This principle was tested in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163.
The facts
In November 2012, Mr Anthony Loone entered an employment contract with national accounting firm, Crowe Horwath (Aust) Pty Ltd (Horwath) and was appointed Managing Principal of the Launceston office.
Over the ensuing years, Mr Loone established sound relationships with the firm’s clients.
In January 2015, Horwath was acquired by Findex Group Ltd. The acquisition brought about several changes and restructuring and Mr Loone’s previous management responsibilities and autonomy were substantially curtailed.
In June 2016, a new bonus incentive model was introduced resulting in 20% of annual bonus payments being deferred for three years rather than paid annually (with the remaining 80%). Under the new direction, it was decided to exclude from the Launceston ‘staff bonus pool’ net profits of $440,000 which were attributable to Mr Loone’s efforts and involvement in acquiring another accounting firm. This consequently reduced the bonus Mr Loone would be eligible to receive.
Mr Loone resigned in July 2016, refusing to work out any notice period on the basis that Horwath had repudiated the employment contract.
Horwath sought a temporary injunction in the Supreme Court invoking the restraint provisions in the employment contract. An injunction restraining Mr Loone from offering accounting services to 89 of Horwath’s clients was granted in September 2016.
In April 2017, the Court discharged the injunction previously imposed, deeming Horwath’s actions ‘repudiatory conduct’ and Mr Loone’s termination of the contract valid, by his acceptance of the repudiation. Consequently, the Court determined the post-employment restraints in the contract ineffective.
Horwath’s appeal of this decision was unsuccessful, the Court affirming that:
· The change of duties introduced after Horwath’s acquisition by Findex were significant, resulting in Mr Loone’s new position no longer reflecting the role of Managing Principal as provided in his employment contract.
· The new bonus system which introduced a deferred payment scheme breached the employment contract which, upon its proper construction, provided for annual payments.
· By excluding the major acquisition from Mr Loone’s bonus calculations, Horwath breached the employment agreement by failing to properly assess the bonus entitlement in accordance with the prescribed criteria.
· Horwath could not enforce the post-employment restraint provisions in Mr Loone’s contract because of its repudiatory conduct. Whilst the restraint provisions per se were generally enforceable, the termination of the contract by Mr Loone meant that the restraints had no legal effect. In this regard, the Court could find no other relevant precedent to refute this proposition.
The general law provides that a breach of a contractual condition by one party, will give the other party a right to repudiate (reject) the contract and sue for damages. Horwath’s conduct was deemed repudiatory and Mr Loone’s acceptance of the repudiatory conduct entitled him to terminate the contract.
In this case, Horwath paid a considerable price for its conduct. Mr Loone was awarded over $420,000 reflective of his salary for 12 months, together with $142,000 representing his full bonus entitlement for the prior year.
Key take-home points
· Employers must act cautiously when introducing change that substantially alters the terms of the employment arrangement.
· An employer’s conduct will likely be taken into consideration when relying on restraint provisions. Unilateral changes to employment arrangements at the discretion of the employer and which breach contractual obligations may constitute repudiation of the contract and render any restraint clause unenforceable. The exiting employee may not be restrained from taking an immediate position with a rival company.
· Employers should review contracts regularly and fully understand provisions regarding position descriptions, remuneration and bonus structures.