Breckwoldt & Co (NG) Pty Ltd v Gnoyke (No 2) [1975] PNGLR 195 (15 September 1975)

Papua New Guinea Law Reports - 1975

[1975] PNGLR 195 - Breckwoldt & Co. (N.G.) Pty. Ltd. v Gnoyke (No. 2)

[1975] PNGLR 195

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]

BRECKWOLDT & CO. (N.G.) PTY. LIMITED

V

HAROLD GNOYKE (NO. 2)

Port Moresby

Frost CJ Prentice SPJ Saldanha J

26-29 May 1975

15 September 1975

MASTER AND SERVANT - Contract of service - Remuneration - Meaning of “bonus” - Construction of “Bonus Payment Sheet” - Unilateral contract - Whether incentive payment or addition to salary.

MONEY COUNTS - Money had and received - Basis of action - Principle of unjust enrichment applied.

WORDS AND PHRASES - “Bonus” - Contract of employment.

G. was employed by the appellant company under a written contract of employment as a manager for a period of 2« years commencing approximately July, 1971, in the business of import agents, wholesalers for agency lines etc. In addition to a basic monthly salary the contract of employment provided for a bonus as follows:

“The employee is also to receive the following during his period of employment: free accommodation, free use of a car, a bonus in accordance with the attached sheet.”

The bonus provision was contained in a separate sheet headed “Bonus Payment Sheet” as follows:

“In accordance with para. 5 of the contract, B. herewith agrees to pay the employee a personal bonus at the following conditions for his work as a manager in Port Moresby.

1.       The bonus amounts to:

(a)      5% of the indent commissions of B., Port Moresby

(b)      5% of the gross profit from the employee’s own business

(c)      5% of the gross profit from the workshops in Port Moresby (typewriter & radio).

The right to receive a bonus commences upon commencement of the employee’s work in Port Moresby and lapses upon termination of this work.

2.       The gross profit from the employee’s own business is given by the difference between purchases and sales after allowing for special items, losses (debts) and the depreciation of the stock in hand in accordance with business requirements. Entries relating solely to tax matters are not taken into account when determining the gross profit which requires a bonus payment.

3.       The bonus can be cancelled completely or in part by B. if the employee is dismissed without notice in accordance with par. 13 of the contract in accordance with par. 14 of the contract.

4.       The bonus is calculated by the accounting section at the head office in Rabaul. Payment of the bonus is not permitted until checked and approved.”

G. was validly dismissed in accordance with par. 13 of the contract on 28th February, 1973. On 12th February, 1973, G. knowing he was about to be dismissed withdrew from the company’s account without authority the sum of $9,000.00 being a sum less than the amount of the bonus for the year 1972 to which he considered he was entitled. In an action by the company for money had and received by G. to its use in which G. counterclaimed for damages for wrongful dismissal and the full amount of the bonus, the trial judge held that the bonus was not a bonus in the sense of a gratuity but was recoverable as an additional salary payable monthly as in the case of the salary under the contract, that cl. 4 of the bonus payment sheet amounted to a penalty, and that the claim for money had and received was unenforceable as an attempt to enforce such a penalty.

On appeal therefrom held that on a proper construction of the documents:

(1)      The “Bonus Payment Sheet” was a unilateral contract, in which the employer’s obligation to pay the bonus was subject to a condition subsequent, whereby the employer was given the option to cancel that obligation upon the event specified occurring, viz. the dismissal if justified, of the employee without notice.

United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd. [1968] 1 W.L.R. 74 referred to.

(2)      The nature or purpose of the “bonus” was clearly that of an incentive payment, being “something which an employee is entitled to on the happening of a condition precedent and is enforceable when the condition is fulfilled”.

Great Western Garment Co. Ltd. v. Minister of National Revenue [1947] Ex. C.R. 458 followed.

(3)      Accordingly, upon G.’s dismissal, the company was entitled to exercise its option and cancel the bonus for the year 1972 and the months of January and February, 1973.

(4)      Further the withdrawal of the moneys by G., without authorisation, in circumstances where he knew he was about to be dismissed and before any payment had been approved, amounted to a receipt of a benefit, at the appellant’s expense, in circumstances such that it would be unjust to allow him to retain the benefit.

Goff & Jones The Law of Restitution 1st ed. p. 14 referred to.

(5)      The appellant was entitled to succeed on the action for money had and received and the appellant’s counterclaim had no legal basis.

Appeal

This was an appeal in an action for money had and received in which the appellant company (plaintiff) sought to recover moneys, withdrawn without authority by the respondent employee (defendant) and in which the respondent counterclaimed for damages for wrongful dismissal and a bonus payable in respect of a contract of employment and in which the trial judge found for the respondent. Further facts and relevant argument appear in the joint reasons for judgment of Frost CJ and Saldanha J hereunder.

Counsel

D. G. McGregor Q.C. with him D. W. F. Libling, for the appellant (plaintiff).

J A. Griffin, for the respondent (defendant).

Cur. adv. vult.

15 September 1975

FROST CJ SALDANHA J: This is a case arising from a contract of employment between Breckwoldt & Co. (N.G.) Pty. Limited, a subsidiary of a German company based in Hamburg having extensive interests abroad, and Mr. Harold Gnoyke, 32 years of age, who had been employed by the German company during all his working life.

The appellant, Breckwoldt’s, is a company which conducts in Port Moresby and other main centres in Papua New Guinea the business of import agents, wholesalers for agency lines, and through its subsidiary Brewo Motors Pty. Ltd., agencies for the sale of Mercedes Benz and Volkswagen motor cars.

On 5th February, 1971, the parties entered into a contract whereby Gnoyke was to be employed as the manager of the Port Moresby branch for a period of 2 1/2 years, commencing approximately in July 1971. In fact Gnoyke had been working for Breckwoldt’s since early in the year, at Rabaul, and for the purposes of Gnoyke’s entitlement to a bonus, which is the particular matter in dispute, his employment was regarded as extending throughout 1971.

We shall now refer to the material provisions of the contract. Clause 4, headed “General obligations” so far as is relevant provides:

“The employee has to devote his entire working capacity and all his working hours to the firm, to protecting the interests and reputation of the firm as well as he possibly can ... The employee is also obliged to absolute honesty and respectable conduct ... The employee is not permitted to conclude any business for his own account or for the account of a third party or to offer his services as an intermediary in such business either directly or indirectly. He is not permitted within the scope of his work for the firm to negotiate any benefits for himself from a third party or to accept any such benefits.”

It is convenient next to refer to cl. 13 headed “Notice, dismissal, transfer”, the material portion being subparagraph (a), as follows:

“(a)    The contractual relation can be terminated in writing with or without notice by either of the contracting parties for any important reason. An important reason is given, for example, if one of the contracting parties neglects his obligations grossly.”

Clause 14 purports to impose a liability to pay a penal sum for certain breaches of contract. It is in the following terms:

“14     Breach of contract

The employee is obliged to pay a penal sum amounting to twelve monthly salaries if, without any important reason, he does not take up his position, commences his return journey prematurely or stops his work in the country of employment prematurely. Other damages may be claimed if the law applied does not provide for a penal sum to be paid.”

Provision for salary is contained in cl. 5 headed “Salary and other payments”. It provided that the employee was to receive a basic salary of $500.00 per month payable at the end of each month. It also made provision for a bonus as follows:

“The employee is also to receive the following during his period of employment at the place of employment: free accommodation, free use of a car, a bonus in accordance with the attached sheet.”

The bonus provision was contained in a separate document headed “Bonus Payment Sheet” which it is important to set out in full because the case depends upon the proper construction of this document. It is in the following terms:

“BONUS PAYMENT SHEET

additional agreement to the contract dated February the 5th, 1971 between

Breckwoldt & Co. (N.G.) Pty. Ltd., Rabaul/New Guinea and

Mr. Harald Gnoyke, Nienburg/Weser,

In accordance with par. 5 of the contract, Brewo herewith agrees to pay the employee a personal bonus at the following conditions for his work as a manager in Port Moresby.

1.       The bonus amounts to:

(a)      5% of the indent commissions of Brewo, Port Moresby

(b)      5% of the gross profit from the employee’s own business

(c)      5% of the gross profit from the workshops in Port Moresby (typewriter + radio).

The right to receive a bonus commences upon commencement of the employee’s work in Port Moresby and lapses upon termination of this work.

2.       The gross profit from the employee’s own business is given by the difference between purchases and sales after allowing for special items, losses (debts) and the depreciation of the stock in hand in accordance with business requirements.

Entries relating solely to tax matters are not taken into account when determining the gross profit which requires a bonus payment.

3.       The bonus can be cancelled completely or in part by Brewo if the employee is dismissed without notice in accordance with par. 13 of the contract or if he is guilty of a breach of contract in accordance with par. 14 of the contract.

4.       The bonus is calculated by the accounting section at the head office in Rabaul. Payment of the bonus is not permitted until checked and approved.”

The document was signed on behalf of or by each party in Hamburg on 5th February, 1971.

Turning to the facts of the case, on 19th October, 1971 Gnoyke took up his appointment in Port Moresby. He was provided with a house in Airvos Avenue, which he described as good accommodation and worth $100.00 a week in rent, and also a Mercedes Benz car, all running expenses being paid by Breckwoldt’s. Gnoyke seems to have been an efficient manager and was obviously well regarded by Mr. Sabert, the company’s general manger and director, who operated from Rabaul.

In August 1972, following approval by Sabert, Gnoyke received a bonus in the vicinity of $6,000.00 for the whole of 1971. It is material to note that Breckwoldt’s accounting period extends over the calendar year.

But unfortunately events occurred in the latter half of 1972, arising out of the conduct by Gnoyke of the agency for frozen food lines, which led in February 1973 to his dismissal without notice. It was part of the agreed facts at the trial that “prior to September 1971 the plaintiff (Breckwoldt’s) employed representatives whose duty it was, inter alia, to seek orders for foodstuffs which included frozen foods. Breckwoldt’s also received orders for foodstuffs, including frozen foods, from established customers by telephone. These orders were filled either through Australia or New Zealand. If they were filled through Australia, Breckwoldt’s Sydney office would purchase the goods; if through New Zealand the purchasing would become the responsibility of Wm. Scollay & Co. Limited. Breckwoldt’s purchases would be on indent basis; that is, the property in the goods would pass directly from the seller to the Papua New Guinea purchaser. On New Zealand sales Scollays would purchase the goods and the property would pass directly from Scollays to the Papua New Guinea purchaser; Breckwoldt’s acting as agent only. The agent customarily received a commission from the seller in such a situation and on New Zealand purchases this commission would be split 50/50 between Breckwoldt’s and Scollay’s.

In September 1971 Mr. Howard came to be employed by Scollay’s in Papua New Guinea. This resulted in two changes:

(1)      In Port Moresby, the primary responsibility for getting frozen food sales became that of Mr. Howard.

(2)      Scollay’s obtained a larger share of the commission than Breckwoldt’s on sales exceeding a basic figure.

Otherwise operations remained unchanged.

As it happened there were very real difficulties in the New Zealand trade due mainly to the apparently poor shipping service between that country and Papua New Guinea, the limited refrigerated space and delays caused by strikes. Orders were difficult to get because of the irregularity of arrival of ships. Howard was a young man who was very ready to rely upon Gnoyke’s undoubted business ability, good standing and experience in business in this country. The obvious solution to foster the New Zealand trade was to establish a freezer in Port Moresby. This subject was discussed between Mr. Robert Scollay and Sabert in Sydney in the middle of 1971 and later that year when Scollay came to Papua New Guinea and, in travelling around the country with Howard on a familiarization tour, had a further opportunity to discuss the matter in Rabaul with Sabert.

A further proposal was the formation of a company to act as a wholesaler in frozen foods which involved a departure from the existing agency basis. So far as the provision of capital was concerned, Scollay’s indicated it wanted the major interest. During the discussions in Rabaul, to Howard it appeared that Sabert was indifferent about the proposal. However, early in 1972 Howard made a feasibility study and in May 1972 Scollay’s became definitely interested in the establishment of a freezer. When Howard enquired at this time of Breckwoldt’s attitude, Gnoyke telephoned Sabert. The latter indicated however that Breckwoldt’s were temporarily experiencing tight liquidity and could not contribute in any way financially, and appeared disinterested. At this stage Howard suggested that Gnoyke might be interested to take up a share, but Gnoyke would not commit himself.

When in July 1972 Gnoyke, pressed by Howard, took up the matter again, Sabert suggested that Gnoyke write to Mr. Hoertelmann, the company’s managing director, who was based in Hamburg. The proposal then put by Gnoyke in a letter to Hamburg dated 31st July, 1972 was for the purchase of a freezer, the price discussed being $50,000.00 with a suggested participation by Breckwoldt’s of 10% to 20% of the capital. But if the capital was to be raised by loan, each of the parties would be required to guarantee repayment of the entire sum. Gnoyke’s advice was that a properly-run freezer could be profitable but only with a high element of risk. A copy of the letter was sent to Rabaul also, but despite Gnoyke’s request for specific instructions no reply was received from either centre.

Then, without informing Breckwoldt’s, although without any attempt of concealment, as the trial judge put it Gnoyke himself personally joined forces with Scollay and Howard, and a company called Pacific Frozen Foods Pty. Ltd. was formed. Gnoyke became a subscriber to the Memorandum and Articles of Association. He also became a director.

At the first meeting of directors on 10th October, 1972 he received an allotment of ten $1.00 shares, being one-third of the allotted share-holding, the remainder being divided equally between Howard and the Scollay’s group. But it is important to note that the enterprise went ahead on a completely different basis, for instead of finding funds for the purchase of a freezer an existing freezer was leased at the rate of $500.00 per month. The only other financial provision required of Gnoyke was a loan to the company of $750.00.

To refer again to the agreed facts, the incorporation of Pacific, which occurred in October 1972, had no effect on the method of Breckwoldt’s operation. At first it became a customer of Breckwoldt’s, purchasing its stock through that company and also Scollay’s. This continued until February or March 1973 when the dispute between Breckwoldt’s and Gnoyke had arisen. Pacific from the beginning employed representatives whose duty it was to obtain sales of frozen food in Port Moresby but not on an indent basis. It also had an employee at the freezer able to handle over the counter sales of frozen food.

In fact Breckwoldt’s gained substantially from the increasing profitability of Pacific for whose purchases it continued to receive a commission but, as the trial judge found, there was a potential conflict of interest. Indeed it went further as Pacific’s increasing retail sales obviously presented inroads on the market, and thus competition with Breckwoldt’s.

After the incorporation of Pacific, Gnoyke continued as director. The actual work he did seems to have taken up a minor part of his time being confined, he said mainly outside office hours, to making out some receipts, conducting the banking and taking odd telephone calls. It was Howard who really ran the company. Gnoyke’s most valuable contribution so far as Pacific was concerned seems to have been his role as adviser to Howard.

Matters came to a head on 8th February, 1973 when Hoertelmann arrived in Port Moresby on a routine visit. Upon enquiry from Howard about the freezer proposal he leant for the first time of the incorporation of Pacific and Gnoyke’s participation in it.

From the beginning he regarded the matter as a serious breach of his obligations by Gnoyke and became aggressive in his attitude. On 10th February, 1973 he demanded that Gnoyke sign a paper acknowledging that he held the Pacific Frozen shares on behalf of Mr. Breckwoldt. Gnoyke was told that if he did not sign the paper the 1973 bonus would be stopped.

On Monday, 12th February, after further threats Gnoyke, who maintained his refusal to sign the paper, took the high-handed action of going to the Bank and withdrawing from Breckwoldt’s account $9,000.00. He arrived at this sum after calculations from company documents which satisfied him that it was less than the amount of bonus for the year 1972 which he considered he was entitled to. Although he had general authority to draw cheques, as there was no calculation checking or approval of the bonus as required by the Bonus Payment Sheet, this withdrawal was plainly without authority as Gnoyke himself conceded, nor was it maintained to the contrary in this Court.

On the following day Gnoyke was suspended from his employment. Upon his return from a pre-planned holiday in Australia he received a letter dated 28th February, 1973, terminating his services without notice as from that date. The reasons for the dismissal were stated to be twofold: first, that in contravention of cl. 4 of the contract he had concluded business with Pacific and, secondly, that in contravention of par. 4 of the Bonus Payment Sheet he had withdrawn monies which purported to be a bonus payment for 1972. The return of this latter sum was required.

On 22nd May, 1973, Gnoyke was sent a telegram confirming that his services were terminated for an important reason, and that his entitlement to a bonus was cancelled. It is material to mention, because Breckwoldt’s sought at the trial to rely on this matter also, that in the letter of dismissal Gnoyke was required to return a Volkswagen car which belonged to Breckwoldt’s and which, early in 1972, Gnoyke had made available to his wife for her own use. Actually Sabert was aware of the use of this car and in June 1972 instructed Gnoyke to charge it to his own account at the value stated in the company’s books, but Gnoyke ignored the instruction. However, the trial judge found that it did not constitute an important reason within the meaning of cl. 13 (a) for dismissing Gnoyke.

Breckwoldt’s then took proceedings claiming $9,000.00 as money had and received by Gnoyke to its use, the defence being set up by Gnoyke that the money was received by him as due under the contract of employment, and further that it was not recoverable as it would amount to the enforcement of a penalty. A counter-claim was also set up claiming damages for wrongful dismissal and the full amount of the bonus.

Although the contract was made in Germany, it was accepted by both parties that the law of the contract was the law either of Papua or New Guinea, and hence the common law in force in England so far as the same is applicable to the circumstances of Papua New Guinea. However, there are no circumstances which would lead us to any conclusion but that the common law is applicable, and indeed it was not argued to the contrary.

During the trial in the Supreme Court it was agreed that the sum, if any, to which Gnoyke was entitled by way of bonus was $9,975.00 for 1972, and for the months of January and February 1973, $1,665.00, being $11,640.00 in all. The trial judge upheld Gnoyke’s defence to the claim, dismissed the counterclaim so far as it related to damages for wrongful dismissal, but gave judgment thereon for $2,640.00 being the balance of the bonus to which he found that Gnoyke was entitled.

The trial judge held that the bonus was not a bonus in the sense of a gratuity but was recoverable as an additional salary payable monthly as in the case of salary under the contract, that cl. 4 of the Bonus Payment Sheet amounted to a penalty, and that to allow the claim for money had and received would amount to a “back door” attempt to enforce such a penalty.

Breckwoldt’s then appealed to this Court against the dismissal of the action and the judgment for the defendant upon the counterclaim. There was no appeal by Gnoyke. Thus the trial judge’s findings, that Gnoyke was by reason of his participation in Pacific in clear breach of cl. 4 of the contract, and that that breach was of sufficient seriousness to warrant his dismissal without notice, are not challenged.

In reaching his basic conclusion that the bonus was additional salary the trial judge adopted a passage from the judgment of Kitto J in Attorney-General of the Commonwealth v. Schmidt and Others (No. 3)[ccli]¹. That was a case in which a claim made on behalf of a manager and woolbuyer for a bonus which he had received annually for many years past failed on the ground that the evidence did not establish that the payment of the bonus was obligatory upon the employers. The passage is the first sentence of the longer statement of the law by his Honour which we set out in full:

“... The difficulty is that the annual payments made to Mr. Weissflog are described by everyone, including himself, as bonuses; and although the word ‘bonus’ is sometimes used as the designation of a payment received as additional remuneration paid under a contract of employment at the end of a year as distinguished from the regular payments of wages or salary paid during the year, it is probably more generally used to designate a gratuitous addition to contractual remuneration. No doubt is a business employing a staff over a period of years it can happen that what has begun as a gratuitous payment may come to be regarded by both employer and employee, being repeated year after year, as one of the incidents of the employment; and if employment (including promotion) is accepted on the footing that it will be continued at a fixed rate or on a fixed scale a binding term of the employment to that effect may be inferred.”

The basis of the trial judge’s conclusion that the bonus was “true” salary and not a gratuity was that the two agreements being closely linked must be read together, particularly because of the words of cl. 5 of the contract of employment, and also by reason of par. 3 of the additional agreement, for it invoked cl. 13 and cl. 14 of the original contract. The same reason, that is by a combination of par. 3 of the additional agreement and cl. 13 of the main agreement, led his Honour to the view that the cancellation provision of the additional agreement was a penalty and not a genuine pre-estimate of damage. It is important to note that the only breach of contract his Honour had in mind was a breach under the contract of employment.

In this Court the appellant’s case was argued differently. A distinction in the contractual position was put based on a citation referring to a contract upon a condition, to be found in the definition of “bonus” in Stroud’s Judicial Dictionary, 4th ed., Vol. 1, p. 306 and, in written submissions exchanged after the hearing, on a decision of the Court of Appeal in United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[cclii]². The passage from Stroud’s Judicial Dictionary, after referring to the definition of “bonus” as given in the New English Dictionary, viz. “a boon, or gift, over and above what is nominally due”, cites the Canadian case of Great Western Garment Co. Ltd. v. Minister of National Revenue[ccliii]³, which is not available to us, as follows:

“It may be a mere gift or gratuity as a gesture of goodwill, and not enforceable, or it may be something which an employee is entitled to on the happening of a condition precedent and is enforceable when the condition is fulfilled. (per O’Connor J).”

Appellant’s counsel used this authority to found an alternative argument that the bonus was payable only on a condition which was not fulfilled.

The decision in United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[ccliv]⁴ is important because it is based upon the distinction between unilateral contracts subject to a condition and bilateral contracts. (Instead of using the term “bilateral”, Diplock LJ preferred the term “synallagmatic”, an expression which he borrowed from French Law (Code Civile Articles 1102, 1103) because there may be more than two parties). Thus the appellant contended in a similar argument that the obligation to pay was subject to a condition which was not complied with.

As we apprehend this case there are two issues only: first, whether Gnoyke became entitled to the bonus as a contractual right and, secondly, whether par. 3 of the additional agreement was a penalty “designed as mere security for the performance of the contract” — Law of Contract, Cheshire & Fifoot, 3rd Australian ed., p. 739. If it was not a penalty then it is clear, and it was not argued to the contrary, that Breckwoldt’s were entitled to recover under the claim for money had and received, for in appropriating to himself Breckwoldt’s money without authority Gnoyke enriched himself at their expense in circumstances such that it would be unjust to allow him to retain the benefit — The Law of Restitution (Goff & Jones), p. 14.

To narrow the case even further, although counsel’s arguments ranged over a wide field, in our opinion the case turns upon the proper construction of the contract of employment and the additional agreement, and the legal analysis of the material provisions including the provision for cancellation contained in the additional agreement.

Notwithstanding the reference in the cancellation provision of the Bonus Payment Sheet to cl. 13 and cl. 14 of the contract of employment, in our opinion the additional agreement contains the complete statement of the terms upon which the bonus is to be payable. We consider that this is the proper conclusion having regard to the words in cl. 5 that, “The employee is also to receive the following during his period of employment at the place of employment: free accommodation, free use of a car, a bonus in accordance with the attached sheet.”, and the omission of any specific provision, as was made in the case of salary, for the period in respect of which payment of the bonus was to be made. However, for a reason which it is convenient to refer to later, the contrary conclusion that the two agreements should be read together would not determine the case differently.

Turning now to the significance in law of the term “bonus” as used in the Bonus Payment Sheet, whilst there are indications in that sheet that the bonus was a gratuity, particularly the discretionary nature of the provision that the bonus could be cancelled completely or in part, and the provision that payment was not to be permitted until checked and approved, there are indications also to the contrary, and on the whole we consider that the document imposes a legal obligation on Breckwoldt’s.

Before we consider the nature of this obligation two points at the outset require consideration, the first being as to the time when the bonus became payable. We are unable to agree with the trial judge that the bonus was payable monthly. In our opinion it follows from the provision in the Bonus Payment Sheet that portion of the bonus was to be calculated upon profits from the businesses referred to, and the express reference to the allowance to be made for special items, bad debts and depreciation of the stock in hand, that the calculation could only be made over an accepted accounting period. In our opinion it is irrelevant that Breckwoldt’s regular accounting practice was to calculate each invoice as to profit and loss on the same day as the invoice was drawn, and it was not suggested that the bonus was payable daily. Our conclusion is that this is one of the usual type of cases referred to by Kitto J in Attorney-General of the Commonwealth v. Schmidt and Others (No. 3)[cclv]⁵ in which the bonus is payable annually after the expiration of the financial year, here the calendar year.

The second point relates to the provision for cancellation. Mr. Griffin, counsel for the respondent, argued that if the words in the third paragraph are given their literal meaning the receipt of the bonus by the employee would be haphazard depending upon whether the payment was made promptly by Breckwoldt’s or delayed. The basis of the argument can be expressed in the words of Lord Reid in Schuler (L.) A.G. v. Wickman Machine Tool Sales Ltd.[cclvi]⁶:

“The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.”

The question is, what was the date when the bonus became payable if at the end of the calendar year Gnoyke had not been dismissed without notice. The effect of par. 4 of the Bonus Payment Sheet is relevant upon this question.

As counsel for Breckwoldt’s conceded, approval could not be withheld if it appeared that Gnoyke had not been guilty of any conduct which the employer was entitled to treat and did so treat as a ground for dismissal. But in our opinion par. 4 is designed to provide that the right to a bonus does not automatically arise immediately upon the expiration of the financial year. The employer is to be given time to have it calculated, checked and approved in the sense referred to. No doubt a term is to be implied that the steps leading to approval should be completed within a reasonable time, but on the evidence of Gnoyke a reasonable time would not have expired before April 1973 in relation to a bonus for the period covered by the calendar year 1972.

Further, it may well be that if after the end of the year the employee called on the employer for payment of the bonus, after the effluxion of a reasonable time thereafter, which could not be less than three months, unless disapproved on proper grounds the bonus would become immediately payable.

In the circumstances of this case it is not necessary to go further into the analysis of the consequences of such implied terms. It is sufficient to say that the reasonableness or otherwise of the construction of par. 3 contended for by the appellant’s counsel, which would allow cancellation upon proper grounds in respect of any unpaid bonus covering the period up to the date of dismissal without notice, is to be considered in the light of the purpose of the bonus which is clearly that of an incentive payment. Taken subject to the legal qualifications stated, in our judgment it cannot be said that such a construction, which is the natural meaning of the words used, is unreasonable, and we adopt it as correct.

These matters lead us to the nature of the legal obligations contained in the Bonus Payment Sheet. The express agreement on the part of the employer to pay the bonus is supported, to use the words of Kitto J, as “an incident of the employment”. But as was forcefully pointed out by counsel for the appellant the agreement is stated, in translation, as being “at (which we would take to mean “upon”) the following conditions”, which are set out. The question whether the contract is a bilateral or unilateral one at once arises.

As stated earlier this distinction is brought out in the case of United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[cclvii]⁷ already cited. There the Court of Appeal had to consider a repurchase undertaking made by the defendants who sold aircraft to a finance company, which in turn let the aircraft on hire purchase agreements to another company, repayment being made over a period by monthly instalments. A condition that on termination of a hire agreement the finance company should call on the defendants to repurchase was held to be a condition precedent, which imported by necessary implication the requirement that the call should be made within a reasonable time of the termination. As on the facts the call to repurchase was not made within the period held to be a reasonable time, the condition had not been fulfilled, and the obligation on the defendants to repurchase did not arise and could never arise.

Denning LJ referred to the contract as follows:

“... It has been shown, quite correctly, that the agreement to repurchase was not an ordinary bilateral contract. It was a unilateral contract of a kind which does not become binding on both sides until a condition precedent has been performed. It is like a lease in which the lessee is given an option to renew the lease for a further term. Such a lessee usually covenants to keep the premises in repair during the term: and he is given an option to renew if he gives notice six months before the end of the term and duly performs all the covenants to repair. In order to exercise the option, the lessee must give the notice in the specified time and he must fulfil the covenants to repair according to their terms. He is not entitled to excuse himself by saying that the want of repair is trifling ... In point of legal analysis, the grant of an option in such cases, is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.” United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[cclviii]⁸.

Diplock LJ described unilateral contracts in somewhat wider terms whereby “one party, whom I will call ‘the promisor’, undertakes to do or to refrain from doing something on his part if another party, ‘the promisee’, does or refrains from doing something, but the promisee does not himself undertake to do or to refrain from doing that thing” (at p. 83)[cclix]⁹. But the learned Lord Justice agreed that the obligation to repurchase never arose because of the non-occurrence of the event of the finance company calling on the defendants to repurchase within a reasonable time, which is reasoning appropriate to describe the non-fulfilment of a condition precedent.

Turning to the present case, so far as any obligation on the part of the employee is concerned the only portions of the Bonus Payment Sheet from which an obligation to do anything on his part could be inferred are the words used in relation to the agreement to pay the employee the bonus “for his work as manager”, and the words of par. 3. However, the former words are concerned in our opinion merely further to identify the employer’s obligation, and are not apt to create any additional obligation on the part of the employee. The same applies to par. 3. Also in view of the detailed statement of the employee’s obligations in the main contract, in our opinion the parties could not have intended to duplicate them in the Bonus Payment Sheet. The Bonus Payment Sheet thus provides only a unilateral obligation on the part of the employer.

The crucial question next is whether par. 3 is to be construed on the one hand as either liquidated damages or a penalty, or on the other as a condition governing the payment of the bonus. In our opinion the issue of liquidated damages or penalty does not arise at all for the parties did not have in contemplation either a genuine pre-estimate of damages for breach or the enforcement in terrorem of the contract of employment.

In his helpful written submission after the hearing counsel for the respondent argued that the power to forfeit an accrued bonus was penal in character since it operated in terrorem rather than as an estimate of damage. But this is not the proper test. The distinction depends on the intention of the parties, although of course the inherent circumstances of each particular contract and the effect of its clauses are to be taken into account. This appears quite clearly from a passage from the judgment of Lopes J in Law v. Redditch Local Board[cclx]¹⁰ cited by Cheshire & Fifoot at p. 738. The passage is as follows:

“... If the intention is to secure performance of the contract by the imposition of a fine or penalty, then the sum specified is a penalty; but if, on the other hand, the intention is to assess the damages for breach of the contract, it is liquidated damages.”

When one turns to the main contract it is clear that so far as concerns the termination of it by notice or dismissal, the transfer of the employee to prior employment, the provision of either a penal sum or damages in cases of certain classes of breach of contract, these matters are dealt with in full therein. In our opinion, taking into account all the circumstances, the intention of the parties, which is to be gathered from the words used, was not to return in the Bonus Payment Sheet to the subject of the breach of the main contract and make further provision in relation to it by way of penalty or otherwise, but rather to deal with the conditions for the payment of the bonus.

In the light of these considerations the bonus payment sheet is, in our opinion, to be construed as a unilateral contract in which the employer’s obligation to pay the bonus is subject to a condition. In the United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services[cclxi]¹¹ the condition was construed as a condition precedent.

In English law the word “condition” has no single meaning. But in their true meaning conditions “are the terms which specify the contingencies upon which the obligee may require of the obligor performance of the obligation” (Salmond & Williams on Contracts, second ed., p. 43). Whether a condition is to be construed as a condition precedent to an obligation to pay or as a condition subsequent so that the obligation is discharged if a contingency occurs, is not a matter of substance but only of form. (Salmond & Williams on Contracts, second ed., pp. 49-50). The distinction is relevant only as to onus of proof (ibid.). A condition may be expressed in the form of conferring an option to cancel the contract or the obligation. Head v. Tattersall[cclxii]¹².

Looking at the language used in the Bonus Payment Sheet, we are of opinion that the words in par. 3 are apt to create a condition subsequent whereby the employer is given the option to cancel the obligation to pay upon the event specified occurring, viz. the dismissal, if justified, of the employee without notice. The fact that the event occurs only upon the volition of the employer to exercise his right to dismiss the employee if he becomes so entitled under cl. 13 or cl. 14 of the main contract does not take the event out of the category of a contingency because for the reasons we have stated that paragraph does not involve any further contractual obligation on the part of the employee. The mere refraining by the employee from conduct entitling the employer to dismiss him without notice was the occurrence of the event specified in the contract for the employer’s obligation to pay to become indefeasible. Upon Gnoyke’s dismissal it accordingly followed that Breckwold’s was entitled to exercise its option and cancel the bonus, not only in respect of the year 1972 but also for the period January and February 1973.

It is at this point relevant to point out that the same result would follow if the two arguments were read as one, because the agreement to pay the bonus would then be construed as a unilateral obligation amongst a set of bilateral obligations. As Diplock LJ points out, both bilateral or synallagmatic obligations and unilateral obligations “are often contained in a single agreement, as where a lease contains an option for renewal” — United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[cclxiii]¹³.

It follows from our reasoning that the concept of penalty has no application to this case. We thus find it unnecessary to deal with the submission by the appellant’s counsel based on the lack of approval under the fourth condition, or with the other interesting submissions which were put forward by counsel. In the view we have taken of the case it is also irrelevant that Breckwoldt’s took independent actions for damages for breach of contract arising from Gnoyke’s involvement with Pacific and the use by Gnoyke of the Volkswagen car, both of which were subsequently settled. It was not suggested that those settlements constituted a bar to the present proceedings. Also we were not assisted by reference to the amount of the bonus as compared with a salary supplemented as the bonus was by the provision of accommodation and the use of a car.

For all these reasons the appellant was entitled to succeed in the claim for money had and received and the appellant’s counterclaim for balance of bonus has no legal foundation.

The appeal will be allowed. The judgment for the defendant on the claim and counterclaim will be set asside and in lieu thereof judgment will be entered for the appellant on the claim for $9,000.00; there will also be judgment for the appellant on the counterclaim.

PRENTICE SPJ: Minutely detailed and complicated argument has been presented in this appeal. But in the upshot, in my opinion, the real decision turns upon a few points only. The facts are set out in the judgment of his Honour the Chief Justice, which I have had the great advantage of reading. I do not need to re-capitulate them.

It is necessary for this Court to decide firstly whether the sum of $9,000 representing the appellant’s monies, which were without its authorization, withdrawn from its bank account by the respondent (defendant) and appropriated to his own use against a claimed entitlement to a “bonus”; may be recovered on a money had and received count. And secondly it is for the Court to decide whether the respondent’s counter-claim for $11,640 in respect of the said bonus, shall be allowed.

No question remains afoot as to the gross impropriety of the respondent’s behaviour and as to the appellant’s right to dismiss him when it did — because the trial judge’s resolution of these matters is unchallenged.

At the trial, in which the respondent (defendant) succeeded both on claim and counter-claim, it seems to have been assumed that either the plaintiff or the defendant must win both claim and counter-claim; accordingly it was conceded that the defendant should give credit for the $9,000 he had already received against the counter-claim being successful. It does not seem to have been contemplated that a third possibility existed, namely that the plaintiff might be entitled to succeed on the claim and the defendant on the counter-claim — in which event the defendant would be in pocket only $2,640, unless the concession as to the $9,000 were withdrawn.

WHAT WAS THE NATURE OF THE “BONUS”? HOW DID IT ACCRUE?

His Honour the trial judge found in effect that the Contract of Service Exhibit A was to be read with the “Bonus Payment Sheet”. (Also, seemingly, marked Exhibit A). These documents make mutual reference to each other, and in my opinion, they are inter-dependent. His Honour also found that their combined effect was to provide nominally for a “bonus” which was in reality additional salary. He proceeded to the conclusion that this additional salary “was customarily paid yearly but actually payable monthly”. Presumably he felt drawn to this conclusion by the fact that the basic salary of $6,000 was payable on a monthly basis. It was agreed that prior to the dispute, there had in fact been a payment of “bonus”, that was obviously calculated on a calendar year’s past trading.

The “Bonus Payment Sheet” herein requires that in the calculation of any bonus entitlement, gross profits are to be referred to, and allowances made for “special items, losses (debts) and the depreciation of the stock in hand”. I cannot conceive these calculations as possibly referable to any other than a normal accounting period. Construed in the light of the requirements of cl. 4 as to calculation, checking, and approval, these provisions militate effectively against any contention that a bonus entitlement was computable and accrued as a vested entitlement, monthly. With respect therefore, I am unable to agree with his Honour the trial judge’s conclusion in this regard. It seems to me that the natural interpretation is that any entitlement there was to a bonus was to be one payable (on conditions) at the conclusion of service; and that the payment in fact of a “bonus” some months after the conclusion of a calendar year of service is to be regarded as a practical concession, of mutual convenience. In disagreeing, as I do, with the trial judge’s conclusion that the bonus was really additional salary (expressed on a different basis) accruing monthly, as was his cl. 5 salary, I have had regard to the fact that the basic salary of $6,000 p.a. was linked with the use of a Mercedes car for which petrol and oil and repairs were paid (a service which to some extent may be valued by reference to the $15 per day it would cost to hire such a car) and a house on Airvos Avenue (worth $100 per week) provided rent free. These emoluments together constitute a substantial salary, having regard to the lower incidence of tax in Papua New Guinea.

To my mind, a study of the documents produces a clear impression that the provisions regarding a bonus were intended to do more than provide a mere “gratuitous addition to contractual remuneration” (Kitto J in Attorney-General of the Commonwealth v. Schmidt and Others (No. 3))[cclxiv]¹⁴. But on the other hand, I do not think they set up the provision of “additional remuneration paid under a contract of employment at the end of a year as distinguished from the regular payments of wages or salary during the year,” (Kitto J’s other category of “bonus”, in the same case). Rather do I see it as an incentive payment of the description envisaged in Canada by O’Connor J (Great Western Garment Co. Ltd. v. Minister of National Revenue)[cclxv]¹⁵ adopted by Stroud as a further definition of “bonus” viz. “something which an employee is entitled to on the happening of a condition precedent and is enforceable when the condition is fulfilled”.

CAN IT BE SAID THERE WAS A PRESENT ENTITLEMENT AS AT FEBRUARY 1973 (WHEN THE CHEQUE WAS DRAWN)?

Apparently the respondent began work in Port Moresby in October 1971 under the disputed contract. It is not clear from the evidence — but it seems that earlier in 1971 prior to going on leave he had been employed by the appellant in Port Moresby in a different capacity. At any rate he was paid in August 1972 the previously mentioned bonus for the year 1971 — the Company’s accounting being referable to the end of that calendar year. I would be satisfied that, short of any new feature having appeared, the respondent could not have looked for a bonus payment (assuming it was again agreed to pay it as an annual increment) till well into 1973 — the month of April was suggested. Certainly therefore no entitlement could be seen to have vested at the time of the drawing of the cheque, on the view I take of the nature of the agreements between the parties. This is apart from the question as to the necessity for calculation in Rabaul, checking, and approval of its payment. There is no suggestion that any of these processes had been gone through.

I should go on to say that I understand the bonus to have been agreed to become payable on the happening of various conditions precedent viz. (1) the non-dismissal of the employee, (2) no gross breach of the employee’s duty having occurred such as to warrant disentitlement, (3) calculation and checking of the entitlement, and (4) approval of its payment. It seems to me that approval of payment was being stated as a necessary part of the machinery of entitlement precisely so that under this step in the process, opportunity would be given the employer to consider whether satisfactory behaviour had been exhibited. This does not appear to me a strained construction. If it not be come to, the connotation of approval, the word “approved” in cl. 4, would appear tautologous. No doubt, an entitlement to bonus could be considered as vesting, (provided no employee’s breach appeared), after a reasonable period elapsing from computation.

As I see it, even if it be assumed that a bonus was calculable annually, no such lapse of time appears as to suggest a vesting of entitlement (c.f. the April payment of the previous year) by February when this employee (the respondent) took precipitate action to get possession of company funds. Nor when action was brought. There is no suggestion that there had been a calculation, a checking and an approval (express or implied).

It was argued that an interpretation of cl. 3 that would allow uncertainty of vesting of a right to bonus should be regarded as unreasonable. I do not find it such. It seems that the legal position may also (as an alternative) be viewed from the position outlined by Denning M.R. and Diplock LJ (as he then was) in United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd.[cclxvi]¹⁶. Therein the notion of what has been called (in which to my mind, with respect, is a contradiction in terms) “a unilateral contract”, existing inside a “bilateral contract” (“synallagmatic contract”) has been explored. “Obligations of these two different kinds are often contained in a single agreement”, Diplock LJ said (at p. 84); the “unilateral contract” coming into operation upon the happening of conditions which cause the promisor to become bound.

Apart then from any right to raise a defence of an equitable nature, it would seem that the withdrawal of these monies, without authorisation, when the respondent was plainly in gross breach of his contract and about to be discharged, when he was in the very process of further acting most reprehensibly and in breach of duty, and before any payment had been approved; — clearly amounted to the receipt of a benefit, at the appellant’s expense, in circumstances of the kind that would render it unjust to allow him to retain that benefit (Goff & Jones Law of Restitution (1st ed.) p. 14); such being conduct that would support the action for money had and received under the philosophy currently supporting an action of this kind.

PENALTY — RELIEF AGAINST FORFEITURE?

The respondent contended that any cancellation of bonus provided for by the contract must be construed as a penalty, and that this Court should give effect to the rules against forfeiture so as (1) to set up a defence to the money had and received claim; and (2) to negate any defence to the counter-claim.

This is a difficult realm of the law. It seems that there must inherently be difficulties in applying rules designed to meet claims for payment of stipulated penalties (actions for enforcement) where the relief doctrine is used as a shield; to contracts of personal service providing for withholding of sums alleged due, when the doctrine comes to be used as a sword so to speak — to strike down a defence.

On principle it seems to me that if accrued wages may be forfeited on dismissal for misconduct provided that they may be regarded as liquidated damages (Friedman Modern Law of Employment at p. 484); a fortiori incentive payments beyond ordinary wages may be capable of being withheld for proper reasons.

In considering whether any question of penalty fairly arises here; one notes firstly that this is not a claim for a sum expressed to be payable for non-performance. Nor can it be said I think that the provision for “cancellation” of bonus was intended by the parties to amount to a pre-estimate of damage likely to be caused by a breach. The nature of the employment of the respondent and of the business in which the appellant engaged, were such that it might well have been impossible for the parties to have foreseen what measure of damage could be caused by misconduct on his part. Provisions were made by the contract which were expressed as “Penal” (cl. 14, cl. 15); and which I think would be construed in favour of the employee as “penalties”. But the cancellation of bonus provisions, in the setting of this whole contract, do not to my mind raise an “in terrorem” picture. The loss involved in a cancellation of entitlement could not be said to be extravagant and inconsiderable in amount, in comparison with the greater loss that could conceivably be proved to have followed from the breach (Dunlop Pneumatic Tyre Company, Limited v. New Garage and Motor Company, Limited[cclxvii]¹⁷ — Lord Dunedin’s first consideration, at p. 86). The events which could disentitle to a bonus are not trifling matters — but gross breach of obligations. In considering whether a provision amounts to a penalty the intention of the parties is to be looked at (Cheshire & Fifoot at p. 738). The parties here do not seem to have viewed the “cancellation” of bonus as liquidated damages for a breach of contract. Such a provision was indeed sought to be made expressly by cl. 14 and cl. 15 of the contract. Rather was it their intention, I construe, to make clear upon what conditions the additional incentive “bonus” would be paid.

Overall, I consider the “cancellation” provisions, properly understood, not to relate to cancellation of an entitlement to reward which had already vested; but to the measurement of fulfillment of conditions such as would complete an obligation to pay. Nevertheless, as I mentioned above, I would concur with the Chief Justice’s expression of opinion that if there had been no gross misconduct or dismissal of the employee, the employer here, could not have postponed indefinitely the employee’s right to a bonus merely by not completing his approval. The law would, I feel, import a necessity to give approval within a reasonable time.

For these reasons I consider the respondent not to be entitled to the application of any equitable doctrine flowing from that of relief against forfeiture. I would allow the appeal, and order judgment be entered for the appellant both on the claim for money had and received and on the counter-claim.

Appeal allowed. Judgment for the defendant on the claim and on the second claim of the defendant’s counter-claim set aside, and in lieu thereof order that judgment be entered for the plaintiff on the claim for $9,000.00 and that judgment be entered for the plaintiff on the second claim of the defendant’s counter-claim.

Solicitors for the appellant: Craig Kirke & Wright.

Solicitors for the respondent: McCubbery Train Love & Thomas.

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[ccli][1963] HCA 12; (1963) 109 C.L.R. 169, at pp. 172-173.

[cclii][1968] 1 W.L.R. 74.

[ccliii][1947] Ex. C.R. 458.

[ccliv][1968] 1 W.L.R. 74.

[cclv](1963) 109 C.L.R. 169.

[cclvi][1973] UKHL 2; [1973] 2 W.L.R. 683, at p. 689.

[cclvii][1968] 1 W.L.R. 74.

[cclviii] [1968] 1 W.L.R. 74, at p. 80.

[cclix][1968] 1 W.L.R. 74.

[cclx][1891] UKLawRpKQB 219; [1892] 1 Q.B. 127, at p. 132.

[cclxi] [1968] 1 W.L.R. 74.

[cclxii](1871) L.R. 7 Exch. 7.

[cclxiii] [1968] 1 W.L.R. 74, at p. 84.

[cclxiv][1963] HCA 12; (1963) 109 C.L.R. 169, at p. 173.

[cclxv][1947] Ex. C.R. 458.

[cclxvi][1968] 1 W.L.R. 74.

[cclxvii][1914] UKHL 1; [1915] A.C. 79.