Smith v Practical Plastics Ltd [2001] NZCA 141; [2001] ERNZ 68 (3 May 2001)

Last Updated: 13 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA112/00

	BETWEEN	KENNETH MAHURANGI SMITH
		Appellant

	AND	PRACTICAL PLASTICS LIMITED
		Respondent

Hearing:	24 April 2001
Coram:	Thomas J Keith J Blanchard J
Appearances:	M J Sharp for the Appellant C H Toogood QC and N A Burley for the Respondent
Judgment:	3 May 2001

JUDGMENT OF THE COURT DELIVERED BY KEITH J

The proceedings and the result

[1] Mr Smith appeals against parts of two judgments given by Judge Travis in the Employment Court. The first, given on 12 December 1997, is reported as Smith v Practical Plastics Ltd [1998] 1 ERNZ 323 and the second on aspects of damages and on costs was given on 9 December 1999. On 17 April 2000, the Judge granted Mr Smith leave to appeal after the time for appeal had expired.
[2] The Judge held that Mr Smith had a contract of employment with the company, that he had been wrongly dismissed, and that he was entitled to damages for the wrongful dismissal and to other payments totalling $48,301, together with $10,000 costs. Mr Smith challenges the refusal to make awards under other heads. We dismiss the appeal, essentially on the ground that the appeal raises no question of law which can be the subject of appeal to this Court.

The contract and the dismissal

[3] Mr Smith had been employed as a plastic moulder by a company under the supervision of Mr Murray, a shareholder and director of the company. In 1987 they formed a partnership, running their own moulding business. Their business was at risk and they agreed with a major customer, David Evans Marine Ltd, to form a new company, the defendant. Mr Evans, the managing director of David Evans Marine Ltd, would provide the main capital (taking 52% of the shares, Mr Murray 28% and Mr Smith 20%), and be responsible for administration, sales and marketing, while the other two shareholders who were also directors would concentrate on factory production in Tauranga.
[4] The Judge found that it was agreed that Mr Murray and Mr Smith would draw “a living allowance” of $1,000 a month. Those payments were regarded as salary although it was accepted that the company’s profitability might not permit it being so recorded in its financial statements. It was also agreed that at the end of the financial year the directors would consider in their discretion the best way to allocate salaries, depending on the company’s future profitability, about which they were optimistic.
[5] Mr Murray resigned as a director of the company on 24 October 1989. He received from Mr Evans a statement that the drawings he had received from 1 September 1988 to 24 October 1989 amounted to $17,500. Both Mr Murray and Mr Smith were concerned that the monthly payments were shown as drawings. Mr Murray, through his solicitor, vigorously disputed his liability for the current account debits and asserted that he should have received salary credits. The outstanding issues between Mr Murray and the company were finally settled in May 1992, with Mr Murray transferring his shares to Mr Evans who offered Mr Smith a pro rata share of Mr Murray’s shareholding which Mr Smith declined.
[6] The 1989 and 1990 accounts showed the debit in Mr Smith’s current account as increasing. After the company’s accountant had discussed the 1990 accounts with Mr Smith, the accountant told Mr Evans that it was not reasonable for Mr Smith to pay his own tax as he was being paid only a basic living allowance. Mr Evans said that he would fix the tax up as soon as the company could afford it. The plaintiff’s drawings in the 1991 accounts included provisional tax paid on his behalf. Those accounts also credited “shareholder salaries” of $18,000 to Mr Smith’s current account (the monthly payment having increased to $1,500). There was no salary credit in the 1992 and 1993 company accounts and in the latter accounts Mr Smith’s current account debit was shown as $50,097. The Judge found that Mr Smith would have been entitled to have assumed from his discussions with the company’s accountant of the draft 1992 accounts that when the company became profitable, salary credits would remove his debit.
[7] By the end of 1993 the company’s financial position was beginning to improve, in part because of finance provided by one of its suppliers and increases in sales. The 1994 accounts showed a gross profit of $120,879 on sales of $811,173. These accounts were not discussed with Mr Smith who had been dismissed by the time they were prepared.
[8] Following field days held at Mystery Creek in June 1994, Mr Evans was visited by Mr Dammers, the director of a Western Australian company which manufactured fibreglass tanks and was interested in buying a plastic moulding oven which the company was marketing. A successful sale would have resulted in a major cash injection for the company. Many orders for tanks followed those field days. Of the 52 tanks produced in July there were however five major failures. On 1 August, Mr Evans discussed that problem with Mr Smith who became angry and swore at Mr Evans. Mr Evans suggested that Mr Smith take some time out to think about his position.
[9] Mr Evans sent Mr Dammers a fax on the following day, 2 August, saying that “we would send a completed proposal for the sale of the oven”. He did that on 9 August. He did not ever receive a reply.
[10] On 17 August Mr Smith and Mr Evans met and appeared to resolve all matters between them.
[11] A month later, over the evening of 22-23 September and unbeknown to Mr Evans, Mr Smith spoke to Mr Dammers in Auckland about the possibility of employment with his business. He also received an offer from a New Zealand competitor of the company. It was alleged that Mr Smith had betrayed confidences, including confidential information about the company’s source of finance. Mr Smith denied that allegation.
[12] As a result of the meeting and the alleged breach of confidence, Mr Smith was dismissed and a few days later the company demanded payment of the then current account debt of $71,655. Mr Smith did not respond and on 20 February 1995 the company’s solicitor advised him that in exercise of its lien over his 4,000 shares it had sold them at the par value of $1 each. That $4,000 would be offset against the current account debt. On 20 March he was advised that the then deficit of $70,655 had been removed in the interests of finality by crediting the balance as salary. That left him with an income tax liability of $20,537.

The claims and the Employment Court response

[13] In the Employment Court the company argued that Mr Smith was not an employee. Rather he had a contract for services. Judge Travis rejected that argument. Since it is relevant to one of the grounds of appeal, the following passage from his reasons for that conclusion can be conveniently repeated:

Mr Evans was in sole control of the management of the defendant, the hiring and firing of staff and investment and finance. The plaintiff had no input into such matters. Mr Evans was freely able to appoint a new factory manager without consulting the plaintiff and could direct the plaintiff to work under that manager. The plaintiff had to seek Mr Evans's permission to leave early, as he did on the occasion when he visited Mr Dammers. In all aspects of his work the plaintiff was either under Mr Evans's direct supervision or under the supervision of a factory manager appointed by Mr Evans. The plaintiff was therefore always under Mr Evans's control and exercised little, if any, control over others. The plaintiff was required to obey Mr Evans's orders. This factor strongly suggests in this case that he was the defendant's employee.

The plaintiff was solely involved with production work in the factory and played no part in sales, marketing or administration. The plaintiff was required to work continuously in full-time employment. The plaintiff was initially employed as a moulder, although his title was changed after Mr Murray left the defendant. There could be no suggestion that he was employed as a director of the defendant to be remunerated by way of fees or a director's salary. His duties cannot be categorised as the performance of the duties of a director of a company. With one minor exception, he was not even required to sign minutes or pass resolutions from December 1993 onwards. He had no real involvement in approving accounts or dealing with any other aspect of the management of the company.

I do not accept Mr Hollister-Jones's submission [for the company] that this was an incorporated partnership like Brown [v Okiwi Farms Ltd [1957] NZLR 1073] , a concept which in any event was disapproved of by the Privy Council in [Lee v Lee’s Air Farming Ltd [1961] NZLR 325]. The parties knew that they were changing the character of their relationship from a partnership into an incorporated company and as part of that arrangement made Mr Evans the governing director with the total power of control over the defendant's affairs. (342-343)

[14] The Judge also ruled that Mr Smith had been wrongfully dismissed, because (1) it was not open to the company to conclude that he had provided confidential information and that, while some of his actions may have been unwise, the court was not persuaded he had breached his duty of integrity; and (2) the company had failed to give Mr Smith a proper chance to be heard, had not carried out a proper investigation and had acted upon mere suspicion.
[15] The relief Mr Smith sought was for:

(1) $122,560 arrears of salary and related taxation liability;

(2) the value of the 4,000 shares that the defendant had held which he had lost because of the exercise by the defendant of a lien over them;

(3) damages of $40,000 for injury to feelings and loss of reputation caused by the manner of the dismissal;

(4) (alternative) a salary allocation as a shareholder of not less than $122,560 on the basis that had the defendant waited until the financial results for the year ended 31 July had been obtained, the company’s profits would have allowed for that year or subsequent years such a salary allocation;

(5) (alternative) the value of the 4,000 shares, loss of salary to 27 November 1997, and general damages (as under (3)) on the basis that there was an implied term that employment could not have been terminated except for breach until two years after the first date on which the defendant could have cleared the debit balance of the plaintiff’s current account with the defendant.

[16] So far as (1) was concerned, the claim for alleged arrears of salary failed on the basis of the concession by counsel for Mr Smith that it had not been proved that there was an argument that the company would pay Mr Smith a base salary of $36,000 a year (328). Taxation was a different matter. The Court held that the parties had agreed that the company would meet Mr Smith’s taxation obligations and gave judgment accordingly (348-349).
[17] As to (2), the Court held that Mr Smith was entitled to the value of the shares (351-352). The general damages for wrongful dismissal – (3) – were fixed at $5,000 (350-351).
[18] On (4) and (5), the Court held that Mr Smith was entitled to one month’s notice and the payment in lieu was fixed at $2,238 (being $1,500 together with the income tax needed to produce that net sum) (349-350).
[19] The appeal relates to (4) and (5). No other parts of the judgments were questioned.

The first ground of appeal : entitlement to damages in the amount of a catch-up salary payment

[20] The submission is that these damages were a foreseeable loss resulting from the wrongful loss of the shares. It is based on evidence given by Mr Evans that the company would have given consideration to rewarding past efforts. (Mr Toogood QC, in his written submission for the company, properly noted that this overstates Mr Evans’ evidence.)
[21] Judge Travis dealt with this issue, together with the second ground of appeal, relating to the length of a reasonable period of notice, when considering this alleged implied term:

(d) That in view of the fact that the plaintiff had agreed to defer payment of the balance of his wages and future wage increases until the defendant company was in a position to make such payments that apart from dismissal for breach of obligations the plaintiff's employment would not otherwise be able to be terminated until:

(i) Such further time when the defendant company was able to repay all past unpaid balances of salary earned and in addition provide the plaintiff with at least $36,000.00 per annum.

(ii) And thereafter only after providing the plaintiff with a reasonable period of notice which in the circumstances would be no less than two years.

[22] The first part of the implied term fell with the failure to establish an annual salary of $36,000. The Judge held that Mr Smith failed to meet the criteria for the implication of the pleaded term. He decided a reasonable term of notice was one month and gave judgment accordingly (349-350). We return to some of the detail of that reasoning under the next heading. The Judge returned to the issue in his second judgment:

I accept Mr Hollister-Jones’s submission [for the company] that the issue of catch up salary was dealt with in my earlier judgment, although perhaps I should have expressed myself more clearly to have avoided any confusion. I found, at p349, that there was an agreed term that the plaintiff’s debit in his current account would be made up once the defendant came into profit but I did not consider that it followed from such agreement that his employment would be preserved come what may until such event occurred and it may well have been possible that the defendant never came into profit. I found that the current account balances were to be dealt with at the end of the financial year when it was determined whether any salary credits were to be passed but that it did not follow from this that the plaintiff was entitled to claim as his notice period for the termination of his employment as a moulder that he would have been entitled to remain a director and shareholder until all outstanding matters were concluded (p350). I accept Mr Hollister-Jones’s submission that this was a rejection of the claim that the plaintiff’s notice period ought to be extended until the defendant came into profit in order for a catch-up salary to be paid and that the dismissal and subsequent share sale took away not only the value of the sale of his shares, but his rights to continue to be remunerated as a shareholder and director. For clarification I note that I intended to also dismiss the claim for catch-up salary as having no contractual basis.

[23] Mr Sharp, for Mr Smith, could not escape the dilemma he faced. On the one side, he was prevented by s135 of the Employment Contracts Act 1991 from contending that the Judge was wrong in his construction of the contract in finding that there was no implied term requiring the payment which was claimed. On the other, if the claim was not on a “contractual basis” Mr Smith had no legal entitlement to any payment. The Judge had rejected any contractual basis. Section 135 prevents any attack on that finding in the absence of an error of principle (see para [26] below) and that was not suggested in respect of this ground.
[24] Any attempt to put the claim on the basis of the loss of a chance similarly faced the problem that to be enforceable it had to have a contractual base and again the Employment Court had found no contractual term.
[25] The first ground of appeal must fail.

The second ground of appeal : termination terms

[26] The appellant’s written submissions contend that the judge failed to properly apply the principles of the business efficacy test and of reasonable notice. As formulated, this Court cannot consider the argument. It is well established that an appealable error relating to the construction of an employment contract must concern issues of principle going beyond the particular contract. This Court can, for instance, consider general principles and general implied terms and errors in principle in how the Employment Court goes about interpreting the contract (Attorney-General v New Zealand Post Primary Teachers’ Association [1992] 2 NZLR 209, 215, and Walker Corporation v O’Sullivan [1996] 2 ERNZ 513, 515-516). It is not enough to complain only that the Judge has not applied established principles correctly. An error of principle or something similar must be identified.
[27] On the business efficacy principle, Mr Sharp in the end was unable to resist the argument that the Judge had stated the principles correctly. The Judge then went on to say that the plaintiff had failed to meet the criteria stated in the cases. Further, he said, there was insufficient evidence to support a period of two years notice in this case. While he had found that the plaintiff’s debit would be made up once the defendant came into profit, it did not follow that his employment would be preserved come what may until such an event occurred. No issue can be raised on appeal about that reasoning.
[28] The only apparent question raised in the course of argument about the Judge’s reasoning concerned the next passage in his judgment:

There was no evidence as to the practice in this particular trade regarding notice periods. The plaintiff made monthly drawings. It did appear to be accepted as good accounting practice that the current account balances would be dealt with at the nearest convenient time to the termination of a director's employment and that would normally be when a company was settling its accounts at the end of the financial year and determining whether any salary credits were to be passed. In the present case that was done approximately three months from the end of the 31 July 1995 financial year. It does not follow from this that the plaintiff was entitled to claim, as his notice period for the termination of his employment as a moulder, that he would have been entitled to have remained a director and shareholder until all outstanding matters were concluded. Because the plaintiff received his emolument on a monthly basis, I consider that, in the absence of cause, the reasonable notice period for the termination of his employment as a moulder would have been one month. (350)

The award of $1,500 plus the tax element followed.

[29] The question was whether the failure of the Judge expressly to mention and consider in that passage the facts that Mr Smith (1) was a 20% shareholder and could be seen in effect as a partner in the firm, (2) was not merely a moulder but also made moulds, (3) had worked for the company for seven years, and (4) had received minimal pay, meant that he had erred in principle. The second to fourth factors are however clearly to be understood, given their presence throughout the proceeding and the judgment. (Evidence about contracting practice in the industry might have assisted the plaintiff and the Court on such matters.) And the first is plainly rejected by the Judge earlier in his judgment in the passage we have quoted earlier (para [13] above). It follows this ground of appeal also fails.

Result

[30] The appeal is dismissed. Mr Smith is legally aided. In terms of s40 of the Legal Services Act 2000 (which appears to apply to this situation : s117(1)) we specify that we would otherwise have made an order in favour of the respondent of costs of $3,000 and reasonable disbursements, including the costs of travel and accommodation of one counsel, to be fixed by the Registrar if the parties could not agree.

Solicitors:
Holland Beckett Maltby, Tauranga for the Appellant
Jones, Stuart, Burley, Auckland for the Respondent