Report No 18 Aspects of Damages: Employment Contracts and the Rule in Addis v Gramophone Co March 1991 Wellington, New Zealand 1 The Law Commission was established by the Law Commission Act 1985 to promote the systematic review, reform and development of the law of New Zealand. It is also to advise on ways in which the law can be made as understandable and accessible as practicable. The Commissioners are: Sir Kenneth Keith KBE - President Jack Hodder The Hon Mr Justice Wallace Peter Blanchard The Director of the Law Commission is Alison Quentin-Baxter. The office is at Fletcher Challenge House, 87-91 The Terrace, Wellington. Telephone: (04) 733 453. Facsimile: (04) 710 959. Postal address: PO Box 2590, Wellington, New Zealand. Report/Law Commission Wellington 1991 ISSN 00113-2334 This Report may be cited as: NZLC R18 Also published as Parliamentary Paper E 31M 2 CONTENTS I INTRODUCTION AND SUMMARY 7 CONCEPTS AND TERMINOLOGY 9 SUMMARY OF REASONING, RECOMMENDATIONS 12 II THE ADDIS CASE 16 THE LIMITS TO ADDIS 18 EXCEPTIONS TO THE ADDIS RULE 19 III ADDIS IN NEW ZEALAND EMPLOYMENT LAW 21 GEE v TIMARU MILLING CO LTD 21 THE COURT OF APPEAL 22 IMPLIED TERMS 23 WHELAN v WAITAKI MEATS LTD 24 CONTRACTUAL REMEDIES ACT 1979 26 LABOUR LAW STATUTES 26 IV APPELLATE CONSIDERATION OF ADDIS 29 ENGLAND: BLISS 29 CANADA: VORVIS 30 CALIFORNIA: FOLEY 33 V EMPLOYMENT CONTRACTS, ECONOMICS AND THE LABOUR MARKET39 THE NARROW VIEW 39 THE WIDER VIEW 42 VI THE CASE FOR LEGISLATIVE INTERVENTION 46 IS THE ADDIS RULE SATISFACTORY IN THE EMPLOYMENT CONTEXT? 46 SHOULD THE MATTER BE LEFT TO THE COURTS? 48 IMPLIED TERMS 48 RELIEF UNDER THE CONTRACTUAL REMEDIES ACT 1979 50 REMEDIES IN TORT 51 3 IN SUMMARY 52 VII THE FORM OF LEGISLATIVE INTERVENTION 55 CONTRACTING OUT 56 ``COMPENSATION'' OR IMPLIED TERM 57 ``UNJUSTIFIABLE'' DISMISSAL 58 DISMISSAL FOR ``GOOD REASON'' 58 CONCLUSION 60 APPENDIX A 61 Select Bibliography 61 APPENDIX B 64 Case-Law: New Zealand 64 SUMMARY OF NEW ZEALAND DEVELOPMENTS 64 CASENOTES 65 APPENDIX C 74 Case-Law: England 74 SUMMARY 74 CASE NOTES 75 APPENDIX D 80 Case-Law: Australia 80 SUMMARY 80 CASENOTES 80 APPENDIX E 83 Case-Law: Canada 83 CASENOTES 83 C Quebec - the civil jurisdiction 85 APPENDIX F 86 United States 86 APPENDIX G 88 France and Germany 88 4 A France 88 B GERMANY 88 INDEX 90 5 7 March 1991 The Hon D A M Graham MP Minister of Justice Parliament House WELLINGTON Dear Minister I am pleased to submit to you Report No 18 of the Law Commission, Aspects of Damages : Employment Contracts and the Rule in Addis v Gramophone Co. The Report arises out of our ongoing work on damages and the introduction into Parliament late last year of the Employment Contracts Bill. The rule in the Addis case denies damages for the harshness and oppression accompanying a dismissal from employment and any loss sustained from discredit thrown upon the employee. That limit is inconsistent with the general principles of the law of damages; the application of the rule is uncertain; its scope of application in New Zealand is narrowed in an anomalous way by legislative provision (also contained in the new Bill); and its continued force in New Zealand is unclear in the light of recent judicial decisions and criticism. The Law Commission has a particular responsibility for the accessibility and comprehensibility of the law. The relative inaccessibility and incomprehensibility of this law may lead to inefficiency and unnecessary cost. Accordingly the Law Commission proposes a legislative reversal of the rule. Compensation for an employee who has been dismissed without good reason could include compensation for humiliation, loss of dignity, and injury to the feelings of the employee. That is subject to the freedom of the employer and employee to agree otherwise in writing. The Commission will make copies of this Report available to members of the Select Committee currently considering the Employment Contracts Bill. Yours sincerely K J Keith President 6 I Introduction and Summary 1 The introduction into Parliament in December 1990 of the Employment Contracts Bill requires legislative focus on (among many other matters) the topic of remedies for breaches of contracts of employment. In particular, it provides an opportunity for reconsideration of the long-standing, often criticised but still potent judge-made ``rule'' in Addis v Gramophone Co [1909] AC 488. That rule is currently of uncertain scope in New Zealand but has long been regarded as severely restricting awards of damages as compensation for the intangible consequences of breaches of contracts, in particular of employment contracts. 2 The Law Commission has reviewed the Addis rule and recommends a statutory reversal of the rule in the employment context. For reasons summarised at the end of this chapter, we believe that that reversal would provide a desirable increase in the certainty, consistency and coherence of this area of the law. Recently, other matters on our programme have taken priority but the introduction of the Employment Contracts Bill has encouraged us to accelerate our work to make it available while the Bill is before Parliament. We have not had the opportunity to consult as widely on this topic as is our usual practice, but we are grateful for the prompt and helpful responses received from a number of interested individuals and organisations who considered a draft of this report. 3 The effect of Addis has been substantially displaced by New Zealand industrial relations legislation since the early 1970s. Thus the Labour Relations Act 1987, section 227(c)(i), expressly authorises a grievance committee or the Labour Court to order an employer to pay ``compensation'' to an unjustifiably dismissed employee for ``humiliation, loss of dignity, and injury to the feelings of the worker''. The Employment Contracts Bill as introduced does not include a similar express reference to humiliation, etc, but those matters would probably be embraced by the continued provision for ``compensation'' (rather than 7 ``damages''). However, that provision would be mandatory only in relation to collective employment contracts. Thus most breaches of individual employment contracts would continue to involve questions of damages assessed in accordance with judge-made rules. 4 The rule in Addis has been considered in recent High Court cases, many of which have involved termination of employment of middle management personnel and others outside award coverage and the scope of the 1987 Act. It has also been the subject of comment in two recent Court of Appeal decisions. Some of those cases have included judicial suggestions that the Addis rule may cause injustice and is a suitable case for law reform. Those suggestions triggered the Law Commission's preliminary work on this topic. 5 Very recently, in Whelan v Waitaki Meats Ltd (unreported decision of Gallen J, High Court, Wellington, CP 990/88, 30 November 1990) the trial judge declined to apply Addis and awarded $50 000 damages to compensate a manager for the manner of termination of employment which ``was such as to cause the plaintiff undue mental distress, anxiety, humiliation, loss of dignity and injury to his feelings''. However, that approach involves a major departure from other recent High Court decisions and has not been directly considered by the Court of Appeal (we have been advised by counsel involved in the case that no appeal will be lodged in Whelan itself), although it does accord with the policy preference expressed by many commentators. 6 Although the Addis rule is generally understood to be applicable to all contracts - but subject to significant exceptions (see paras 33-34, below) - judicial and academic criticism has most often been directed at its application to employment contracts, and it is with those contracts that this report is concerned. 7 The structure of this report is as follows: this chapter concludes with a discussion of concepts and terminology found in judicial decisions on contracts and damages, and summaries of our reasoning and recommendations; Chapter II outlines the Addis decision itself; Chapter III reviews recent New Zealand developments on damages where employment contracts are terminated; Chapter IV outlines the reasoning and results in certain relevant decisions by English, Canadian and 8 Californian appellate courts; Chapter V reviews competing perspectives on the nature of employment contracts and of labour markets; Chapter VI reviews the policy factors relating to any further legislative intervention in New Zealand; and Chapter VII outlines the options for the form of any such legislation. The appendices contain a wider survey of relevant New Zealand cases, including non- employment cases and Labour Court decisions; and a selective survey of the comparable legal position in other countries. CONCEPTS AND TERMINOLOGY 8 In order to appreciate fully the scope of the Addis rule, it is important to understand some of the general concepts and terminology found in this area of the law and to appreciate that much of the law relating to contracts in general – and especially to damages - is common law (that is, judge-made, and initially inherited from England), rather than the result of legislation, although there are many statutes which deal with some aspects or types of contracts and (less frequently) damages. 9 Contracts provide the basis for commercial activity and for many of our domestic and social activities. In essence, a contract is a bargain entered into by two or more parties: in a simple case, each party voluntarily and reciprocally undertakes obligations which are legally binding. Contractual obligations may be contrasted with those imposed by a statute or by other judge-made rules of the common law (generally described as torts) irrespective of any agreement or consent by those bound. 10 A contract is usually analysed as being made up of a number of component terms which would include, for example, the identity of the subject matter, the price to be paid, and dates for performance. Such basic terms would normally be the subject of explicit agreement - express terms - but others, less significant or obvious, may be implied by the courts as a matter of law (the deemed intention of the parties) or of fact (the presumed actual intention of the parties) or by statute. With some exceptions (notably, contracts relating to land), a contract need not be in writing. 9 11 The undertaking of contractual obligations generally carries with it an expectation of performance and of court-enforced remedies for breach (non-performance) - in particular (although not exclusively), remedies by way of monetary compensation or damages. 12 An explanation of the object of an award of damages and of the concepts of pecuniary and non-pecuniary loss is contained in the leading English treatise on the subject, McGregor on Damages (15th ed, Sweet & Maxwell, London, 1988), in the following terms: The object of an award of damages is to give the plaintiff compensation for the damage, loss or injury he has suffered. The heads or elements of damage recognised as such by the law are divisible into two main groups; pecuniary and non-pecuniary loss. The former comprises all financial and material loss incurred, such as loss of business profits or expenses of medical treatment. The latter comprises all losses which do not represent an inroad upon a person's financial or material assets, such as physical pain or injury to feelings. The former being a money loss is capable of being arithmetically calculated in money, even though the calculation must sometimes be a rough one where there are difficulties of proof. The latter however is not so calculable. Money is not awarded as a replacement for other money, but as a substitute for that which is generally more important than money: it is the best that a court can do. (para 9) 13 The McGregor treatise also provides a convenient explanation of general damages as distinct from special damages, commencing with a citation from an early English case: Prehn v Royal Bank of Liverpool [(1870) LR 5 Ex 92], where Martin B put the distinction thus: ``General damages ... are such as the jury may give when the judge cannot point out any measure by which they are to be assessed, except the opinion and judgment of a reasonable man ... . Special damages are given in respect of any consequences reasonably and probably arising from the breach complained of.'' This type of general damage is usually concerned with non- pecuniary losses, which are difficult to estimate, the principal examples being the injury to reputation in defamation and the pain and suffering in cases of personal injury. Pecuniary loss is also occasionally general damage within this meaning, both in tort and in contract. In tort there is the loss of business profits caused by the defendant's inducement of breach of contract or passing off, while in contract there is the injury to credit and reputation caused by the defendant's failure to pay the plaintiff's cheques or honour his drafts, pecuniary losses which it is difficult to estimate at all accurately. (para 21) 14 In some cases - usually tort cases - the concepts of aggravated and exemplary damages are relevant. In earlier cases the distinction between these was somewhat blurred, but the modern approach is clear. Like ordinary damages, aggravated damages are compensatory: 10