Australia: Full Court Of The Federal Court Upholds Damages Award In Nikolich

Yesterday, the Full Court of the Federal Court handed down its decision on the appeal in Goldman Sachs JB Were Services Pty Ltd v Nikolich [2007] FCAFC 120.

By majority, the Full Court upheld Justice Wilcox’s original decision – which awarded Mr Nikolich damages of around $500,000 (plus interest) (some two and a half years pay), essentially for psychological injury resulting from a breach of his employment contract.

However, the Court did overturn one part of Justice Wilcox’s decision – the original costs order in favour of Mr Nikolich.

The Court concluded that there was no power to award costs because (broadly speaking) the breach of contract claim was brought in the ‘accrued jurisdiction’ of the Federal Court in conjunction with claims under the Workplace Relations Act 1996, which contains restrictions on the award of costs.

But the Court did award Mr Nikolich 90% of his costs of the appeal itself.

Mr Nikolich commenced employment with Goldman Sachs JB Were (GSJBW) in May 2000 as an investment adviser. When he was offered employment, he was provided with a policy document entitled ‘Working with Us’ (Policy). The Policy included provisions on integrity, safety, harassment and grievance procedures. Mr Nikolich was required to sign and return a form acknowledging some of the provisions of the Policy.

Subsequently, under a new team based approach adopted by GSJBW, Mr Nikolich formed a team with two other investment advisors – called the ‘DKN Partnership’. They prepared a business plan (Business Plan), which was submitted to GSJBW. There was an income split between the three team members. The Business Plan provided that no clients would leave the DKN Partnership if a team member resigned.

One of the members of the team resigned.

Mr Nikolich’s manager, Mr Sutherland, then assigned most of the DKN Partnership’s investment advisers to another team – the ‘RSL Partnership’.

Employers can no longer assume that, if an employment contract has a notice of termination provision, they are relatively safe from a breach of contract claim.

Employers should carefully review their contracts and policies, as well as their procedures by which employees are given policies, and should seek legal advice. Consideration should also be given to the position of existing employees – not just new starters.

Employers should also bear in mind this decision when handling grievances. A prompt and thorough investigation can be very important.

In July 2003, Mr Nikolich filed a grievance against Mr Sutherland – asserting, amongst other things, that Mr Sutherland intimidated him. In December 2003, there was a report by GSJBW’s Human Resources section which rejected the allegations against Mr Sutherland. Mr Nikolich sought a review of this decision, but this did not resolve the grievance.

Some time later, in August 2004, Mr Nikolich left work on sick leave. In December 2004, Mr Nikolich’s solicitors advised that if he were to return to work this would have adverse consequences for his health.

GSJBW replied by saying it was clear that Mr Nikolich did not intend to return to work or was not able to return to work in the foreseeable future. In these circumstances, they regarded his employment as having been terminated.

Mr Nikolich brought proceedings on three bases:

1. that GSJBW breached his contract of employment;
2. that GSJBW unlawfully terminated his employment by reason of his mental disability, or his temporary absence from work because of illness, contrary to the Workplace Relations Act; and
3. that GSJBW engaged in misleading and deceptive conduct contrary to sections 52 and 53 of the Trade Practices Act and also the Fair Trading Act (NSW).

The most significant part of the case was the breach of contract claim.

Justice Wilcox rejected the argument that the Business Plan amounted to a variation of the contract of employment.

However, he accepted that the Policy formed part of Mr Nikolich’s employment contract. He concluded this on the basis of a provision in the employment agreement that GSJBW ‘expected’ Mr Nikolich to comply with ‘office memoranda and instructions’. He also concluded that this meant that GSJBW was required to comply with the Policy, as well as Mr Nikolich.

He then concluded that GSJBW had breached various parts of the Policy – in particular:

• the Policy provided that GSJBW would take every practical step to provide and maintain a healthy working environment for its employees (Safety Provision);

• the Policy provided that ‘each person is able to work positively and be treated with respect and courtesy’ and that ‘all people within the … team will work together to prevent any unwelcome, uninvited and unwanted conduct’(Harassment Provision); and
• the Policy included a grievance provision. Justice Wilcox decided that it was an implicit in the grievance procedure that GSJBW would carry out an adequate and timely investigation of the merit of any complaint or grievance (Grievance Provision).

In doing so, Justice Wilcox applied (and in some respects, extended) a Full Court Federal Court decision in Riverwood International Australia Pty Ltd v McCormick [2000] FCA 889 (Riverwood). However, he also showed a willingness to interpret broad statements of intent and philosophy as imposing far reaching contractually binding obligations.

Justice Wilcox concluded that the breaches of the Policy caused Mr Nikolich psychological damage including a major depressive disorder. While damages were ordinarily not recoverable for disappointment and distress, there was an exception for personal injury – which included psychiatric illness. Such damages were not too remote.

Justice Wilcox then assessed the damages as being:

• lost income from the date of termination until the date of the decision – around two years of lost income; plus
• loss of future earnings on the basis that it would take Mr Nikolich six months to find a new job. In this regard, he took the view that the resolution of the case would assist Mr Nikolich in overcoming his illness to the extent that he was able to secure employment elsewhere.

Justice Wilcox rejected the other claims. The reasons included:

• while Mr Nikolich was dismissed by reason of mental illness, the decision was based on the inherent requirements of the job. An inherent requirement of the job was attending for work and carrying out the duties of the position. The letter from Mr Nikolich’s solicitors was a clear indication that Mr Nikolich was unfit for work and would not be returning to work immediately. This in turn amounted to a clear statement that Mr Nikolich was not able to fulfil the inherent requirements of his position; and
• the misleading and deceptive conduct claim failed because any misleading conduct did not cause Mr Nikolich to suffer any loss.

GSJBW appealed Justice Wilcox’s decision on breach of contract. The other parts of the decision were not subject to appeal.

The Full Court was comprised of Chief Justice Black, Justice Marshall and Justice Jessup. Each delivered a separate judgement, with Justice Jessup dissenting.

Each of the judges concluded that the Safety Provision formed part of Mr Nikolich’s contract of employment. Their reasoning differed.

Chief Justice Black took the view that, having regard to all of the circumstances, parts of the Policy were contractual (including the fact that the Policy was apparently given to Mr Nikolich at the time of the offer and also the language of the Policy).

Justice Marshall applied the decision in Riverwood – seeing no distinction between a requirement that an employee comply with policies (as in Riverwood) and a provision that the employee be ‘expected’ to comply with ‘office memoranda and instructions’.

Justice Jessup distinguished the decision in Riverwood but nonetheless regarded the Safety Provision as being contractual – particularly given that it was similar to the implied term at common law that an employer will take reasonable care for the safety of employees.

All judges overruled Justice Wilcox on the Harassment Provision and the Grievance Provision – finding that they did not form a part of Mr Nikolich’s contract. It is important to note that this part of the decision turned on the specific wording of the Harassment Provision and the Grievance Provision. Chief Justice Black, for example, described these provisions as being descriptive or advisory – rather than promissory.

However, it is important to appreciate that, if the wording of the Harassment Provision and the Grievance Provision was different, then the decision too could have been different.

The major difference between the majority and Justice Jessup concerned breach of the Safety Provision and damages.

Chief Justice Black and Justice Marshall decided GSJBW had breached the Safety Provision by failing to promptly investigate the grievance – especially having regard to Mr Nikolich’s delicate mental state at the time. In this regard, it took around five months between the grievance being filed and the rejection of Mr Nikolich’s grievance.

They also decided that this delay was at least partially responsible for Mr Nikolich’s psychological injury and that this psychological injury was foreseeable.

Interestingly, the Court did not find that the rejection of Mr Nikolich’s grievance was wrong – just that it took too long and that this caused Mr Nikolich psychological injury.

In dissent, Justice Jessup decided there was no breach of the Safety Provision. Amongst other things, there was no evidence that the delay in investigating the grievance led to Mr Nikolich suffering psychological injury. In fact, Justice Jessup suggested that, having regard to all the circumstances, a more urgent investigation might only have accelerated events.

The Full Court’s decision continues the resurgence of breach of contract claims in employment law.

This decision, together with the Full Court Federal Court decision of Walker v Citigroup Global Markets Australia Pty Limited [2006] FCAFC 101 (Walker) last year, represent – when measured in number of years pay – some of the largest damages awards in the history of Australian employment law. In this regard, they well exceed the types of damages awards under the New South Wales unfair contracts jurisdiction (although there were some cases where the quantum of damages was higher) and at common law for ‘reasonable notice’ claims.

The only real comparison is with a line of Federal Court cases in the late 1980s and early 1990s starting with the decision of Gregory v Phillip Morris (1988) 24 IR 397 – which were ultimately overruled by the High Court in Byrne v Australian Airlines Ltd (1995) 185 CLR 410.

It is also important to appreciate that Walker and Nikolich are decisions of one of the highest courts in the land – they carry considerable judicial weight and cannot be disregarded.

Nikolich continues the trend of finding employment policies to be contractual. Importantly, two judges regarded parts of the Policy as being contractual on the basis of the language of the Policy and the circumstances in which the Policy was provided to Mr Nikolich. They did not require that Mr Nikolich’s letter of appointment refer to policies to achieve this result.

However, Nikolich could have played out quite differently if the facts were only slightly different. For example:

• in some States, restrictions on recovery of damages under workers compensation legislation may apply;

• if the proceedings had been brought in a different court, and without the Workplace Relations Act 1996 claims, there would be no restrictions on costs; and
• if the wording of the relevant policies was different, the Court may have concluded other parts of the policies were contractual.

Most importantly, for employers though, the risks highlighted in the Nikolich case can simply be avoided – with tightly drafted contracts and policies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.