What defines “serious misconduct” under an employment agreement? – In the case of Phosagro Asia Pte Ltd v Piattchanine, Iouri [2016] SGCA 61

oqmzwnd3thu-helloquence

by Jonathan Liang (Ella Cheong LLC)

 

Most employment agreements provide that the employer is entitled to terminate the agreement without notice or payment in lieu of notice if the employee is guilty of “serious misconduct”. Although the consequences of termination are typically severe, most employment agreements do not stipulate what “serious misconduct” entails or how it would be assessed. In the recent decision of Phosagro Asia Pte Ltd v Piattchanine, Iouri [2016] SGCA 61 (“Phosagro”), the Singapore Court of Appeal had the opportunity to provide some much-needed guidance on the matter.

 

In Phosagro, the respondent-employee (the “Employee”) of the appellant-company (the “Company”) had a practice of signing cheques to reimburse himself for his credit card expenses, which included expenses that he was not entitled to claim (the “Expense Accounting Practice”). Even though the Company’s accountants would subsequently identify those expense claims that the Employee was not, or appeared not to be, entitled to reimbursement, the possibility that these expenses might not be fully accounted for remained.

 

Under such circumstances, the High Court found that the Employee had committed a breach of his obligations under Clause 3 of the employment agreement to “faithfully serve the Company in all respects and use his best endeavours to promote the interests of the Company”. However, the High Court was of the view that the Expense Accounting Practice did not constitute “serious misconduct” as the Employee genuinely believed that he was entitled to adopt such a practice. Accordingly, it was held that the Company could not terminate the employment agreement on the grounds of “serious misconduct”.

 

On appeal, the Court of Appeal reversed the High Court’s judgment, and held that the breach of Clause 3 did constitute “serious misconduct”.

 

The Court of Appeal defined “serious misconduct” as any breach of the employment agreement that is so serious that it would justify the termination of the employee’s employment without more ([49]).

 

In the absence of any pertinent references in the employment agreement in question, the Court of Appeal held that “the most principled approach would be to look to the common law principles relating to discharge of breach for guidance” ([49]). Accordingly, the principles concerning repudiatory breaches, as laid down in the seminal case of RDC Concrete v Sato Kogyo [2007] 4 SLR(R) 413 (“RDC Concrete”), were found to be relevant.

 

Briefly, RDC Concrete sets out the following instances where a breach would entitle an innocent party to terminate the contract:

 

  1. Where the contractual term in question clearly and unambiguously states that the innocent party is entitled to terminate the contract on the occurrence of certain events (“Situation 1”);

 

  1. Where the party in breach clearly conveys to the innocent party, whether by words or conduct, that he will not perform his contractual obligations at all (“Situation 2”);

 

  1. Where the contractual term breached is a condition of the contract (“Situation 3(a)”); or

 

  1. Where the contractual term breached deprives the innocent party from obtaining substantially the whole of the intended contractual benefit to him (“Situation 3(b)”).

 

Moving back to the case at hand, the Court of Appeal was of the opinion that Clause 3 would have been intended by the parties to be of “utmost importance” owing to the fact that the Employee was “entrusted with a significant degree of authority, responsibility and independence in the conduct of the [Company’s] affairs” ([58]). The Court of Appeal thus held that Clause 3 was a “condition” within the meaning of Situation 3(a) of RDC Concrete. Having found that the Employee breached Clause 3, the Court of Appeal concluded that the breach constituted “serious misconduct” ([59]).

 

In summary, the Court of Appeal’s decision clarifies that in the absence of anything to the contrary, “serious misconduct” would ordinarily refer to any act that would constitute a repudiatory breach of an employment agreement.

Ella Cheong LLC