Singapore: the meaning of serious misconduct

Employment contracts often provide that employees may be dismissed without notice or payment in lieu of notice for 'serious misconduct'. However, what constitutes 'serious misconduct' is not always clear. The recent decision of the Court of Appeal of Singapore in Phosagro Asia Pte Ltd v Piattchanine [2016] SGCA 61 provides some clarification on this question.

Background

Piattchanine was the sole director and shareholder of Asiafert Trading Pte Ltd (Asiafert). After the acquisition of Asiafert by the Phosagro Group, Asiafert was renamed Phosagro Asia Pte Ltd (Phosagro), and Piattchanine became Phosagro's Managing Director under an employment contract. Piattchanine carried over a practice from Asiafert whereby he reimbursed himself for both corporate and personal expenses incurred on his corporate credit card, and repaid his personal expenses to the company at the end of the financial year (Expense Accounting Practice).

Piattchanine's employment contract was terminated by Phosagro when tensions arose between him and Phosagro's other directors. Three weeks later, Phosagro sent him another letter of termination in which it alleged that he had misappropriated corporate funds. The second termination letter purported to invoke clause 20 of the employment contract, which dealt with summary dismissal on the ground of 'serious misconduct'.

In response, Piattchanine commenced legal proceedings to recover termination benefits that were allegedly due to him under his employment contract. Phosagro argued that it was not liable, since the employment contract provided that no such benefits were payable where the contract was terminated for 'serious misconduct'.

Threshold question

A threshold question arose as to whether Phosagro was entitled to invoke clause 20 at all, as it had already purported to terminate Piattchanine's employment in its first letter of termination. The Court answered this question in the affirmative. The Court referred to Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339, in which the English Court of Appeal held that, where an employer did not rely on an employee's misconduct at the time of dismissal but later found out about it, they may still subsequently invoke the misconduct to effect summary dismissal. Although the Boston case involved the termination of an employment contract for a breach at common law rather than a breach of an express term, as was the case in the present case, the Court of Appeal of Singapore held that the Boston case could nevertheless be applied by analogy.

Breach of clause 20: 'serious misconduct'

The Court of Appeal found that 'serious misconduct' referred to 'a breach of the Employment Contract that is so serious that it would justify [Phosagro] in terminating [Piattchanine's] employment contract without more'. The Court also commented that the general common law principles relating to repudiatory breach were relevant to determining whether a particular breach of the Employment Contract constituted 'serious misconduct'.

Four situations which give rise to a repudiatory breach at common law were identified by the Court of Appeal in its earlier decision in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR(R) 413:

• Situation 1: where the contract clearly and unambiguously states that the innocent party may terminate the contract upon a certain breach occurring;
• Situation 2: where a party, by words or conduct, renounces the contract;
• Situation 3(a): where the parties intended a clause to be so important that any breach of it, regardless of the actual consequences, would entitle the innocent party to terminate; and
• Situation 3(b): where the nature and consequences of a breach will deprive the innocent party of substantially the whole benefit of the contract.

The parties did not dispute that Situations 1 and 2 were inapplicable in this case. As for Situation 3, the Court of Appeal found that the judge in the court below had failed to consider situation 3(a) and had only considered situation 3(b). Here, given the level of trust and responsibility given by Phosagro to Piattchanine, the clause in his contract which required him to 'faithfully serve the Company in all respects and use his best endeavours to promote the interests of the Company' was a condition any slight breach of which justified immediate termination. The Court further found that this clause was breached by Piattchanine's application of the Expense Accounting Practice, since it was likely that not all of the personal expenses claimed by Piattchanine would be captured by the exercise and be subsequently recovered by Phosagro. Accordingly, the Court of Appeal found that Piattchanine's conduct constituted 'serious misconduct', which meant that he was not entitled to the termination benefits that he claimed under his employment contract.

Other issues

Situation 3(b)

For the sake of completeness, the Court of Appeal considered whether Situation 3(b) was available to Phosagro as an additional ground to refuse Piattchanine the termination benefits that he claimed. The Court answered the question in the negative, as the application of the Expense Accounting Practice did not detract from Piattchanine's overall contribution to Phosagro and hence did not deprive Phosagro of substantially the whole benefit of his employment contract.

Wilful breach

Another ground on which the employment contract could have been terminated under clause 20 was a 'wilful breach or non-observance' of the contract. The Court of Appeal also considered this ground for completeness. The Court held that Piattchanine did not commit a wilful breach of the contract because he genuinely believed that he was entitled to apply the Expense Accounting Practice and to claim his personal expenses throughout the year so long as he reimbursed the company for his personal expenses at the end of the year. However, this did not detract from the Court's earlier finding that applying the Expense Accounting Practice amounted to 'serious misconduct'.

Evidence

Section 108 of the Evidence Act (Cap 97) provides that 'when any fact is especially within the knowledge of any person, the burden of proving that fact is upon him'. Phosagro argued that whether expenses were personal or business-related was a fact especially within Piattchanine's knowledge, and that Piattchanine therefore bore the onus of proving that all of the expenses that he had claimed were legitimate corporate expenses. The Court of Appeal rejected Phosagro's arguments. It held that a mere allegation that certain expenses were personal and the mere fact that the Expense Accounting Practice was improper were not sufficient to establish a prima facie case that all of the expenses claimed by Piattchanine were personal expenses. The court also considered it significant that Phosagro had failed to call a representative from its external accountants to give evidence on whether the claims made by Piattchanine were authorised or unauthorised.

What this means for employers

When drafting an employment contract, employers should consider whether there are any clauses in the contract that are so important that even a minor breach should be able to justify summary dismissal. If so, employers should expressly set these out to make it easier for a court to find that breach of the clause amounts to serious misconduct. Employers who take on transferred employees following a merger or acquisition are also advised to review the existing practices to ensure that the new employees are not accustomed to practices that may constitute serious misconduct.

By Fatim Jamubhoy, Tess Lumsdaine, Sarah Yazid and Barry Wang