In this In Brief, we discuss the Western Australian Supreme Court decision in Heugh v Central Petroleum Limited  WASC 311 (5 September 2014).
In this case, the former Managing Director (Heugh) of an oil and gas exploration company was awarded over $1.59 million for unlawful termination of his contract of employment.
Heugh was the Managing Director of Central Petroleum Limited (Central Petroleum). His role included the responsibility for investigating and negotiating farmout agreements.
In February 2012, contrary to Heugh’s recommendation, the Central Petroleum Board resolved that his farm-out agreement duties were to be re-assigned to another employee (Shortt). The following day, Heugh sent Shortt two letters:
The Board wrote to Heugh informing him that in attempting to circumvent the Board’s decision to re-assign the farmout responsibilities to Shortt, Heugh had placed unacceptable pressure on Shortt. Heugh had thereby breached his employment contract and the company’s Code of Conduct.
The letter from the Board required Heugh to remedy the alleged breaches within 14 days. The remedy would be considered complete if the Board received written assurance that Heugh would comply with his duties including public support of any direction of the Board in the future, and if he proffered a written apology to Shortt in the form attached to the letter.
Heugh signed the written assurance, and withdrew the written warning to Shortt. However, he provided Shortt with an apology in a different form to the one proposed by the Board.
One month later, the Board took measures to remove Heugh as an employee, director and Managing Director of Central Petroleum, by seeking his voluntary resignation. Heugh refused to resign.
Central then terminated Heugh’s employment under clause 14 of his employment contract, which was in the following terms (emphasis added):
The Company may at its reasonable discretion terminate the Employment: (a) if at any time the Executive ... (iii) commits any serious or persistent breach of any of the provisions contained in this Agreement and the breach is not remedied within 14 days of the receipt of written notice specifying the breach from the Company to the Executive to do so.
Some time prior to his termination, Heugh had engaged a private investigator to investigate Shortt, using Central Petroleum’s funds but without the permission of the Board. He had not disclosed this matter to the Board. However, this matter was not relied upon by Central Petroleum as a ground for terminating Heugh’s contract.
At trial, it was accepted that Central Petroleum had terminated the contract of employment. Heugh argued that the company was not entitled to terminate his employment and in doing so breached and repudiated his contract because:
In its defence, Central Petroleum argued that it was entitled to terminate Heugh’s employment because of:
Le Miere J held that Heugh committed a serious breach of the contract when he sought to put pressure on Shortt to not accept responsibility for farmouts in future, and thereby undermined the Board’s resolution. His Honour dismissed Heugh’s argument that the Board was pursuing a pre-determined plan to marginalise Heugh and ultimately remove him from his position.
However, Le Miere J went on to hold that Central Petroleum wrongfully terminated Mr Heugh’s employment because Heugh had remedied his serious breach of the contract; alternatively, termination of the contract was not a reasonable exercise of discretion by the company.
Le Miere J observed that:
In the alternative, Le Miere J observed that the contract specified grounds for termination, and the steps required to effect termination, and no others. Therefore, it displaced the common law right to summarily dismiss. One ground for termination under the contract was ‘gross misconduct’, which was a narrower concept than misconduct at common law.
Central Petroleum did not have an unrestrained discretion to terminate the contract. The purpose of qualifying the company’s decision to terminate by the requirement that it be ‘reasonable’ was to ensure that the company did not do so without giving proper consideration of all relevant matters.
The requirement of reasonableness has both a subjective and objective element: the subjective element focused on the Board’s reasons for terminating, while the objective facts to be taken into account included Heugh’s position, history and the circumstances of his breaches of the contract.
Heugh’s failure to disclose the engagement of the Private Investigator was held not to be a further ground for dismissal because an employee is not under a duty to disclose their own breaches of contract.
In any event, on the evidence, Central was aware of that matter before the dismissal and elected not to raise it. Central thereby waived its right to rely upon this reason in a post-termination context. Central Petroleum was also obliged under the contract to notify Heugh of any proposed breaches and give him an opportunity to rectify them, which it did not do.
Le Miere J ordered Central Petroleum to pay Mr Heugh $1,598,298 in damages, which included:
According to a recent media release Central Petroleum, in consultation with its insurers, is considering whether to bring an appeal against Le Miere J’s decision.
The drafting of executive contracts presents employers with a number of challenges. The significance of an executive’s role in the organisation and their high levels of remuneration are important reasons for ensuring that these contracts are carefully drafted to protect the employer’s interests.
The decision in Heugh v Central Petroleum illustrates that:
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