Employer successful in $500,000 claim for breach of contract against employee

The New South Wales Supreme Court has awarded financial broking company, Tullett Prebon (Australia) Pty Ltd, more than $500,000 damages after a finding that its former employee had breached their employment contract.

Background

The employee was engaged as a broker with the Company for a fixed term of at least two years.
Some 15 months before the end of the contract, the employee resigned his position.

The Company refused to accept the employee’s resignation and instead invoked the ‘gardening leave’ provisions of the contract, and advised the employee he would not be required to attend work, but would continue to be paid his base remuneration.

Despite this, the employee immediately commenced work with a direct competitor of the Company.

Claim for Injunction

The employment contract contained a restraint of trade provision, that prevented the employee from working for a competitor or soliciting clients or employees until the end of the fixed term, or for a period of three months’ after the termination of his employment.

The Company sought an injunction to prevent the employee engaging in this conduct for a period extending until the end of the fixed term contract – which was not due to expire for a further 11 months.

However, the Court considered this timeframe was unreasonable but granted an injunction for six months from the date the employee gave his resignation.

The Court noted that, while the employment relationship had ended, the employment contract remained on foot unless the Company accepted the employee’s resignation.

Claim for damages

Two days before the injunction was due to expire the Company issued the employee a letter directing him to attend for work the following week. The letter advised him that, if he failed to do so, he would be in breach of his contract and would give the Company grounds to terminate the contract.

The employee did not respond to the letter and instead, re-commenced work with the Company’s competitor.

On this basis, the Company terminated the employment contract and instituted proceedings against the employee relying on a clause within the contract that permitted the Company to seek liquidated damages if the employee breached or repudiated the contract.

To be successful, the Company had to establish that, although the employment relationship had ended, it was still able to give the employee a direction to attend work and that the failure to attend was a repudiation that triggered the liquidated damages clause.

In addressing this issue, the Court found that, while the Company did not have the power to unilaterally reinstate the employment relationship, it was entitled to require the employee to make a final decision as to whether he wished to resume employment.

If he chose not to, this would be a fresh repudiation of the employment contract and would therefore entitle to the Company to bring the contract to an end.

The judge found that this was in fact what had occurred, and therefore found that the Company could invoke the right to claim liquidated damages under the contract.

The employee argued that the damages clause was penal in nature and therefore unenforceable as it was not a genuine pre-estimate of the Company’s damages taking into account the fact that the employee would most likely have been replaced by another broker.

The calculation set out in the clause was however, considered to be standard practice in the broking industry. Evidence was provided by the Company that, in the time the employee was absent from work, a loss of approximately $400,000 had been sustained.

Based on this comparison, the calculation provided for under the contract was held not to be “so extravagantly out of proportion to the loss as to attract the doctrine relating to penalty”.

The employee was ordered to pay $503,100 plus interest and costs. The employee has indicated that he will consider appealing the decision.

Lessons for employers

• Liquidated damages clauses can be a means of restraining valuable employees from working with competitors.
• To ensure that an employer’s rights are protected, employment contracts should be well drafted.