Plaintiff v Defendant

2 In August 2006 Dr Gray's employment was pursuant to a contract with the ACA dated 22 October 2004. The period of employment was from 1 February 2005 until 31 January 2010. The agreement was terminable prior to the expiry of the term by notice pursuant to clause 14 or for misconduct pursuant to clause 15. The procedures under clause 15 are of no present relevance. Clause 14 is in these terms:

THIS Agreement may be terminated at any time during the period specified in Clause 1 by either party giving to the other a minimum of six month's written notice. The Principal acknowledges that she will endeavour to give as much notice in excess of the minimum as possible to enable the Employer to obtain another suitable Principal.

3 On 24 August 2006 the employment of Dr Gray was summarily determined by letter for the reason given that she no longer had the confidence of the ACA. She was paid six months salary in lieu of notice. It is accepted that this dismissal was wrongful; she was entitled to serve out the period of notice provided for in clause 14.

4 The contract contained an arbitration agreement, and in August 2006 the dispute was referred to Mr T J Ginnane SC as sole arbitrator pursuant to the provisions of the Commercial Arbitration Act 1984. Following a hearing over some eight days, the arbitrator on 16 December 2008 published his interim award dealing with all issues other than interest and costs.

5 Each party seeks leave pursuant to s.38(5) to appeal against the award. The issue before me in each case is whether there is a manifest error of law on the face of the award, or strong evidence that the arbitrator made an error of law and that the determination of the question may add to or be likely to add substantially to the certainty of commercial law.

6 An application for leave involves two steps. In the circumstances of this case, there is little benefit in approaching the two steps separately, and I have not done so. In an application for leave to appeal it is not customary for the court to provide lengthy reasons. Under the first limb the error must be manifest. As will appear, I am not persuaded that the second limb has much application in this case.

7 The second preliminary observation I make is that I am concerned here with errors of law. Questions of fact are essentially for the arbitrator, and I express no views about the facts which the arbitrator has found.

8 The ACA's questions of law, as they emerged at the hearing, were expressed as follows:

1. Whether damages are available at common law for loss of opportunity to find alternative employment in a wrongful dismissal case.

1A. Alternatively or further to 1, whether damages are available at common law for loss of the chance or opportunity to find equivalent alternative employment from a position of employment during the notice period, in a wrongful dismissal case.

1. Whether there was a term that "the parties would not, without reasonable cause, do anything to destroy or seriously damage the relationship of trust and confidence between them" (term of mutual trust and confidence) implied by operation of law into the employment contract between the parties.

2A. Alternatively to 2, if there is a term of mutual trust and confidence implied by law into the employment contract between the parties, whether that term imports obligations of natural justice into the employment contract.

2B. Alternatively to 2A, if there is a term of mutual trust and confidence implied by law into the employment contract between the parties, whether that term imports obligations of procedural fairness into the employment contract.

2C. Alternatively to 2A and 2B, if there is a term of mutual trust and confidence implied by operation of law into the employment contract between the parties, whether that term should be construed so as to impose obligations upon the Applicants (in circumstances in which the Applicants conduct an inquiry into the conduct of the Respondent) to:

(a) (if the inquiry may lead to the termination of the employee's employment) tell the Respondent that the inquiry may lead to the termination of the Respondent's employment; and

(b) given the Respondent an opportunity to consider all the significant material considered by the inquiry.

1. Whether damages are available for disappointment and distress arising from a breach of an employment contract.

3A. Alternative to 3, whether the fifth exception in Baltic Shipping v Dillon [1993] HCA 4; (1993) 176 CLR 344 applies to the employment contract between the parties so that the employment contract falls within that exception, so as to entitle the Respondent to damages for disappointment and distress for breach of the employment contract.

Grounds 1 and 2: damages for loss of opportunity

9 Dr Gray sought damages representing the value of the opportunity she would have had if she had been permitted to serve out her period of notice. This lost opportunity was that to seek alternative employment from a position of employment. The arbitrator allowed this claim and awarded her $25,000. The amount of damages is not here in issue. What was said on behalf of the ACA is that the law does not permit an employee to obtain damages for such a loss. Leave was sought under both limbs of s.38(5)(b).

10 In argument before me a distinction was properly drawn between this kind of loss and that which an employee might suffer following wrongful determination inasmuch as she has lost the prospect of her employment being extended at the conclusion of the current term.[1] What is said here is that Dr Gray would have been in a stronger position seeking an alternative employment if she were a serving principal rather than a dismissed principal.

11 It was suggested that Addis v. Gramophone Co Ltd[2] is authority against the award under consideration. I think not. That case concerned the availability of exemplary damages for the circumstances of wrongful dismissal. The award in question here is an award of damages for breach of contract in accordance with ordinary compensatory principles. The common measure of damages for a breach of this kind will be the sum of money representing the remuneration that the employee would have earned during the period of notice less any sum that she has in fact earned. But if further or other loss is demonstrated to flow from the breach, there is no reason why it should not be recoverable. Damages of this nature were awarded by the Full Federal Court in WT Partnership Pty Ltd v Sheldrick.[3]

12 In the circumstances I find here no manifest error. Nor is this a case which falls within the second limb of s.38(5)(b). Although it will not be a common case where loss of this kind would be demonstrated in a contract of employment, the arbitrator's reasons show that his decision depended upon the circumstances of this case.

Grounds 2, 2A, 2B and 2C, mutual trust and confidence

13 The arbitrator found that it was an implied term of the contract of employment that the employer owed to the employee an implied contractual obligation of mutual trust and confidence. There is abundant authority to support such an implication.[4] This may be the case, particularly in a contract such as the present, where the office of principal may involve her making hard managerial and professional decisions in the interests of the students and in accordance with her obligations under the contract, decisions which may not be appreciated by the members of the ACA or by certain elements in the staff.

14 In his careful and thorough survey of the authorities, the arbitrator demonstrated that such a term is to be implied in this contract. Far from manifest error I am strongly persuaded that he was correct in law in so concluding. Ground 2 must therefore fail.

15 The expression "term of mutual trust and confidence" is a shorthand expression used in employment law for a term of uncertain ambit. In paragraphs 208-211 of his reasons the arbitrator points to aspects of the term as it applied to particular cases.

16 Grounds 2A and 2B assert error in the reasons for the award inasmuch as the term of mutual trust and confidence was there said to import obligations of natural justice and procedural fairness in the employment contract.

17 These grounds proceed on a false assumption. It appears from the arbitrator's reasons that in December 2005 the Victorian Independent Education Union on behalf of certain of the teaching staff at the college made to the ACA a number of complaints against Dr Gray concerning her treatment of current and former staff members. A committee of inquiry was established in February 2006 to look into these matters. The committee delivered its report in May 2006, finding the complaints to be substantiated and it recommended that the ACA seek Dr Gray's resignation or that it dismiss her with notice. The first option was unable to be achieved, and on 24 August 2006 Dr Gray's employment was terminated by the letter to which I have referred.

18 It should be noted that Dr Gray was not dismissed for misconduct pursuant to clause 15. The letter of 24 August purported to terminate her employment pursuant to the notice provisions of clause 14. This course was available to the ACA whatever might have been the findings of the committee of enquiry.

19 The arbitrator found that in two respects the committee, on behalf of the ACA, breached the term of mutual trust and confidence:

(a) the committee failed to advise Dr Gray that the outcome of the inquiry could result in the termination of her employment; and

(b) Dr Gray was not afforded an opportunity to respond to all of the material received by the committee.

20 While it must be acknowledged that these two matters might constitute a breach of the principles of natural justice and procedural fairness, the arbitrator specifically noted that these were not the obligations which he found that the ACA had failed to observe. The arbitrator considered how the obligation of mutual trust and confidence worked out in this contract and in the circumstances of this inquiry. Having considered them he concluded that the two matters referred to amounted to a breach of that obligation. It is not difficult for me to follow or indeed to accept his reasoning to this conclusion.

21 What was put on behalf of the ACA may be summarised as follows. First, the conduct in question found against the ACA amounts to a breach of natural justice or procedural fairness. Second, the common law imposes on an employer no implied contractual obligation to provide an employee natural justice and procedural fairness in the dismissal process: the employee is not entitled to any protection from acts of the employer in the dismissal process which might amount to a breach of natural justice or procedural fairness. Third, the employee is, therefore, given by the common law no protection against the conduct here in question notwithstanding that it constitutes a breach of another term of the contractual relationship between employer and her and that it occurs otherwise than in the dismissal process. Such a contention is not sound as a matter of logic. Nor am I persuaded that it demonstrates a manifest error of law.

22 The application of the implied term of mutual trust and confidence to the facts of this case raises no question of law which would satisfy the second limb of s.38(5)(b).

23 Ground 2C approaches the same question, but with greater emphasis upon the particular facts of this case. If this is indeed a question of law, it must fail for the same reasons as cause me to reject grounds 2A and 2B.

Grounds 3A and 3B: damages for disappointment and distress

24 The arbitrator, having found these two breaches of the term as to mutual trust and confidence, made an award of damages in the total sum of $35,000 for the distress and disappointment which Dr Gray suffered as a consequence. It was contended on behalf of the ACA that the general principle should apply - damages for disappointment and distress are not available for breach of the contract - and that the arbitrator fell into manifest error in concluding that it did not. The short point here which is clearly exposed in ground 3A is whether this is a contract falling within the fifth exception to this general principle.

25 The leading authority is the decision of the High Court in Baltic Shipping v Dillon,[5] a case involving a disastrous and aborted pleasure cruise. The relevant exception to the general principle is described in these terms in the various judgments -

Finally, there are other cases in which the plaintiff has recovered damages for distress, vexation and frustration where the very object of the contract has been to provide pleasure, relaxation or freedom from molestation. So, in Heywood v Wellers, where the plaintiff instructed a solicitor to obtain an injunction to protect the client from molestation and the solicitor negligently failed to do so, the client recovered damages for the mental distress she suffered in consequence of being molested. The contract between the client and the solicitor had as its object the protection of the client from molestation of the kind which occurred. Likewise, plaintiffs have recovered damages for disappointment and distress caused by the breach of a contract to provide a stipulated holiday, entertainment or enjoyment, the object of the contract being to provide pleasure or relaxation.[6]

I respectfully agree. To ascertain whether the obtaining of peace of mind is the object of a contract or, more accurately, an object of a contract, reference is made to its terms, express or implied, construed in the context of facts which the parties know or are taken to have known. Thus, if peaceful and comfortable accommodation is promised to holidaymakers and the accommodation tendered does not answer the description, there is a breach which directly causes the loss of the promised peacefulness and comfort and damages are recoverable accordingly. In cases of this kind, a statement by the promisor commending a service or facility to be provided under the contract is frequently a term of the contract, not a mere representation.[7]

... it should be accepted that the present case falls within a category to which the general rule does not apply. That category of case encompasses cases where the disappointment and distress have been caused by breach of a contract under which the party allegedly in breach is shown expressly or impliedly to have agreed to provide pleasure, entertainment or relaxation or to prevent molestation or vexation.[8]

The application of basic principle concerning the awarding of damages for breach of contract requires an award of damages for distress or disappointment where it is an express or implied term of the contract that the promisor will provide pleasure or enjoyment or personal protection for the promise.[9]

26 These passages are directed to the object of the breached contractual obligation rather than to the object of the contract itself. It is clear from the passages which I have quoted from the judgments of Brennan and McHugh JJ, and it is not inconsistent with the other quoted passages, that this object may not be the sole object of the contract. As I mentioned in the course of argument, the Dillon case does not stand for the proposition that a contract of employment, which incidentally is intended to confer upon the employee pleasure and job satisfaction, necessarily falls outside the fifth exception to the rule that damages of this kind are not available for breach of contract; so that damages for distress and disappointment are not available in respect of such a contract simply because it is breached by wrongful dismissal. As McHugh J points out, attention is to be focused on the object of the breached term rather than on the object of the contract as a whole.

27 In his award the arbitrator concluded that this case fell within this fifth exception, as it was explained by Wilcox J in Nikolich v Goldman Sachs JB Were Services Pty Ltd.[10] In that case, which concerned the wrongful dismissal of an employee engaged as client investment adviser, the court found that the employer breached terms of the contract with respect to health and safety, harassment and grievance procedures. On the question of damages for distress and disappointment as a consequence, His Honour said this:

The present case does not concern a pleasure cruise. However, it is strongly arguable that it comes within the principles applied in Dillon's case. The purpose of the relevant subsections of WWU [the employer's health and safety policy] was to provide assurance to existing and prospective employees concerning the manner in which they would be treated in their workplace and, in particular, about the support they would be offered by their employer. The "very object" was to provide peace of mind. It was foreseeable that, if the employer's promises were broken in relation to a particular employee, that employee might suffer distress.[11]

It was, however, not necessary for his Honour to reach a final conclusion as to this, because the applicant's case there fell within another of the exceptions, that where the breach caused personal injury.

28 In the present case the term as to mutual trust and confidence was breached, generally speaking, in the manner in which the ACA, through the committee of inquiry, addressed the staff complaints against Dr Gray. The conflict in this sense was not one in which the ACA was a party, so that its own interests were not in play. It had of course an important interest in resolving the conflict insofar as it adversely affected the conduct of the school. In the particular circumstances of this case, then, the ACA's contract required that it act with mutual trust and confidence in its fact-finding functions, and that it have regard to the prospect that an unfair inquiry with adverse findings might affect the interests of Dr Gray - her professional interests, obviously enough, and also, given her physical condition at the time, her psychological interests. It is not difficult to see that the term of mutual trust and confidence had as its objective in these circumstances the prevention of such a result.

29 Leaving aside the circumstances of the termination of her employment, it was open to the arbitrator to find, as he did, that damages for her distress and disappointment were recoverable in accordance with ordinary contract principles enunciated in Hadley v Baxendale.

30 I have not overlooked the body of authority to which I was referred in which these damages have not been awarded in the context of an employment contract. I have considered how the arbitrator analysed these cases which were referred to in his reasons, and have considered also those further cases to which I have been referred. I am mindful that, in a contract of employment these damages might rarely arise as a matter of fact, but I am not concerned with this because the arbitrator has made the findings of fact. I am mindful also of the dangers of accepting and applying a proposition which might be thought to run counter to the line of authorities starting with Addis v Gramophone Co Ltd, so that a distinction must be drawn between those authorities and those cases where non-physical loss is suffered otherwise than for breach of contractual provisions dealing with wrongful dismissal.

31 I remind myself that leave should not be granted under the first limb of s.38(5)(b) unless I find error which is manifest. I am not persuaded that such an error is here present. Nor am I satisfied that the present case, depending as it does upon the unusual circumstances, in which the breach occurred, falls within the second limb. The application of the ACA therefore will be refused.

32 This application attacks the arbitrator's rejection of contentions put on her behalf that she was entitled to notice, not of six months, but reasonable notice, and further that this reasonable notice was two years. I indicated in the course of argument that I was not attracted to the second proposition as an error for which leave should be granted. If indeed it is a matter of law, there was material upon which the conclusion was warranted. There is no manifest error. I did not understand counsel to be pressing a second limb of s.38(5)(b) in respect of this proposition.

33 The first proposition, however, was expressed in the proposed notice in four ways.

1. The Arbitrator erred in law in construing clause 14 of the contract by finding that it dealt comprehensively with the issue of termination of the contract on notice.
2. The Arbitration erred in law in construing clause 14 of the contract by misdirecting himself in paragraph 129 of his Reasons, as to the legal test to be applied. The Arbitrator failed to construe clause 14 of the contract by determining what a reasonable person would have understood it to mean, having regard to the text, the surrounding circumstances known to the parties and the purpose and object of the contract.
3. The Arbitrator erred in law in finding that clause 14 of the contract operated to exclude an implied term requiring termination of the contract on reasonable notice.
4. The Arbitrator erred in law in finding that no term for giving reasonable notice of termination was implied in the contract.

34 In essence the point turned upon the construction of clause 14 of the employment contract which I have set out above[12]. It was argued by Dr Gray that the provision meant that she was entitled to reasonable notice provided this was not less than six months.

35 This is a construction question which turns on the terms of the contract as a whole, in the light of the evident objective that both the school and the principal had an interest in avoiding an abrupt termination of the contract. The drafting of this provision, and also clause 13 demonstrates this, that a degree of flexibility and co-operation is expected in the interests of both parties. Both cll 14 and 13 deal with the departure of the principal from that office for a reason other than misconduct. In the case of termination upon notice, the employee in particular agrees to give more than six months notice as is possible in order to minimise any disruption to the school and any adverse effect upon the interests of the employer. There is, however, no obligation for her to do so. There is no corresponding obligation imposed upon the ACA. What is spelt out is the expectation of the parties that more than the stipulated notice might be given by either party. When read in this context, the interpretation put on clause 14 by the arbitrator is not manifestly wrong. Indeed, if I may say so, I think he was quite correct.

[1] See Citigroup Global Markets Australia Pty Ltd (2006) 233 ALR 607; Murray Irrigation Ltd v Batsdon [2006] NSWCA 253; (2006) 67 NSWLR 73

[2] [1909] UKHL 1; [1909] AC 488.

[3] (1999) 96 IR 202 at [38], per Lee, Branson, Marshall JJ.

[4] Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186 at 191. See too Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217.

[5] [1993] HCA 4; (1993) 176 CLR 344.

[6] [1993] HCA 4; (1993) 176 CLR 344 at 363, per Mason CJ (omitting footnotes).

[7] [1993] HCA 4; (1993) 176 CLR 344 at 371, per Brennan J (omitting the footnote). I refer also to the cases referred to upon which his Honour's conclusion was based.

[8] [1993] HCA 4; (1993) 176 CLR 344 at 381-2, per Deane, Dawson JJ.

[9] [1993] HCA 4; (1993) 176 CLR 344 at 405, per McHugh J.

[10] [2006] FCA 784.

[11] [2006] FCA 784 at [317].