RDC Concrete v Sato Kogyo summary

For employment law practitioners, the Singapore Court of Appeal decision in Phosagro Asia Pte Ltd v Piattchanine, Iouri [2016] SGCA 61, released 28 October 2016, (the "Judgment") is noteworthy.

The Judgment sets out the grounds pursuant to which the Court of Appeal reversed the decision of the High Court (unreported, Piattchanine, Iouri v Phosagro Asia Pte Ltd [2015] SGHC 259), released almost exactly a year ago.

Whilst the grounds of decision set out in the Judgment are (in this author's view at least) largely unremarkable, what has been laid to rest is perhaps some of the uncertainty arising from the consequences of the holding in the court below.

Background

The facts of this case are straightforward and involved a claim by a former employee against his employer for monies due to him under his employment agreement as a result of its termination or, in the alternative, damages to be assessed.

The employee prevailed in the High Court whereas the employer's counterclaim, i.e. that there were valid reasons justifying summary termination for cause, was dismissed.

On appeal, the Court of Appeal held (as a matter of fact - and overturning the High Court's findings on this point) that the employee's conduct justified the employer's exercise of its right to summarily terminate the employment agreement. Consequently, the decision in the court below was set aside and judgment ordered in favour of the employer.

Applicable Law

Insofar as the Judgment is concerned, the Court of Appeal held that common law contractual principles applicable to the discharge of an agreement by reason of acceptance of repudiatory breach (discussed at length by the apex court in the earlier, reported decision of RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR(R) 413 ("RDC")) generally apply to all contracts, including employment contracts (see [54] of the Judgment).

In RDC, the Court observed that there were four situations in which a breach of contract could amount to a repudiatory breach (see [52] of the Judgment):-

(a) Situation 1: where the contract clearly and unambiguously states that, in the event of a certain event or events occurring, the innocent party will be entitled to terminate the contract (RDC Concrete at [91]).

(b) Situation 2: where a party, by his words or conduct, simply renounces his contract inasmuch as he clearly conveys to the other party to the contract that he will not perform his contractual obligations at all (RDC Concrete at [93]).

(c) Situation 3(a): the condition/warranty approach where the focus is on the nature of the term breached and, in particular, whether the intention of the parties to the contract was to designate that term as one that is so important that any breach, regardless of the actual consequences of such a breach, would entitle the innocent party to terminate the contract (RDC Concrete at [97]).

(d) Situation 3(b): where the focus is on the nature and consequences of the breach; in particular, where the breach in question will give rise to an event which will deprive the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract (RDC Concrete at [99]).

Adopting and applying these principles to the facts before it, Singapore's apex court held that the employer's right to summarily terminate its employee could be justified on both Situation 3(a) and Situation 3(b)-type grounds (see [59] of the Judgment) and accordingly allowed the appeal.

Consequently, the success of the appeal turned (in this author's view) on inter alia reversing a finding of fact made by the Court below.

Unresolved Issues: The Applicability of the Principle in Cavenagh v William Evans Ltd [2013] 1 WLR 238 ("Cavenagh")

As part of the Coda in the Judgment, the Court of Appeal further observed that the judge in the court below had unnecessarily considered and endorsed the principles set out in the English decision Court of Appeal decision in Cavenagh v William Evans Ltd [2013] 1 WLR 238 ("Cavenagh").

The Court of Appeal declined to endorse the holding in Cavenagh as it opined that the present case did not call for a consideration of the decision. The Court did, however, preserve the position by stating that it would be considered at the appropriate time, in an appropriate case.

Consequently, whether the principles laid down in Cavenagh (or the extent thereof) form part of Singapore jurisprudence is left to be seen.

Insofar as Cavenagh is concerned, this was a decision by the English Court of Appeal and stands for the proposition that once an employer elects to terminate the employment agreement pursuant to an express term therein, it cannot later change the basis of termination, i.e. the employer is bound by its election to terminate the employment say, for example, by making payment in lieu of notice. Upon the exercise of the employer's right to terminate the contract by making payment in lieu of notice, the value of the notice period becomes immediately due and payable as a liquidated sum by the employer to the employee.

As such, even if the employer subsequently discovers that there were in fact grounds justifying summary dismissal (such that no notice or payment in lieu thereof was required), it cannot change the mode of termination. The English Court of Appeal reasoned, however, that this would not unfairly prejudice the employer, who would still have a claim for breach of contract against the employee, in respect of the subsequently discovered matters justifying summary termination.

The Singapore Court of Appeal suggested that though there is much to commend the approach in Cavenagh (provided one balances the interests of the employer and employee), practical difficulties may arise. In this regard, the Court observed at [86] as follows:-

"Notwithstanding the reasons that appear to weigh in favour of endorsement of the decision in Cavenagh (briefly set out in the preceding paragraphs), there are, however, practical difficulties that point in the opposite direction. If, for example, an employer terminates the employee’s contract of employment pursuant to an express term of the said contract (and pays a contractually promised sum in severance) and later discovers that the employee had committed a repudiatory breach at common law which would have entitled the employer to terminate the employee’s employment (pursuant to one or more of the situations set out in RDC Concrete), Cavenagh would permit the employer to mount a claim on the basis of the employee having breached his fiduciary duty to the company by failing to disclose his misconduct. However, it should be noted that such a duty may not apply to an employee who is not in a fiduciary position. In that case, the only breach that the employer would be able to rely upon would be the original misconduct of the employee. However, there might be a disconnect between the sum which the employee would have (wrongfully) received in severance and what the employer would be able to recover in its claim for the employee’s breach of contract, thus resulting in unfairness. Utilising the facts of the present case as the basis for a hypothetical illustration, if the employer had terminated the employee’s employment pursuant to cll 2 and 14 of the Employment Contract, the employer would have to provide severance payments to the employee pursuant to the aforementioned terms. If the employee had been guilty of a repudiatory breach of the Employment Contract at common law by using the employer’s accounts to pay for his personal expenses, and assuming that the employee was not a fiduciary, the employer could mount a claim against the employee and what the former could claim against the latter would be the repayment by the employee to the employer of personal expenses (assuming that those expenses could be proved by sufficient evidence adduced by the employer). However, if the amount of the severance payments was larger than the amount of personal expenses claimable by the employer, the overall result might be less than satisfactory. Whilst the employer could attempt to claw back the severance payments made to the employee, this could well be a very difficult task since it could be difficult to establish that the employee’s repudiatory breach of contract at common law had caused the employer to make the said severance payments."

[emphasis added in bold]

The Court declined to comment further, save to say that the approach in Cavenagh was not free from practical difficulty but that the present case was an inappropriate forum to comment further on whether this approach would be accepted under Singapore law.

Conclusion and Drafting Notes

Whilst there remains a degree of uncertainty as to whether the principles laid down in Cavenagh will subsequently be endorsed by the Singapore Courts, employers have a practical solution to safeguard their position from the potential pitfall of contractually terminating their employee with notice and subsequently discovering breaches of duty by the employee and being unable to recover the appropriate quantum of damages suggested by the Court of Appeal in its hypothetical.

In this regard, one suggested approach is for employers to draft their employment agreements:-

"...in a way that makes it a condition of the payment of any amounts pursuant to the express term(s) of the employment contract concerned that the employee in question has not been guilty of any serious misconduct and that if it transpires that the employee had in fact been guilty of any such breach(es), any severance payment which had already been made would be repayable on demand."

Draftsmen, take note.

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*The contents of this article represent the views of the author alone from a Singapore law perspective and are subject to copyright protection under the laws of the Republic of Singapore (as may from time to time be amended). No part of this article may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of the author.

Please note that whilst the information in this article is correct to the best of the author's knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for and/or in respect of any particular course of action as such information may not suit your specific business, operational and/or commercial requirements. You are therefore urged to seek legal advice for your specific situation. All the author's rights are expressly reserved and nothing herein shall be construed as a waiver thereof.

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