposal until 6 June 2006, the day Mr Howard was advised of his 2005/2006 incentive bonus and a few months after his first "act of disobedience".

97 On 5 April 2006 Mr Howard wrote to Mr Lambe requesting an increase in loan repayments by $3,500 taking the monthly amount to $7,343.91. The request or instruction given to Mr Lambe appears to have been implemented without question. This request or instruction, Pilkington submitted, is the first act of wilful disobedience. There are two further such acts upon which Pilkington relied - a direction on 15 June 2006 that Mr Howard's incentive bonus be applied in reduction of the loan and a request or instruction to further increase the monthly repayments on 25 August 2006.

98 In his reply to Mr Howard's redundancy proposal, on 6 June 2006, Mr Kruger made it clear that he was approaching the proposal as a business, and not a redundancy proposition. He said that Mr Howard's position would not change. Mr Kruger requested details of the "loan situation" and a copy of Mr Howard's offer of employment. Mr Howard gave evidence that Mr Kruger came into his office in April 2006 and asked him some questions concerning his low interest loan and repayment increase. Mr Howard said that he showed his contract to Mr Kruger on that occasion.

99 It is surprising that Mr Howard did not interpret Mr Kruger's email of 6 June 2006 as exposing him to a significant risk. If Pilkington was proposing, as Mr Howard understood, to downgrade his position he would become entitled to a redundancy payment of many hundreds of thousands of dollars and might have been able to choose the time of his departure. On the other hand, his summary termination, as a business proposition, while exposing Pilkington to a risk of damages, might relieve it of any future tax liability in relation to the unpaid balance of the loan. Notwithstanding Mr Kruger's denial, I am of the view that from early in Mr Kruger's term as President, Mr Howard's termination must have been considered within Pilkington as a business proposition. Mr Howard does not appear to have appreciated the risk.

100 I have formed the view that what took place between senior management at Pilkington following Mr Kruger's appointment, and from about June 2006 at the very latest, was a plan, managed by Mr Kruger, to establish a basis to justify the summary termination of Mr Howard's employment.

101 When responding to Mr Howard's redundancy proposal of 16 January 2006, Mr Kruger did not inform Mr Howard that in April 2006, shortly after his appointment, he had commenced an investigation into the financial impact on Pilkington of Mr Howard's salary sacrificing. Nor did Mr Kruger, on that or any other occasion, inform Mr Howard that he disagreed with Mr Howard's interpretation of his entitlements under his contract of employment.

102 Mr Kruger gave evidence that when taking up his new position he compared the fringe benefits tax cost to Pilkington against budget and observed an extreme discrepancy. He did nothing about it until July 2006 when it was brought to his attention that Mr Howard was salary sacrificing his bonus for the 2005/2006 year. I do not accept that Mr Kruger was unaware of Mr Howard's practice of redrawing and accelerating loan repayments until July 2006. Having regard to his attention to Pilkington's fringe benefits tax liability and the content of Mr Howard's redundancy email of 23 November 2005, sent to Mr Kruger on 16 January 2006, it is inconceivable that Mr Kruger did not know, as early as 5 April 2006, that Mr Howard was in the practice of accelerating salary sacrificed loan repayments and believed that he was entitled to do so. Mr Howard's treatment of the incentive bonus was merely an extension of the same practice - take the bonus as income and salary sacrifice the amount as an accelerated loan repayment.

103 In my view, Mr Kruger's email of 6 June 2006 was a step in his investigation. Mr Howard was firmly in his sights. Mr Kruger had access to all of Pilkington's relevant financial information and Mr Howard's employment contract. I do not accept that Mr Howard had the only copy of his letters of appointment.

104 Mr Howard replied to Mr Kruger's email on 13 June 2006, setting out in some detail the basis for his calculation of a redundancy amount. Mr Howard's email contained the following,

I owe around $130,000 (as at the end of June) on the company loan which is repaid by salary sacrificing (agreed to by Brian Young when he recruited me).

Mr Howard did not include a copy of his offer of employment.

105 On 15 June 2006 Mr Howard instructed Vikki Noble to salary sacrifice his incentive bonus of $34,563, which had been approved a few days earlier. The email is relied upon by Pilkington as the second act of disobedience. On the following day, Mr Kruger sent an email to Mr Howard thanking him for his email of 13 June 2006 in which Mr Howard calculated his redundancy entitlement. Mr Kruger estimated the impact on profit of the redundancy package including fringe benefits tax on the loan to be approximately $600,000. He said "I don't see this as a good business proposition Russell". Mr Kruger said nothing to challenge Mr Howard's assertion of his right to salary sacrifice accelerated repayments. Nor did he say anything to challenge Mr Howard's direction to Vikki Noble that his incentive bonus be salary sacrificed. It is inconceivable that Mr Kruger knew nothing of that instruction and there is every reason to believe that he was fully expecting it.

106 Mr Howard replied the same day with information in response to some queries raised by Mr Kruger in his email. One query related to Mr Howard's loan balance. In his reply Mr Howard said,

The loan repayment is a cost that will be incurred regardless of whether I stay or go because it is repaid from pre-tax dollars. The loan is a low interest loan and not a housing loan. Under the terms of my contract, once repaid I can convert the benefit into salary, superannuation, expenses or take out another loan.

107 When asked about the steps taken in his investigation, Mr Kruger said:

We were advised that the MIP payment was to be salary sacrificed, which at that time I found unusual. And I stated at the time that I would need to find out whether or not Mr Howard had obtained the correct approval to do that, as doing this was against my knowledge of what you could do with the MIP payments. The - I was also investigating the loan and found that the payments had become variable, which again gave rise to an FBT component. I notified the UK in mid July that I had a potential sensitive situation with Mr Howard undertaking these things. I also found out at that time, around about the same time, that Mr Howard had varied his repayment instructions to the payroll department to vary that - his repayment in April 2006. After notifying the UK in July Mr Mike Powell, who had been the financial controller for Pilkington Australasia, made me aware that this issue had been raised with Mr Howard I think it was in 2004. And that he believed that there was a fixed term and fixed repayments for the loan, and that these could not be varied. And that he believed that - I can't tell you. Those investigations were ongoing at the time when I looked at the emails from 2004. They were supplied to me by Mr Powell via Mr Moreno. Then I believe it was the end of August, Mr Witherington informed myself and Mr Moreno that Mr Howard had again instructed the variability of that loan to be increased for the September 2006 salary payment.

108 Mr Kruger said that he did not have enough knowledge until July 2006 to confront Mr Howard about the adverse financial impact of his salary sacrificing. He said that he only became aware in July 2006 of Mr Howard's practice of accelerating payments. As I have said, I do not accept his evidence in that regard. Having identified the impact of Mr Howard's salary sacrificing on fringe benefits tax liability I have no doubt that Mr Kruger very quickly came to understand how that came about. The issue had been fully rehearsed within Pilkington in 2003 and 2004. Mr Powell and Mr Witherington, who were not called to give evidence, knew the full details. So did Mr Kruger's predecessor, Mr Leeming. When asked why he did not then confront Mr Howard and forbid the practice, Mr Kruger said,

because he was such a senior person I wanted to determine whether he had received the appropriate approvals in his position.

Counsel: You were setting a trap for him Mr Kruger?

Witness: No, sir.

109 In his evidence Mr Kruger conceded that in hindsight he should have contacted Mr Howard and insisted he do nothing until his rights were clarified. I have formed the view that Mr Kruger was setting a trap for Mr Howard. The plan was to require answers to questions which, if characterised as inadequate, may justify dismissal.

110 During early July the instruction by Mr Howard that his incentive bonus be salary sacrificed was being implemented within Pilkington. On 6 July 2006 Mr Witherington made an enquiry of John Moreno, Finance Director, for some guidance in processing the payment towards the balance of the outstanding loan. Mr Moreno responded on 10 July by asking Mr Witherington,

What will be the FBT implications and costs of this for the current year, and for how long has salary sacrificing MIP payment against the loan been occurring?

111 Mr Witherington replied the same day, informing Mr Moreno of the amount of the bonus, the tax implications and that Mr Howard had salary sacrificed his bonus once before.

112 On 11 July 2006 Mr Moreno sent an email to Mr Kruger asking for authorisation that Mr Howard's bonus be salary sacrificed towards his loan account. There is no evidence of any response from Mr Kruger to that request.

113 Mr Kruger was asked about Mr Witherington's opinion, expressed to Mr Powell, that Mr Howard's contract of employment entitled him to salary sacrifice accelerated repayments. Mr Kruger said there came a time when he formed the opinion that Mr Witherington was wrong. He said he formed that opinion during the course of his investigation in July and August 2006. In my opinion Mr Kruger probably formed his views sometime earlier. If he had taken the time to review Mr Howard's letters of appointment he would almost certainly have sought advice. He was aware of the very significant cost to Pilkington of Mr Howard's practice. One of his stated objectives, upon assuming the role as President of Pilkington, was to reduce overheads. Fringe benefits tax was a significant overhead. Mr Kruger's response to Mr Moreno's email of 11 July 2006 was curious. He said:

I will get info from Russell when he returns to enable approval.

I presume we wouldn't have accrued the FBT that would be associated with this? How much is it please?

114 Mr Kruger admitted under cross-examination that he was not in a position to approve the salary sacrificing by Mr Russell of his bonus. He also agreed that it was within his power to ensure that the proposed salary sacrifice of the bonus did not take place. He agreed that he could have responded by saying that he would not authorise the salary sacrifice by Mr Howard of his bonus.

115 Mr Kruger's initial excuse for taking no action was that the transaction had already happened. He later conceded that if it had, it could have been reversed. In my view, Mr Kruger was proceeding with his plan to gather evidence as a basis for dismissal. The evidence sought might have been the accumulation of a number of so-called acts of disobedience, or it might have involved the adequacy of Mr Howard's answers to questions about authorisation.

116 Following his email to Mr Moreno of 11 July 2006, Mr Kruger sent an email to Mr Howard:

Russell,

To ensure the correct internal controls are being followed can you please provide me with supporting approval documentation that allows salary sacrificing of your MIP. I thought MIP could only be salary sacrificed to superannuation, or the after tax amount either being used to purchase shares in the Deferred Bonus Scheme or taken as cash.

Also I note from the correspondence that Tim forwarded to me (attached) that Brian Young had authorised $13,000 per annum ($1083.00 per month) that could be salary sacrificed to a loan. Could you please have the supporting approval documentation that allows higher amounts to be salary sacrificed that you have made.

117 Mr Kruger knew the amount of the bonus. Mr Moreno had told him on 11 July 2006 that it was around $34,000. He knew that there were significant tax implications for Pilkington and Mr Howard. He was undertaking an investigation into Mr Howard's practice of salary sacrificing. He had already obtained a history of Mr Howard's loan transactions. He knew that repayments had varied. He had formed the view that Mr Howard was not fulfilling his obligations as a senior employee and director.

118 On 18 July 2006 Mr Kruger sent an email to Mr Izzett:

Tim,

I have a potential sensitive situation with Russell detailed below. I am copying Mike as he is aware of this, he was involved to a degree when he was in Australia, and he can also explain any technical aspects for you.

1. MIP Payments

As far as I am aware MIP payments could be either salary sacrificed (gross) into superannuation or either taken on an after tax basis either as cash or into the Deferred Bonus Scheme.

Russell has with his 2002/03 and 2005/06 MIP payments salary sacrificed (Gross amount) these against the loan he has with the Company. In other words he has not had tax deducted and the Company becomes liable to pay tax on this known as Fringe Benefits Tax (FBT) in Australia. This virtually doubles the cost to the business. I have only been able to find direct communication by Russell to the Payroll Department requesting them to do this and I have not been able to locate any authority approval.

2. Housing Loan

As per the documentation you forwarded to me, that Russell gave you, Brian Young authorised an amount of $13,000 per annum could be salary sacrificed against his housing loan. This again gave rise to FBT, however was duly authorised by Brian. This monthly repayment ($1083.00) occurred from October 1994 to April 2001. However since that date repayments have increased ranging for varying periods from $1666.67 to as high as $8903.26 per month. Currently monthly deduction is $3843.91 from December '04 through to now. Bottom line is the higher the repayment the higher tax the Company has to pay and I can find no documentation authorising this to occur and Russell is paying off out of pre tax dollars higher than approved. I believe the purpose of the loan was to have the low interest rate but not to be used to avoid personal tax that basically the Company ends up paying.

I intend to sent the attached e-mail to Russell if you agree.

Thanks

Laurie.

119 While it might be said that Mr Howard was opportunistic in the way in which he pressed his entitlement to redraw loans and salary sacrifice repayment, he had acted openly and in a manner consistent with a belief in his right to do so. He was also endeavouring to ease himself out of Pilkington. He was pursuing a favourable redundancy package. Mr Kruger and the other senior executives must have known that if Pilkington was planning to redefine Mr Howard's position it would be a costly exit, particularly if Mr Howard took full advantage of salary sacrificing his loan repayment. By not confronting Mr Howard and putting a stop to what he regarded as improper behaviour, Mr Kruger allowed Mr Howard's instructions to be implemented, thus exposing Pilkington to a liability for fringe benefits tax which Mr Kruger thought was unauthorised and improper.

120 At a meeting between Mr Howard and Mr Izzett on 26 or 27 June 2006 in the United Kingdom, Mr Izzett asked Mr Howard if he would accept a lower redundancy payout. Mr Howard refused. On 26 July 2006 Mr Powell sent an email to Mr Witherington asking for a copy of the loan agreement signed by Mr Howard when he drew down the new loan. Of course there was no such agreement. Mr Witherington responded by explaining that he had initiated the preparation of a loan agreement but that there was no resolution on a number of issues and as a result there was no agreement in relation to the 2004 loan. There was further correspondence between Mr Powell and Mr Witherington on this topic, without any adequate explanation from Mr Witherington as to why an agreement was not signed. Mr Witherington's final email on this topic was sent to Mr Powell, Mr Moreno and Mr Kruger.

121 Notwithstanding the events of the preceding months, on 25 August 2006 Mr Howard sent an email to Vikki Noble, with a copy to Bruce Witherington,

Vikki,

Please increase my home loan salary sacrifice to $10,000 per month... effective 1 September 2006.

Thanks

Russell.

122 On the same day Mr Kruger sent an email to Messrs Izzett, Powell and Moreno,

Just had another "incident" from RHH today where he has requested that his loan repayment be increased to $10,000 per month as per attached email. This will now cost us on an annualised basis approx. $120K in fringe benefits tax plus the tax on his bonus. So we have now incurred approx. $150K tax.

I believe I now have to be more direct and on the second attachment I have drafted a note to him.

Can you please check out my note on the second attachment & advise that you are both OK with this.

Thanks

Laurie.

123 A draft email to Mr Howard, prepared by Mr Kruger, was modified before it was sent, deleting the first sentence - "I haven't yet received info. from you on this." On 28 August 2006 Mr Kruger sent the email, as amended, to Mr Howard. He said,

Russell,

As you are in charge of payroll, I need to approve, from an internal control perspective, the quantum of the bonus (presume you would have had notification from UK) and a copy of the authority to salary sacrifice this please.

Thanks

Laurie.

124 At this time Mr Kruger well knew that he had not provided his approval or authorisation in response to the earlier email from Mr Moreno. In my view the request for a copy of the authority to salary sacrifice the bonus was disingenuous. On the same day Mr Howard responded,

Laurie,

MIP letter from Tim is attached.

Loan repayment by salary sacrifice goes back to my original contract signed off by Brian Young. I have shown you this previously and you have a copy I believe.

Russell.

Mr Kruger had a copy because Mr Izzett had provided that and other material to him prior to Mr Kruger's email of 18 July 2006. It is probable that Mr Kruger had read the letters of appointment shortly after taking up his position in April 2006.

125 Mr Kruger gave evidence that on 28 August 2006 he had a conversation with Mr Howard in which he asked him for the basis upon which he advised the payroll department to salary sacrifice his bonus in reduction of his loan. He said that Mr Howard told him that he could do this as part of his "overall package", and had done it before. Mr Howard generally agreed with the substance of what Mr Kruger said passed between them.

126 On 29 August Mr Kruger wrote to Messrs Izzett, Powell and Moreno referring to his discussion with Mr Howard. He said,

Attached is latest correspondence regarding the above.

Following receipt of RHH's e-mail I had a discussion with him as follows:

I asked him that given his e-mail to me of June 16th 2006 where he stated that his "flexible package" excluded the bonus scheme how he could advise payroll department to salary sacrifice against his loan. He replied that he could as it was part of his "overall package" plus he had done it previously (which he had in June 2003). I said that I believed the bonus could only be salary sacrificed to superannuation or the NET (after tax) taken as cash or to purchase shares under the deferred bonus scheme. Reply was again he could take as part of overall package & he did not produce any additional documentation that authorised this.

I then asked under what authority that he could vary repayments on a pre tax basis against his loan. He replied that as per Brian Young's letter April 16th 1992, which he produced, that the amount he could salary sacrifice was "not capped" (in other words he could salary sacrifice his total salary, not paying any income tax and the company becomes liable for FBT - effectively costs the company double!) and that he has been doing so for some time with no queries and that "others" (mentioned Pat Z) had varied repayments as well. I replied that to me it only seemed that $13,000 had been approved to be salary sacrificed to which again he stated that the amount he could salary sacrifice against the loan was not capped. He produced no other documentation. I asked if this was "legal" and he stated that it was.

My summary is that he commenced varying repayments against the loan on a pre tax basis in April 2001, he has salary sacrificed (pre tax) his June 2003 & 2006 bonus by direct communication to the payroll department (I have no other documentation and he produced none that authorised these) and my interpretation is that because previous management did not address, that to him this means that it is OK. I am of the opinion that it is not and this has cost the Company hundreds of thousands of $'s in FBT & RHH has avoided paying income tax to an amount in the order of $150-$200K over the last 5 years.

I believe we now need to seek a legal opinion as to his actions and take appropriate action.

Your views?

Laurie.

127 In a briefing note prepared by Mr Izzett dated 7 September 2006 to Stuart Chambers, Group Chief Executive Officer, Mr Izzett informed Mr Chambers that Mr Howard was using the loan as a device to avoid personal tax and that instructions were being given by Mr Howard to payroll to vary the home repayments without authorisation. Mr Izzett continued,

This matter came to Laurie Kruger's attention in April 2006 when Russell issued instruction to increase his loan repayment by $3,500/month to $7,343/month.[15]

There is a difficulty in interpreting to what extent the practice followed by Russell is allowed by his contract and/or can be deemed to be approved through Roger's tacit acceptance. In normal circumstances the HR Director would be the authority in such matters. For this reason Laurie Kruger has had to take preliminary external legal advice.

This memorandum is consistent with a level of knowledge and involvement by Mr Kruger in Mr Howard's salary sacrificing practices extending back to April 2006, shortly after Mr Kruger took up his new position.

128 The next communication was on 13 September 2006 when Mr Kruger wrote to Mr Howard by email with a copy to Mr Izzett:

Russell,

Following on from our conversation on Monday August 28th that resulted from our e-mail exchange where by I had been requesting copy of appropriate approval of you salary sacrificing your MIP for 2005/06 against your low interest loan. During our conversation I also raised the variability of repayments to which you referred to Brian Young's letter of 16th April 1992 and you stated that the salary sacrifice level for deductions was "not capped".

Following on from this conversation I have further reviewed the detail, and discussed in the UK, as I still need to be satisfied that appropriate approval authorities have been obtained. As Directors and Senior Executives of the company our fiduciary obligations to the company need to be of the highest order.

As you are aware, the FBT cost that has been incurred by the company as a result of the approach that has been taken has been very substantial. I require substantiation that these costs were incurred with proper authorisation.

For me to be satisfied that you sought or obtained appropriate approvals can you please provide this information to me on the following by Friday September 22nd, 2006:

1. The advance of $87,876.32 on October 31st, 1998

1. 2. The increase of monthly deductions on May 15th, 2001 from $1083.00 to $1,666.67
2. 3. The increase of monthly deductions on May 15th, 2002 from $1,666.67 to $2,528.59
3. 4. A deduction on May 15th, 2003 of $9,861.26
4. 5. A deduction of $74,061.26 on June 15th, 2003 (believe this includes a MIP component)
5. 6. The increase of monthly deductions on July 15th , 2003 to $8,903.26
6. 7. The advance of $237,000 on 1st December 2004
7. 8. The setting of monthly salary deductions at $3,843.91 from 15th December, 2004
8. 9. The increase of monthly deductions on 15th April 2006 to $7,343.91
9. The application of your MIP payment to this loan, with the effect that this was included in the salary sacrifice payment of $41,906.61 on 15th June 2006
10. The proposed increase on your monthly deduction to $10,000 from 15th September 2006

Can you please provide any documents that support requests for approval and/or subsequent granting of approval with your response to this e-mail by Friday September 22nd 2006.

Laurie.

129 Mr Howard responded on 22 September 2006 by email, advancing various grounds upon which he claimed to be entitled to salary sacrifice variable repayments, including the approval of Mr Marshall in December 1993, his letters of appointment and past practice.

130 In my opinion the strategy - for that is what it was - of Mr Kruger in formulating the questions for Mr Howard was not designed to inform Pilkington as part of a genuine enquiry about "appropriate approval". The die was cast, solicitors had been engaged, and evidence was being assembled to justify the summary termination of Mr Howard.

131 There was a meeting between Mr Howard and Mr Izzett on 11 October 2006. Mr Howard made a file note of his conversation with Mr Izzett at Wetheril Park in the United Kingdom. Mr Izzett told Mr Howard that Mr Kruger was not satisfied with Mr Howard's answer to his questions and nor was he. Mr Izzett said that Mr Howard had abused the spirit of the housing loan. Mr Howard responded, prophetically, that the matter could end up in court.

132 On 13 October 2006 Mr Kruger sent an email to Mr Howard making further enquiries, giving him a final opportunity to show that appropriate approvals were obtained or that there was some other explanation for his salary sacrificing activity. The email concluded,

If appropriate approvals were not obtained, and there is no other acceptable explanation, the company will determine what action should be taken within the full range of disciplinary measures.

Laurie,

The following sets out my response to the matters raised in your e-mail dated 13/20/06.

In relation to the e-mail from Roger Leeming dated 2/9/04 that you refer to, Roger and I held subsequent discussions about the concern raised re "rapid repayment followed by renewal" and the FBT impact on P(A)L. As a result of those discussions, it was agreed that this would be my last low interest loan and therefore the total FBT liability exposure for the company would be fixed. This removed the rapid repayment followed by renewal and ongoing FBT liability exposure concern. It also meant that the FBT exposure was fixed whether the loan was repaid over 2, 5 or 10 years. The new loan commenced on 1 December 2004 as an amortising loan that includes interest and principle (the same as my previous loan) as set out in the 2005 Annual Report, and does not have a fixed duration or fixed repayments. I advised this to Tim (12/10) and yourself (13/10) during separate discussions. Roger has stated to me that he will verify our verbal agreement if asked. If Roger and I did not have that agreement why would he sign off on the loan on the same basis as the previous loan renewals?

Variation to my loan repayments in e-mails to John Lambe and Vikki Noble were actioned by me as per past custom and practice and are not contrary to the agreement between Roger Leeming and myself post the 2/9/04 e-mail and the current loan arrangement.

In relation to MIP, as you are aware from my previous response, this has been done before, and signed off. There is nothing in my contract that prevents this. The reference to my "flexible package excludes any bonus scheme", simply means that any MIP cannot be used in calculating the value of the three items - salary, loan and second vehicle - for entitlements (leave etc), superannuation and redundancy payments. Salary sacrificing the MIP is not contradictory to my e-mail 16/6/06, nor is it contrary to the loan agreement and past practice.

I have re-read the e-mail from Tim dated 31/5/06 and accept that I should have discussed the matter of salary sacrifice prior to me actioning this.[16]

Mr Howard advanced his version of the conversation with Mr Leeming in November 2004 as his authority for accelerated repayments of the 2004 loan.

134 On 2 November 2006 Mr Howard's employment was terminated. He was provided with a letter of termination that day. The letter is lengthy and set the framework for Pilkington's defence in this proceeding. In the letter Pilkington relied upon the various requests made by Mr Kruger to Mr Howard for explanations as having provided Mr Howard with an opportunity to "provide details of the authorisation of the loan advances, the changes to loan repayment amounts and salary sacrificing of MIP payments ..."

135 The letter of termination also referred to Mr Leeming's position in relation to the advance made in December 2004. Mr Kruger wrote,

Roger Leeming confirmed that the arrangement with you was that your low-interest loan was to be repaid based on the agreed repayment amount of $3,843.91 per month. Roger Leeming agreed that you had reached an oral agreement that this advance would be the last advance made to you and, on that basis, that the amount of FBT that would be incurred by Pilkington in connection with this loan was effectively capped (assuming you worked for long enough to pay the loan out). However, Roger Leeming also acknowledged that it would be undesirable for the company to incur more FBT than necessary in a particular year and, if you wanted to change the amount of the monthly repayment, you would have had to obtain his or my authorisation to do so.

136 Mr Leeming's evidence was consistent with most, but not all, of the passage. I have already found that in late November 2004 Mr Leeming gave his approval to accelerated salary sacrificing for the last time.

137 I am satisfied that shortly after Mr Kruger commenced his new position as President of Pilkington he became fully acquainted with Mr Howard's practice of redrawing a low interest loan, salary sacrificing repayments and accelerating repayments, including the application of his incentive bonus, to loan repayments. He was well aware of the financial impact on the company and was determined to put an end to a practice he regarded as an abuse of position. Mr Leeming was also fully acquainted with Mr Howard's practice and had endorsed it. Mr Kruger and Mr Leeming were aware that Mr Howard asserted a right to do as he did. Mr Leeming shared Mr Howard's belief as to his rights.

138 Each act of disobedience upon which Pilkington relied to justify summary dismissal did not go unnoticed. In my opinion each act was fully anticipated and when Mr Howard gave his instructions on 5 April 2006, 6 June 2006 and 25 August 2006, Pilkington allowed the instructions to be implemented without intervening. Pilkington's reasons for doing so were the subject of some evidence and submissions. If, as Pilkington contends, it was unsure of Mr Howard's entitlements, it took no steps to clarify the position. Even after Mr Kruger claims to have formed an opinion, in July 2006, which contradicted Mr Howard's asserted position, he did not seek to clarify matters with Mr Howard. In my opinion, Pilkington owed a duty to Mr Howard to clarify what had been a shared misunderstanding of contractual rights, before relying upon his conduct, consistent with those claimed rights, as a breach justifying termination. Instead, Pilkington allowed the conduct to go unchecked and was complicit in its implementation.

139 In my view Pilkington cannot avoid the consequence of their full knowledge of the alleged breaches by explaining their conduct as part of an investigation. A genuine investigation may excuse an employer from acting promptly to dismiss an employee if the investigation was necessary to properly inform the employer of the true character or extent of the employee's conduct. That is not this case. In my view the investigation was a managed process, designed to accumulate material to justify Mr Howard's early termination. Mr Kruger's written interrogation of Mr Howard was demonstrated to be a charade, designed to justify his dismissal for failure to co-operate. This is no doubt why Pilkington did not rely upon Mr Howard's responses as a justification.

140 In my opinion Pilkington, with full knowledge of all relevant facts and circumstances surrounding each event of disobedience on which they relied, elected, as part of a strategy, to do nothing about the conduct. In so doing Pilkington lost any opportunity it might otherwise have had to rely upon that conduct to justify dismissal.

141 I am also of the opinion that insofar as Mr Howard's conduct might be characterised as a breach of a lawful direction, his conduct was not wilful. Mr Howard believed, mistakenly, that he had a right to redraw his loans and to salary sacrifice all and any repayments. So did Pilkington, until Mr Kruger decided in 2006 that Mr Howard was not entitled to accelerate salary sacrificed repayments, including his incentive bonus. Mr Kruger did not challenge Mr Howard's position. He could have given Mr Howard an express direction that he must not accelerate repayments or salary sacrifice his incentive bonus. He did not. His failure to challenge Mr Howard's openly asserted right or give him a clear unambiguous direction, denied Pilkington the opportunity to rely upon Mr Howard's conduct as wilful. Having regard to the fact that Pilkington relied upon three acts of disobedience as deliberate conduct, it is unnecessary to consider other circumstances in which less than wilful conduct might suffice to justify dismissal. Even if Mr Leeming had not authorised Mr Howard to accelerate repayments one last time, Mr Howard believed that he was entitled to do so. Pilkington was aware of Mr Howard's belief and, in that knowledge, permitted him to give the instructions said to constitute disobedience. Pilkington implemented those instructions. In the circumstances, Mr Howard's conduct cannot, in my view, be characterised as amounting to a renunciation of the contract of employment.

142 The circumstances of Mr Howard's employment relationship with Pilkington and his position on 2 November 2006 indicate a strong case for a period of reasonable notice of at least 12 months. I find that 12 months' notice was reasonable in the circumstances.

143 Mr Howard was, at that time, Pilkington's Human Resources Director for Australasia with additional responsibilities. He was a Vice President, reporting to the Chief Executive and President for Australia, Mr Kruger. His salary was $260,000 per annum plus superannuation and benefits. He was aged 56 years and had been employed for one month short of 15 years. Given his age and period of employment with Pilkington it is reasonable to conclude that he would require a reasonably long period of time to obtain alternative employment to a similar level.[17]

144 The damages to which Mr Howard is entitled must flow from the breach. He had a duty to mitigate his loss by using reasonable diligence to find other suitable employment. The duty is not unduly onerous and does not require Mr Howard to be successful. He must act reasonably.[18]

145 Mr Howard gave evidence of the steps taken by him to find alternate employment. His evidence was not challenged. I find that he acted reasonably in that regard. There is no evidence Mr Howard was in receipt of income that ought to be deducted from an award of damages flowing from Pilkington's failure to give 12 months' notice of termination. Pilkington did not submit that any such deduction should be made.

146 There are a number of elements to Mr Howard's claim for damages in addition to 12 months' salary which, as at 2 November 2006, was $260,000 per annum. Mr Howard claims to be entitled to the benefit of a salary review due in April 2007 which he calculated would have increased his salary to $271,000 per annum resulting in a claim for lost salary entitlement for the 12 month period ending 2 December 2007 in the sum of $266,825. Pilkington disputes Mr Howard's entitlement to any salary increase. It is true that Mr Howard may not have been entitled to an increase. But, having regard to his salary history, he would almost certainly have received an increase in the order of that for which he contends. I will allow a salary component of $266,825.

147 Mr Howard claims a superannuation contribution of $44,200 which is not in dispute. He claims an entitlement to a second car, the value of which, including fringe benefits tax, is calculated by him at $12,800. While Pilkington disputed a proportion of this sum it does not dispute the item. The only evidence I have to quantify the claim is given by Mr Howard. I accept his evidence. The same may be said for Mr Howard's claim to a fuel allowance in the sum of $4,200 and health insurance in the sum of $4,650. There is no dispute as to Mr Howard's claim to an allowance for gymnasium fees of $969, the Executive Fitness Program in the sum of $750, salary continuance insurance in the sum of $750 and telephone rental in the sum of $333.

148 Mr Howard's claim of $37,800 for motor vehicle benefit is not disputed as an item but there is a dispute as to the amount. Once again, the only evidence is that of Mr Howard in relation to his claim and I accept it.

149 Mr Howard also claimed undisputed outstanding amounts owed to him for his gymnasium membership and the second car expense in the sum of $300 and $800 respectively. There are, however, a number of disputed items. These are an incentive bonus of $50,000 and the value of salary sacrificing the repayment of his outstanding loan calculated at $84,283.56. Had Pilkington performed its obligation to provide Mr Howard with 12 months' notice of termination it is possible that he would not have been awarded an incentive bonus. I accept that the bonus is discretionary.

150 Pilkington did not adduce evidence or submit that had notice been given to Mr Howard he would not have received his bonus. The only evidence is of regularly approved bonuses, no doubt corresponding to profitability or satisfactory compliance with performance indicators. Nor did Pilkington submit that had a bonus been approved, the amount would have been different to that estimated by Mr Howard, or that the amount estimated by Mr Howard is otherwise unreasonable. In the circumstances I infer that a bonus would have been paid and the only evidence of an amount is the sum estimated by Mr Howard.

151 As for the benefit of salary sacrificing the repayment of the balance of his loan, I have found that Mr Howard was not entitled to a further loan or to salary sacrifice accelerated payments under the terms of his contract of employment as defined by the September letters of appointment. I have found, however, that Mr Leeming approved Mr Howard's proposal that he could salary sacrifice his last loan as rapidly as he chose. Accordingly, I am satisfied that he is entitled to that benefit.

152 Mr Howard also submitted that his position with Pilkington was redundant and that he is entitled to compensation calculated pursuant to the redundancy policy of Pilkington. Mr Howard gave evidence that, after his termination, his position was restructured and downsized and therefore ceased to exist. He submitted that had the redundancy policy been applied he would have received a payment of $537,385 including an ex gratia payment of $10,000. Mr Howard conceded that he was not entitled to duplication of damages for unlawful termination of his contract of employment and the benefit of compensation under the Pilkington redundancy policy. He submitted that any component of a redundancy package referable to salary foregone, and presumably other benefits, should be off-set against any co-relative entitlement to a payment of damages in lieu of notice.

153 On behalf of Pilkington it was submitted that there was no entitlement to redundancy payments. Further, Pilkington submitted, Mr Howard's position was not made redundant.

154 Mr Howard's submission assumed that he would have become entitled to the redundancy package had he not been summarily dismissed. Even if it may be argued that his position became redundant after he was dismissed, Pilkington would have been astute to avoid any such entitlement had Mr Howard been given reasonable notice. I am not satisfied that Mr Howard would have become entitled to redundancy payments during the period of reasonable notice.

155 Accordingly, Mr Howard is entitled to damages for breach of contract by Pilkington in the sum of $508,660.56. I will hear the parties on interest and costs.

[1] Adami v Maison De Luxe Ltd [1924] HCA 45; (1924) 35 CLR 143.

[2] [2000] HCA 64; (2000) 176 ALR 693, paras [25]-[26].

[4] [1924] HCA 45; (1924) 35 CLR 143, 155.

[5] Adami v Maison De Luxe Ltd [1924] HCA 45; (1924) 35 CLR 143, 152-3.

[6] [2001] VSC 150.

[7] Russell v The Trustees of the Roman Catholic Church (2007) 69 NSWLR 198; [2008] NSWCA 217; Thompson v Orica Australia [2002] FCA 939; (2002) 116 IR 186, 224; Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312, 321; Blythe Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66, 81.

[8] Quinn v Jack Chia (Australia) Ltd [1992] VicRp 37; [1992] 1 VR 567.

[9] Macken, O'Grady, Sappideen and Warburton, The Law of Employment, 5th ed at pp 171-172; Quinn v Jack Chia, supra, at p 580.

[10] Rankin v Marine Power International Pty Ltd [2001] VSC 150

[17] Rankin v Marine Power International Pty Ltd [2001] VSC 150 at [220].

[18] Hem v Cant [2007] FCA 81, [25].