Leiola Group Ltd v Moengangongo [2010] TOCA 10; AC 26 of 2009 (14 July 2010)

IN THE COURT OF APPEAL OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY APPEAL

NO. AC 26 of 2009

BETWEEN:

LEIOLA GROUP LIMITED
Appellant

AND:

FOLOLINA MOENGANGONGO
Respondent

Coram: Ford CJ
Burchett J
Salmon J
Moore J

Counsel: Mrs Stephenson for the Appellant
Mr C Edwards for the Respondent

Date of Hearing: 5 July 2010
Date of Judgment: 14 July 2010.

JUDGMENT OF THE COURT

[1] This is an appeal by Leiola Group Limited (the Leiola Group) filed on 13 July 2009. The appeal is from a decision of Shuster J of 5 June 2009 upholding a claim by Ms Moengangongo, the respondent, for wrongful dismissal from her employment with the appellant. On that day his Honour published extensive reasons for reaching the conclusion that the dismissal had been wrongful. The formal judgment awarding damages in the sum of $50,000 was given by his Honour in Chambers on 10 July 2009 though no further reasons were published.

BRIEF FACTS AND BACKGROUND

[2] The appellant is a company which runs a Duty Free Shop at the departure lounge of the Fua'amotu International Airport. The respondent commenced working for the appellant in May 2002. In November and December 2006 the respondent was employed as the officer in charge of the shop and was responsible for the day to day management, supervision of locally employed staff and the security and safety of all stock. In November 2006 there were stock shortages amounting to $393.80 and in December 2006 stock shortages amounting to $1919.00. These sums were repaid by the respondent. However she was demoted and her salary was reduced from $11,544.00 to $8,516.00.

[3] On 30 December 2006 the receipts for the day's cash sales ($7,112.00) were counted by the respondent and another member of staff in the presence of an employee, Mr Kivalu Tu'iono from the appellant's head office. The money went missing. On 17 February 2007 the respondent was suspended on full pay. On 22 June 2007 she was dismissed. The police report, which found there was insufficient evidence to charge the respondent, was not received by the appellant until 29 August 2007.

DECISION OF THE TRIAL JUDGE

[4] In reasons published on 5 June 2009, Shuster J found that the Leiola Group wrongfully dismissed the respondent from her employment as an accounts clerk on 22 June 2007. The issue of damages was reserved to allow negotiations for settlement over the respondent's reemployment within the company. Based on the evidence, Shuster J concluded that the plaintiff could not be regarded as dishonest.

[5] His Honour found that there was a valid contract of employment the terms of which were contained in the Conditions of Service Manual which was in evidence (the Manual). His Honour held expressly that these conditions formed part of the respondent's contract of employment and that the respondent had had full knowledge of them. At page 13 of the judgment, Shuster J, observed that "the status of the defendant [the Leiola Group] as a public enterprise is defined by law" apparently because the Leiola Group repeatedly described the company as a private company registered under the Companies Act.

[6] In relation to the two stock shortages for November and December 2006, his Honour found that the respondent was significantly penalized and a proper affordable payments schedule should have been considered by the Leiola Group to afford natural justice. In accordance with the terms of the procedures in the Manual, an internal investigation was held into the loss of the takings for 30 December 2006. His Honour concluded there was no requirement in the Manual for the Leiola Group to wait for the police report before terminating the respondent's employment. However Shuster J found this action imprudent, particularly as the respondent was a long term employee of over 5 years. His Honour questioned whether the General Manager of the Leiola Group was informed of all the facts and whether the procedures adopted were fair. Shuster J concluded that the investigation should have been entrusted to another staff member.

[7] His Honour accepted the respondent's evidence in its entirety and found as a fact on the evidence and admissions of the appellant that the takings for 30 December were handed to Mr o Mr Tu'iono by the respondent. His Honour concluded the respondent could not be held responsible for the loss of the $7,122.00 and should not have had to repay this sum becthe loss "...must lie elsewelsewhere – most likely in the hands of Kivalu Tuiono – or others – at the company Head Office." This sum, in his Honour's opinion, was unlawfully deducted by Leiola. The company was held to have acted unreasonably and reference was made by his Honour to Koloa v Helu [1999] TLR 227 and Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1KB 223.

GROUNDS OF APPEAL

[8] In its appeal, the appellant challenges the:

(1) finding that the respondent was wrongfully dismissed from her employment with the appellant;

(2) the procedure of the trial judge to reserve the issues of damages to permit the parties to negotiate a settlement over the respondent's reemployment with the appellant;

(3) finding that as a matter of fact the respondent could not be regarded as dishonest.

Ultimately the appeal proceeded on the basis that Shuster J erred in awarding the respondent $50,000 and the appellant challenged the legal foundation of a judgment in this amount.

[9] The appellant contends that Shuster J erred in:

(a) failing to consider to apply the principles of law relating to the wrongful termination of contracts of employment and the availability of damages resulting from this;

(b) failing to consider whether the appellant acted within the scope of its contract of employment with the respondent to terminate the respondent's employment;

(c) applying the principles relating to the exercise of a statutory discretion in the context of the private employment contract between the appellant and the respondent;

(d) considering and questioning the fairness of the appellant's decision to dismiss the respondent in the context of the private employment contract between the respondent and the appellant;

(e) concluding that the termination of the private contract of employment by the appellant amounted to a repudiation of the contract of employment thus preventing damages for wrongful termination of contract from being limited to the period of notice specified in the contract of employment.

CONSIDERATION ON APPEAL

[10] During the hearing of the appeal, the appellant conceded that the termination of the respondent’s employment constituted a wrongful dismissal. That concession appears to be based on an acceptance that certain provisions in the Manual concerning procedures for dealing with complaints about employees were not followed. We will discuss this document in more detail later. However it was not in issue in the appeal that the Manual recorded the respondent's terms and conditions of employment at least in so far as they were in writing. One issue, to which we come in due course, is whether there was an implied term that the appellant was entitled to dismiss the respondent by giving her reasonable notice. The answer to that question has a bearing on the method of calculating the damages that should be awarded for the conceded wrongful dismissal.

[11] A convenient starting point in considering the issues raised in this appeal is what is the applicable law. This is potentially important because in the common law world there have been incremental and significant changes to the common law as it applies to contracts of employment. The applicable law is identified in sections 3, 4 and 5 of the Civil Law Act Cap 25. The common law of England is to be applied with such modifications as may be required by these provisions which focus attention on the circumstances prevailing in the Kingdom of Tonga. There are two related strands to the common law of England which are relevant in this appeal. The first concerns an implication into contracts of employment of a term that the employment can be terminated by the employer giving the employee reasonable notice or the employee doing likewise. The second concerns the implication into contracts of employment of a term of mutual trust and confidence.

[12] As to the first strand, the common law of England operated for most of the 20th century in most circumstances on the basis that in the absence of an express term to the contrary, the contract of employment contained an implied term that an employee could be summarily dismissed for misconduct or dismissed by the employer giving the employee reasonable notice or payment in lieu. Similarly the employee could terminate the contract by giving reasonable notice. The common law provided that, again in the absence of an express term to the contrary, if an employee was wrongfully dismissed then the damages to which the employee was entitled was generally only an amount equal to the wages or salary for the period of notice. No damages could be awarded by way of compensation for the manner of dismissal, for injured feelings or the fact that the dismissal might make it more difficult for the employee to obtain fresh employment. These basic principles flowed in substantial part from the decision of the House of Lords in Addis v Gramophone Co Ltd [1909] AC 488.

[13] In a landmark decision in 1957, the House of Lords decided that the express terms in the contract of employment of a senior clerk employed by a Health Services Board precluded the implication of a term that his employment could be terminated by giving reasonable notice: McClelland v NortIreland General ServiServices Board [1957] 1 WLR 595. In the result, the employment of Mr McClelland was effectively permanent. That decisio considered by the Court ofrt of Appeal of New South Wales in NSW Cancer Council v Sarfaty (1992) 26 NSWLR 68. In a joint judgment, Gleeson CJ and Handley JA said:

The contract between the parties was not one of "general hiring" and it contained, in cl 5 and cl 7, express provisions concerning the circumstances in which it could be brought to an end by either party. The question whether, in those circumstances, it could also be terminated by the appellant [the employer] on reasonable notice comes down to a question of construction of the contract: McClelland v Northern Id General ServiServices Board [1957] 1 WLR 595; 2 All ER 129. To ask whether, as a matter of interpretation of the agreement, thties intended, or are to be taken to have intended, that the contract could be brought to a to an end by reasonable notice is only another way of asking whether, on the true construction of the contract, the respondent was employed until retirement or sixty-five and cl 6 and cl 7 contained a complete statement of the circumstances in either party could terminate the contract before that date.

It is well established that, as a general rule, if the parties to a contract of employment make no provision as to the circumstances in which it may be brought to an end, the law will imply a term to the effect that the contract is terminable by either party upon reasonable notice to the other [citations admitted]. In the last mentioned case [Richardson v Koeford] Lord Denning MR said "..... in the absence of express stipulation, the rule is that every contract of service is terminable by reasonable notice".

That proposition, it may be observed, is somewhat elliptical. It is one thing to say that when a contract of employment is silent on the matter of its duration the law will imply a term that it may be terminated by either party on reasonable notice. Even in that case there may be room for disagreement as to whether the implication is to give business efficacy to the contract, or whether it is a legal incident of the contract of employment. However some of the speeches in McClelland go further and indicate that, even where a contract of service contained some express provisions relating to termination, the parties will be taken to have intended that it may also be terminated on reasonable notice unless the language they have chosen evinces a clear intention of the contrary. Other things being equal, the courts have shown a strong inclination to impute such an intention to the parties. Even so, as McClelland shows, where, as in the present case, the parties have expressed detailed provisions as to the right of either party to terminate, it is ultimately a question of construction as to whether they intended those provisions to be comprehensive. If they did, the intention will prevail and there will be no implication of a right to terminate on reasonable notice.

[14] In that matter clause 5 of the contract provided, in substance, that the employee had to retire on his 65th birthday but was eligible for annual reappointment until he turned 70. Clause 7 provided, in substance, that the employee could be dismissed for misbehaviour, incompetence, unsuitability, neglect of duties or for cause. The employee successfully resisted his employer's argument both at trial and in the Court of Appeal that there was an implied term he could be dismissed on reasonable notice and also successfully resisted the argument that dismissal "for cause" included a redundancy situation (which arose on the facts of that case). The Court of Appeal decided damages for loss of income should be assessed on the basis of the after tax salary which the employee would have received had the employment continued. We will return shortly to assess the application of these principles to the facts of this case.

[15] The second strand was that the common law in England recognized towards the end of the 20th century an implied term of mutual trust and confidence in employment contracts. The leading case was a decision of the House of Lords: Mahmud (or Malik) v Bank of Credit and Commerce International SA [1997] UKHL 23; [1998] AC 20. The existence of this implied term potentially had important consequences for the way in which damages might be assessed in circumstances which include a wrongful dismissal.

[16] Because of the existence of the statutory regimes concerning claims for unfair dismissal, the implied term of mutual trust and confidence had no field of effective operation in relation to the dismissal itself. That is, no question of breach of the term founding a claim for damages could arise in relation to the actual dismissal. However it was recognized that events preceding a dismissal, but not the dismissal, might demonstrate a breach by the employer of the implied term of trust and confidence and that the breach might sound in damages. The leading authorities concerning the application of this term are Johnson v Unisys Ltd [2003] 1 AC 518 and Eastwood v Magnox Electric Plc [2004] UKHL 35; [2005] 1 AC 503.

[17] It is convenient at this point to describe the terms of the Manual. It is sufficient to summarise them. The Manual describes its scope which is that it applies to all employees unless the employment is covered by an individual contract which prevails over the Manual in the event of any inconsistency (clause 1.4). It provides for the recruitment of employees of various classes, namely Established staff, Unestablished staff (small in number), and Daily paid staff (to be employed for no more than a month) (clause 2.1). Established staff are recruited through a competition involving interviews and selection on merit (clause 2.2). A successful candidate for a vacant established post is given a letter of appointment explaining, amongst other things, the nature and of the appointee's probation (clause 2.3). The appointee must undergo a medical examination (clause 2.4) and a police clearance must be obtained (clause 2.5). Transfers from position to position are dealt with in clause 4. Clause 5 deals with seniority (and details how seniority is determined) and provides that seniority is to be considered in promotion and was "a factor in selecting staff for termination where abolition of post makes this necessary as a last resort".

[18] All employees must serve a period of probation (clause 6). It is necessary for management to ensure that the probationer "understands the significance of being on probation and for giving him serious and official warning in good time if he seems to fall short of the performance of the position as detailed in his/her letter of appointment (i.e. job description), as well appropriateness (quickness in learning, understanding and intelligence)" (clause 6.2). At the conclusion of the probationary period an employee's appointment can be confirmed (clause 6.3). There is a provision (clause 6.4) giving the General Manager a right to terminate appointments of employees in accordance with clause 6.2. Plainly what this contemplates is that if an employee "falls short of the performance" or is not "appropriate" then, probably at the end of the probation period (though precisely when termination may take place is not clear from the Manual's terms), the probationary employee’s appointment can be terminated.

[19] The Manual contains clauses dealing with pay (clause 7), hours and overtime (clause 8), leave (clause 9), sickness and sick leave (including maternity leave) for established staff and unestablished staff (clause 10) and promotions (clause 11). The system of promotion is merit based though it contains a promotions procedure and an appeals procedure and also a procedure for annual confidential reports on employees.

[20] Clause 12 deals with retirement, compulsory termination of the employment, resignation, redundancy and notice. It firstly provides that no employee shall be terminated without the General Manager's approval (clause 12.1). The clause contemplates the retirement of an employee and notes that the "company offers a Staff Retirement Scheme" (clause 12.2). While it is not a matter we need to explore to conclusion in this appeal, it is tolerably clear that clause 12.2 contemplates an employee retiring from employment and gaining benefits under that retirement scheme. A document setting out the scheme (published in the same month as the Manual - September 2002) has two significant provisions concerning retirement and payment of retirement benefits. It provides that a person can qualify for benefits under the fund if retiring at the "normal eligible age of retirement" (50 years) and having not less than 15 years service on account of medical reasons (clause 8(a)). It then provides that the compulsory retiring age is 60 years of age and that an employee receives a pension from that point on for the employee's lifetime (clause 8(c) and (d)).

[21] Returning to the Manual, clause 12.3 provides for the "compulsory termination of employment on the grounds of inefficiency" (the heading). It provides a mechanism to put the employee on notice that termination might occur for this reason and a trial period in which the employee can improve. If the employee fails to do so the employment can be terminated by giving "one month's notice of compulsory termination of employment". The clause gives the board a discretion to "retire" an employee who has been found to be inefficient and who is terminated on that basis. Presumably this might be done to confer some benefit under the pension scheme.

[22] Clause 12.4 provides for "compulsory termination of employment on the grounds of ill-health" (the heading). This provision authorises the compulsory termination of an employee's employment when the employee is suffering from an injury or physical or mental illness which renders him/her incapable of satisfactorily performing the duties of the position. A medical report must be obtained. That report and a management report must, it appears, be considered by the board. If termination occurs for this reason then one month's notice must be given. As with compulsory termination for inefficiency the board may "grant retirement" and probably for the same reasons.

[23] Clause 12.5 provides for termination where the employee's position is taken over by another organisation or the post has been abolished. The provision authorises the employee to elect to retire on the grounds of abolition of post. If there is to be termination for this reason, at least three months notice has to be given.

[24] Clause 12.6 provides for notice by an employee. It requires an employee resigning or retiring to give at least three months written notice though, in the case of resignation, that period can be waived or reduced with the approval of the board. There is a provision for forfeiture of pay for giving less than the prescribed period of notice.

[25] Clause 13 deals with conduct and discipline. It prescribes a high standard of conduct. It provides a detailed disciplinary code for dealing with minor disciplinary cases and with more serious disciplinary cases (which include serious financial irregularity). Clause 13.2 .7 deals with penalties which include the deduction from pay by way of restitution of losses caused by the offender (clause 13.2.7(ii)), demotion (clause 13.2.7(v)) and dismissal (clause 13.2.7(vi)). Clause 13.2 .8 confers a right of appeal against the imposition any of the penalties in clause 13.2.7 (misdescribing it as paragraph 9).

[26] The remainder of the Manual deals with dress code (clause 14), grooming (clause 15), amendments (clause 16) and legal action (clause 17). It concludes with a declaration by an employee that the employee will abide by the Manual. Presumably each employee signs this declaration at the end of a copy of the Manual when they take up employment.

[27] We have already set out some of the factual background and the findings made by the primary judge. It is necessary to note only a few matters. The appellant took action on 9 January 2007 against the respondent (suspension without pay for two weeks, demotion, a requirement to repay the losses, not to be reappointed officer in charge for a year and a warning) in relation to the smaller losses at the end of November and the end of December ($393.80 and $1919 respectively totalling $2312.80) The primary judge made a finding, which is not challenged on appeal, that the money which went missing in late December 2006 ($7,112.00) was given by the appellant to another employee for it to be taken to the head office. On 17 February 2007 the appellant's Acting General Manager wrote to the respondent noting the $7,000 loss in late December 2006 and suspended the respondent. On 22 February 2007 the respondent replied to that letter putting her version of events and indicating that the matters she raised should be brought to the attention of the "Board Members". While there is room to debate this point, it is relatively clear, on balance, that she was exercising her rights to appeal conferred by clause 13.2.8. This was conceded by the appellant during the hearing of the appeal in this Court. Also conceded by the appellant was that the Board never dealt with her appeal.

[28] In the termination letter of 22 June 2007, the Acting General Manager indicated he had reached "the conclusion that the money you counted at the shop for these flights [the $7,112.00] was never placed in a plastic bag, stapled shut and transferred to head office". He went on to note statements of witnesses which he appears to have accepted supported this conclusion. The termination letter constituted summary dismissal.

[29] Given the concession by the appellant that the termination was wrongful it is necessary to determine whether the damages awarded by the trial judge were appropriate. As noted earlier, his Honour awarded damages in the sum of $50,000 which was the amount claimed by the respondent. In the statement of claim, that amount was particularised in the following way. The first amount was $25,000 for loss of employment. The second amount was $5,000 for loss of benefits on account of her dismissal. The third amount was $20,000 for loss of reputation. While the trial judge did not explain how he arrived at the figure of $50,000, it can be assumed it reflected the amount claimed by the respondent in the statement of claim.

[30] In discussing the quantum of damages, it is necessary to consider at the outset a submission made by the appellant that the respondent's employment could have been terminated by giving reasonable notice. We assume that this submission invokes the principle that if a party terminates a contract in breach of a term then in assessing the damages for that breach the Court proceeds on the basis that, in a case such as the present, the employer would perform the contract in the manner least disadvantageous to them: Withers v General Theatre Corp Ltd [1933] 2 KB 536. Thus if the appellant could have dismissed the respondent by giving reasonable notice, then it would have done so even though, in fact, it summarily dismissed the respondent. But could the appellant have dismissed the respondent by giving reasonable notice because a term to that effect could be implied in the contract? In our opinion, the answer is no.

[31] The terms of the Manual which we set out earlier, address in many and varied ways the contractual rights of the appellant to dismiss an employee with the attendant procedural rights of the employee and, in many circumstances, the period of notice the employee should be given. It also addresses how the employee might terminate the contract. The Manual has the appearance of a comprehensive employment code. Viewed in its entirety, it creates secure employment for employees who are expected to conduct themselves at a high standard and who are likely to remain in employment with the employer for the long-term. It can be safely assumed that it was drafted at the request of or by the appellant. It is difficult to imagine that the the Manual was not intended to address all circumstances in which an employee's employment might come to an end either on the initiative of the employee or the initiative of the employee. There is no room, in our opinion, for the implication of a term that the respondent's employment could be terminated by giving reasonable notice.

[32] Accordingly the measure of damages should be assessed on the basis of the salary which the respondent would have received had the employment continued. The respondent would, of course, be required to mitigate damages by seeking other employment. However, at trial, the appellant did not seek to establish that the respondent had failed to mitigate. Accordingly the respondent is entitled to the present value at the time of the assessment of the salary she would have earned in her employment with the appellant but for the wrongful dismissal. The amount claimed for loss of employment was $25,000. At the time of her dismissal she would have been (but for the suspension of her employment in February 2007) at level 7 (because of the demotion on 9 January 2007) earning $8,516 per year. Accordingly the claimed $25,000 represents approximately 3 years' salary. While it may have been open to be trial judge to award a greater amount of damages for loss of employment, this amount appears to us to be appropriate given that it is the amount claimed.

[33] Because we are awarding the damages claimed (amounting, as just noted, to approximately 3 years salary) and we are not seeking to evaluate the loss over the remainder of the respondent’s working life it is unnecessary to make adjustments for the possibility that the respondent’s employment might have been lawfully terminated by the appellant (or even the respondent) before the respondent reached retiring age or that the respondent may have suffered premature death. It also unnecessary to consider whether the damages should reflect loss of pension benefits.

[34] However the amount of $20,000 claimed for "loss of reputation and hardship due to [being] dismissed and reported to the police as a criminal" is more problematic. While it is conceivable that damages for loss of reputation and hardship might be awarded because the conduct of the appellant involved a breach of an implied term of mutual trust and confidence, it was made clear in Mahmud (or Malik) v Bank of Credit and Commerce International SA that damages for breach of such a term were to compensate the employee for financial loss. In other words if an employee is stigmatised and their reputation adversely affected by the conduct of the employer then the damages are intended to compensate the employee for the financial loss flowing from the damage to their reputation which would ordinarily arise because the employee could not get other employment and could not earn income as a result. However in this case, the respondent is already getting damages for the lost employment and the salary she would have made if she had remained in employment. Accordingly to award her damages for loss of reputation would involve double counting and compensating her for the same loss namely, income she would have earned had her employment continued.

[35] The last element in the damages claimed by the respondent was loss of benefits on account of her dismissal. The amount claimed was $5,000. We understand this to relate to deductions made from her termination pay. The appellant was to be paid a total $4494.14 which was an amount of holiday pay outstanding ($1822.19) and her contributions to the retirement fund ($2666.96). However the appellant did not pay her this amount because it notionally deducted from the $4494.14 an amount of $7,706.93 which was the shortfall of takings in late December 2006 for which she was being held personally responsible. In fact by deducting the $7,706.93 from the $4499.14 it left a shortfall of $3217.79 which the appellant wrote off.

[36] The appellant's right to make this deduction depended on its contractual right under their disciplinary code (clause 13 of the Manual) discussed earlier to impose a penalty including seeking restitution for losses. However, as we discussed earlier, there are certain procedural protections in that disciplinary code which includes a right to appeal. The right to appeal was exercised by the appellant in relation to the shortfall of $7,706.93 but the appeal was never heard. It appears to us that the procedural requirements are an important protection for employees and their full implementation is a condition precedent to the exercise of the appellant's right to enforce the penalty. Because the respondent's appeal to the board was never heard, the procedural requirements were not fully implemented. In other words the appellant was not entitled to set off the $7,706.93 from the $4484.14 due to the respondent. She is entitled to damages in that amount.

[37] It is unnecessary for us to deal with some of the specific arguments advanced by the appellant critical of the approach taken by the trial judge. However we should note that the appellant is correct in pointing out that the law concerning the exercise of statutory discretions has no direct application in the field of employment law unless, of course, a statute directly operates on the employment relationship.

[38] In the result, the judgment of the trial judge should be varied and judgment entered in favour of the respondent in the sum of $29,488.14. The costs order concerning the trial in favour of the respondent should not be disturbed. While the appellant has had some limited success in the appeal we nonetheless think that the respondent is entitled to her costs of the appeal.

[39] We wish to make a general observation. The conclusion we reached in this appeal that there was no implied term in the contract that the appellant could terminate the employment by giving reasonable notice was based on the detailed express terms of the employment contract in the Manual. The common law in Tonga would ordinarily imply a term into contracts of employment that the employer can dismiss an employee by giving the employee reasonable notice: see the decision of the Privy Council in Va’inga Teu v Commodities Board PC 7/1988 cited by Webster J in Palu v Commodities Board (1990) Tonga LR 28 at 32. What is reasonable notice will depend on the nature of the employment. This judgment should not be taken to be an indication that this implied term does not arise in employment contracts generally.

Ford CJ
Burchett J
Salmon J
Moore J