WHITE & ORS v THE RESERVE BANK OF NEW ZEALAND CA404/2012 [2013] NZCA 663

WHITE & ORS v THE RESERVE BANK OF NEW ZEALAND CA404/2012 [2013] NZCA 663IN THE COURT OF APPEAL OF NEW ZEALANDCA404/2012[2013] NZCA 663BETWEEN BRUCE WHITE, IAN HARRISON,PETER KATZ, PETER LEDINGHAMand DAVID ARCHERAppellantsAND THE RESERVE BANK OF NEWZEALANDRespondentHearing: 31 October 2013Court: Harrison, White and Miller JJCounsel: I R Millard QC and N E Flint for AppellantsA R Galbraith QC and J B Opie for RespondentJudgment: 17 December 2013 at 4.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The first question is:Did the Employment Court fail to apply orthodox interpretationprinciples by failing to take into account the words "unless otherwise agreed in writing" in the applicants' employment contracts and by failingto consider what was implicit in those words against the background of past dealings and the obligations of good faith that arise in the context of an employment contract?This question is answered "no". We need not answer the second.C The respondent is entitled to costs and usual disbursements for a standard appeal on a Band A basis. We certify for two counsel.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)[1] The appellants are longstanding former employees, now retired, of the Reserve Bank of New Zealand, and members of its Staff Superannuation andProvident Fund. Their retirement benefits under the Fund's defined benefit divisionare calculated by reference to a percentage – known as "superable salary" – of their total annual remuneration before retirement.[2] The appellants sued the Bank in the Employment Court, claiming that it had breached their individual employment contracts by failing after 1994 to review their superable salary from time to time. They lost.1[3] This appeal was brought by leave2 on a question of law.3 The questions were formulated by counsel as follows:1. Did the Employment Court fail to apply orthodox interpretationprinciples by failing to take into account the words "unless otherwise agreed in writing" in the applicants' employment contracts and byfailing to consider what was implicit in those words against the background of past dealings and the obligations of good faith that arise in the context of an employment contract?2. If the answer to question one is yes, was the respondent required periodically to review the percentage of the total remuneration package that was deemed to be superable salary and to adjust the percentage having regard to the material revealed by the review.[4] The first of these is the question of law. It is settled that on an appeal under s 214(1) of the Employment Relations Act 2000 this Court may review theEmployment Court's methodological approach to contract interpretation.4 Only if that Court erred in principle may this Court interfere.1 White v Reserve Bank of New Zealand [2012] NZEmpC 20, [2012] ERNZ 18 [Employment Court decision].2 White v Reserve Bank of New Zealand [2012] NZCA 254.3 Employment Relations Act 2000, s 214(1).4 Service and Food Workers Union Nga Ringa Tota v Cerebos Gregg's Ltd [2012] NZCA 25, [2012] ERNZ 38 at [46].The narrativeThe defined contribution superannuation scheme[5] The Reserve Bank of New Zealand Staff Superannuation and Provident Fund was established in September 1935 at the same time as the Bank itself. It is controlled and managed by a group of trustees, of whom two are Bank representatives, one Board-appointed, and two elected by eligible members. Membership was at one time compulsory for all employees.[6] The rules of the Fund provided that employees were to contribute at a rate of six per cent of their salaries. For this purpose salary originally meant cash salary –that is, exclusive of all non-cash benefits or "perks" – and later superable salary. The Bank also contributes and it must keep the Fund sound; to that end it traditionally contributed at an actuarially assessed rate of about 12 per cent of cash salaries.[7] Several retirement benefits were calculated by reference to the employee'ssalary at retirement. Notably, a pension was calculated using the final average earnings during the five years before retirement.[8] The trustees might amend the rules of the Fund, but not so as to affect benefits adversely.The Executive Remuneration Paper[9] By the 1980s staff were receiving part of their overall remuneration in non-cash benefits such as low interest rate loans, company car usage, expense accounts, telephone accounts and professional club memberships. After interest rate controls ended in 1984, the loans were of substantial value to employees who were financing their houses, but of no utility to those who were not.[10] In 1988 the Bank began to reform its executive remuneration arrangements,moving to "total package remuneration". This regime was designed to valuenon-cash benefits (notably the low-rate mortgages and use of cars), to increase overall remuneration packages so as to attract and retain staff, and to relate totalremuneration more closely to "comparator institutions". Accordingly, non-cash benefits were ascribed a cash value which was treated as part of total remuneration.[11] The reform was introduced in a paper entitled "Executive Remuneration"written by Richard Lang, then Deputy Governor of the Bank. It is known as the ERP. Its salient features were:(a) The proposals were said to provide a "framework rather than a rigid structure" for fixing remuneration.(b) The Banks's primary policy objective was identified as that of recruiting and retaining "a good quality highly motivated staff" of atleast equal quality to those in comparable organisations. That meant paying remuneration at least equal to that paid for similar positions in comparable organisations.(c) For the purpose of fixing retirement benefits, the paper proposed abase salary of 70 per cent (excluding bonuses) of "total package entitlement", regardless of the form in which employees chose tostructure that entitlement. The percentage would "need to be reviewed from time to time in line with market indicators".[12] The Bank used a percentage of total remuneration packages for superannuation purposes because its liabilities for pensions and other retirement benefits were linked to salaries on retirement, and it did not want to add to those liabilities by moving to a total remuneration approach. The percentage of total remuneration that counted for superannuation purposes became known as superable salary. It was broadly equal to previous cash salaries, and it was used to calculate not only retirement benefits but also staff and Bank contributions.Developments 1988–1991[13] The Fund rules originally defined salary as the "ordinary salary" of a member in respect of his or her service to the Bank. This definition excluded non-cashbenefits. On 28 June 1988, several months before the ERP was issued, the definition was changed to reflect total remuneration and the superable salary concept.[14] Around 22 May 1989 executive staff were advised that the superable salary was currently 70 per cent of their packages. In 1990 it was reviewed but not changed, and in 1991 it was moved to 75 per cent. In that year the definition of salary was again changed, this time to provide that the superable salary percentage was to be agreed between the Bank and the employee:(a) in the case of any contributor whose ordinary salary per annum takes the form of a remuneration package (consisting partly of payment in cash, with the remainder being provided by way of non-cash benefits), means:(i) the contributor's ordinary salary per annum; or(ii) some specified proportion of the contributor's ordinarysalary per annum; as determined from time to time by agreement between the Bank and the contributor; and(iii) in any other case, means the contributor's ordinary salary perannum.[15] The Bank established a defined contribution division of the Fund in 1991, and the defined benefit division was closed to new members, apparently at the same time.Individual employment contracts and superable salary[16] It appears that before 1991 the terms of employment of Bank executives were not recorded in individual employment agreements. Junior employees had a collective agreement with the Bank, but the appellants, senior executives all, did not.[17] In anticipation of the Employment Contracts Act 1991 the Bank negotiated employment contracts with its senior staff. The negotiations were protracted, extending for more than a year between April 1991 and mid–1992. Counsel highlighted two features of the negotiations. First, by letter of 6 September 1991 theBank's personnel manager responded to a request for details of the executives' existing terms and conditions by listing "the major documents" containing such terms. The list began with the ERP. Second, the Bank reminded the employees on3 October 1991 that the ERP stated that it provided a "framework rather than a rigid structure" for fixing remuneration.[18] The employment contracts were executed for the most part in 1992, though one appellant did not sign his until 1995. Over succeeding years some signed new contracts which replaced the earlier ones. The contracts exhibit some variations. We need not discuss the differences, because it was not suggested that any given appellant is in any different position from the others.[19] The contracts specified the percentage – initially 75 per cent – of the value of their remuneration packages that was superable salary:For the purposes of this contract unless otherwise agreed in writing, superable salary shall be deemed to be 75 [per cent] of total remuneration package.[20] The contracts also contained provision for annual reviews of remuneration packages, which term was defined to include such benefits as an expense allowance, a car park, a home telephone, and medical insurance. The Bank was to undertake thereviews, taking into account remuneration in the marketplace and the employee'sperformance. We observe that the appellants have not alleged any breach of this provision; we understand that the Bank did conduct reviews as required. Where a review resulted in a salary increase, the amount of superable salary also increased.[21] The contracts did not require that the employee be a member of the Fund, but after 1994 they did provide that total remuneration included the Bank's contributionto the defined benefit or defined contribution division, as the case may be.[22] The contracts also contain an entire agreement clause:The terms and conditions set out in this contract shall represent all of the terms and conditions of employment (other than matters which are implied by law) and shall supersede all terms and conditions of employment which may have previously existed between the Bank and the employee. The terms and conditions of this contract shall not be amended, waived, or in any way altered unless both parties agree in writing.[23] In 1994 the percentage of total packages that was treated as superable salary was increased to 80 per cent, although it was expressed as 73 per cent because theBank's contribution was now included as part of total remuneration. After that yearthe Bank reviewed superable salary at irregular intervals by reference to what comparable employers paid comparable staff, but the percentage was not changed again. The last such review was in 2000.[24] Between 1994 and 2004 executives, including some of the appellants, occasionally signed new employment contracts, none of which mentioned the ERP or any obligation to review superable salary and all of which5 specified that, unless otherwise agreed in writing, superable salary was 73 per cent of total remuneration.The pleadings[25] In an amended statement of claim filed in the Employment Court theappellants narrated the facts and pleaded that an obligation "regularly to review thesuperable salary percentage relative to market comparators" and to "propose and make adjustments based on those reviews" was "established as" a term of theirindividual employment contracts.[26] That term was so established, they pleaded, by the ERP and confirmed by theBank's actions of 6 September 1991 and 14 September 1994. The first of these datesevidently refers to the letter to executives mentioned at [17] above. The second refers to the 1994 review of superable salary.[27] The appellants further pleaded that as a matter of "established practice"annual reviews were required. In argument before us Mr Millard QC contended that an obligation to review superable salary at that frequency was implicit in the contracts. The principal relief sought was an order that the Bank retrospectively review and recalculate annual superable salary percentages.5 One contract, that of Mr Katz, was in slightly different terms, but the differences are notmaterial.The Employment Court decision[28] Judge Ford observed that the appellants had put their case in various ways, not all of them pleaded. Notably, they sought to argue that the contracts were incomplete and relied on extrinsic material to introduce an additional obligation:6[37] Although it is not pleaded in such terms, the case for the plaintiffs appears to proceed on the basis that the contracts/employment agreements do not express the complete agreement between the parties. The submissions made on behalf of the plaintiffs focused on countless matters other than the relevant wording of the contractual documents. That approach ignores the well-established principle conveniently summarised by Richardson J inAttorney-General v Sears7 in these terms:While a contract may need to be seen in its factual and legal setting, thus having regard to its genesis and its object, the true character of a transaction is determined according to the terms of the legal arrangements actually entered and carried out, unless they are a sham or there are controlling statutory provisions requiring a different approach in the circumstances of the particular case. That is elementary law restated on numerous occasions in this Court. The focus must be on the contract into which these parties entered. What was their agreement?[38] Although the situation in other jurisdictions needs to be approached with a degree of caution, the principle referred to in Sears was recently reaffirmed by the United Kingdom Supreme Court in Autoclenz Ltd v Belcher8 where Lord Clarke SCJ, delivering the judgment of the SupremeCourt, affirmed: "The essential question in each case is what were the termsof the agreement".[29] The Judge also observed that the appellants complained that the rules of the Fund had been changed in a manner adverse to their interests, and alleged that the Bank was estopped, but neither of these matters had been pleaded.9 Although their evidence indicated that the employment contracts did not reflect what they had intended to agree with the Bank, they pleaded neither mistake nor rectification.10Nor had they pleaded another point that counsel sought to advance in argument;namely, that changes to the Fund rules breached the trustees' obligation to make nochange that adversely affected benefits.116 Employment Court decision, above n 1.7 Attorney-General v Sears [1995] 1 ERNZ 627 (CA) at 629.8 Autoclenz Ltd v Belcher [2011] UKSC 41, [2011] 4 All ER 745.9 At [31]–[32].10 At [34].11 At [35].[30] The Judge found the language of the employment contracts plain; they fixed a superable salary percentage and provided that only by agreement could it be varied,and they specified that they comprised the parties' entire agreement.12 Although he did not expressly say so, he must have accepted that the contracts did not incorporate the ERP. He held that the plain words of a written agreement may be interpreted differently if the contractual context indicates that the parties intended another meaning. But in this case the appellants had established no sound basis for requiring the Court to go beyond plain meaning.13 Later reviews of superable salary by the Bank did not constitute grounds for estoppel or evidence of the obligation: on the contrary, these actions were consistent with the contracts because the resulting changes to superable salary were agreed and documented as a contract variation.14The Judge also dismissed a claim that the Bank had demonstrated a lack of good faith in its dealings with the appellants.15Was the Employment Court's approach in error?[31] The appellants must point to some methodological error in the Employment Court's approach to construction. Counsel did not seriously contend that the Court had misdirected itself; he argued rather that it had "excluded from its actual consideration" various matters, being "reference to prior materials", reliance on theactions of the Bank, the good employer obligation, an implicit obligation to review arising from amendments to the Fund rules (on the premise that absent such reviews members would be worse off), and repetition of the words requiring written agreement in the superable salary and whole agreement clauses (this was said to signal that reviews would continue).[32] We emphasise, as did the Employment Court, the constraints of the pleading, which does not seek to avoid the contracts by any means, or have them rectified, or raise an estoppel, or challenge amendments to the Fund rules.[33] If in these circumstances the contracts are to be given the meaning for which the appellants contend it can only be by implication, for they nowhere specify that12 At [39].13 At [42].14 At [43]–[44].15 At [45].superable salary must be reviewed. And any attempt to imply terms must confront the express language, which specifies unambiguously that superable salary may bechanged by agreement, and that the contracts contain the parties' entire agreement.16[34] The appellants seek to bridge the gap between the express terms used and therelief sought by invoking the parties' pre-contractual negotiations and the employer'sduty of good faith. Mr Millard argued for an implied term which he expressed as follows:If, consistent with the ERP, market data shows the superable salary percentage should be more, then the Bank will propose a change.[35] This term fails almost all the traditional tests for implication:17 it is not necessary to lend business efficacy, nor so obvious as to go without saying, nor capable of clear expression, nor compatible with the express terms of the contracts. Nor would the contracts be reasonably understood, when read in context, to have that meaning.18 Notably, counsel's formulation purports to provide for agreement, as the contract requires, but actually denies the Bank the freedom not to agree: by compelling the Bank to offer an increase it turns the requirement for written agreement into a mere formality. Next, by incorporating the ERP the implied term would squarely contradict the whole agreement clause. It also cannot be said that reviews are necessary for business efficacy, especially when the contracts provide for annual reviews of total remuneration. We observe that the implied term does not specify the frequency of superable salary reviews. Finally, nor can it be said that"market data" would provide a clear and reliable way of gauging the Bank's obligation to "propose an increase", especially when defined benefit schemes wereswiftly becoming a thing of the past; and to the extent that the proposed termcontemplates a negotiation to follow the Bank's proposal, it recognises that verydifficulty.16 The decision in this case does not turn on whether such clauses are substantive or evidential: seeDavid McLauchlan "The Entire Agreement Clause: Conclusive or a Question of Weight?"(2012) 128 LQR 521.17 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC) at 282–283;Gibbston Downs Wines Ltd v Perpetual Trust Ltd [2013] NZCA 506 at [42]–[45] and Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160 at [25].18 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [25] [27].[36] The contracts provide that the Bank must be a good employer,19 and the Bank admits the obligation. We are prepared to assume without deciding that the obligation is in principle enforceable in a private action for compensation.20[37] However, it cannot be said that the good employer obligation requires that this particular implied term be imposed upon the Bank. The appellants implicitly concede that difficulty: their answer to the question why the obligation necessitates the implied term is that the Bank agreed to it. To present the argument in that way is to beg the question, which is: what did the Bank agree to? The contracts supply a plain answer.[38] The appellants feel a grievance attributable to what they see as the Bank'sfailure to adhere to the ERP or to tell them that it no longer meant to do so. They say that the Bank led them to believe reviews would continue. They maintain that, annual salary reviews notwithstanding, they have suffered a loss, especially as the Bank gradually did away with non-salary benefits during the 1990s, so increasing cash salary as a percentage of total remuneration. As an indicator of loss, they observe that for Bank staff employed under a collective agreement superable salary has risen to 90 per cent.[39] These complaints amount to an allegation that the employment contracts donot reflect the parties' agreement. The remedy, if one is available after all this time, must lie in rectification, which was not pleaded and would require the appellants to establish that their employment contracts did not accurately represent the mutual intention of the parties.21Decision[40] The appellants have failed to show that the Employment Court erred in its approach to construction of their employment contracts with the respondent. Theanswer to the first question is "no". We need not answer the second.19 See too Reserve Bank of New Zealand Act 1989, s 168.20 Compare Commissioner of Police v Campbell [2000] 1 ERNZ 432 (CA) at [15]–[16].21 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [67]; RichardBuxton "'Construction' and Rectification after Chartbrook" [2010] 69 CLJ 253 and David McLauchlan, above n 16, at 533.[41] The respondent is entitled to costs and usual disbursements for a standard appeal on a band A basis. We certify for two counsel.Solicitors:O'Sullivan & Associates, Wellington for AppellantsBuddle Findlay, Wellington for Respondent