A recent Victorian Supreme Court decision serves as a warning for Councils to ensure that they provide procedural fairness to CEOs if they wish to dismiss them prior to the expiry of their contracted term, in order to ensure that they comply with the rules of natural justice.
Facts
In Peter Schneider v Warrnambool City Council [2021] VSC 337, the CEO of Warrnambool City Council (Council), Mr Schneider, was dismissed in reliance upon the termination clause in his contract. The termination clause purportedly allowed Council to dismiss Mr Schneider “for no reason” subject to payment of the appropriate remuneration.
Prior to his dismissal, Mr Schneider became aware of Council’s intention to consider termination at a special meeting. Mr Schneider requested that he be provided with details of the Councillors’ issues and for a reasonable time to respond to those issues.
However, during the special meeting, the Councillors who sought to dismiss Mr Schneider refused to either disclose their reasons for wanting to terminate him or discuss the issue. A majority resolution was passed for Mr Schneider’s dismissal.
Arguments
Mr Schneider subsequently challenged the validity of his dismissal in the Supreme Court of Victoria. The arguments that arose centred on whether the dismissal was an exercise of a contractual right under the employment contract or an exercise of a statutory right under the Local Government Act 1989 (Vic) (Act) and therefore subject to the rules of natural justice.
Mr Schneider argued the latter. As Council’s power to appoint a CEO under section 94 of the Act includes the power to terminate the CEO, Mr Schneider contended that Council had exercised a statutory power when it terminated his appointment.
Furthermore, he argued that Council was required to follow the rules of natural justice by putting the issues to him and providing him with a chance to respond, before the decision to terminate his appointment was made. Mr Schneider argued that Council’s refusal to reveal the reasons for his dismissal amounted to non-compliance with the natural justice rules and hence his dismissal was not lawful.
Council, on the other hand, contended that Mr Schneider’s employment was governed solely by the terms of the contract. As such, Council submitted that it had exercised a contractual right of termination and was permitted to terminate “for no reason” (i.e. not comply with the rules of natural justice.) provided that the correct amount of notice was given.
Findings
The Judge who heard the matter found in favour of Mr Schneider.
McDonald J confirmed that when Council appointed Mr Schneider as CEO, section 94(1) of the Act also conferred on Council the power to terminate his appointment and employment. His Honour then found that, as the termination of Mr Schneider’s appointment to office involved a statutory impact on his rights and interests, it followed under the principles of administrative law that Council was bound to follow the rules of natural justice which had not been excluded by the Act.
In rejecting Council’s argument that the employment was solely governed by the contract (not the Act), his Honour referred to the many ways the Act regulated the appointment and employment contract. The Act requires CEOs be appointed on merit and requires Councils to hold annual performance reviews. As such, the Judge held that it would be inappropriate and contradictory for the CEO to be subject to arbitrary termination for “no reason”. While the contract allowed termination to occur “at any time”, the Judge was of the view that this did not establish a clear intention to exclude the rules of natural justice.
The rules of natural justice therefore applied, but had not been complied with by Council. On this basis, the Judge concluded that Mr Schneider’s dismissal was invalid and ordered Mr Schneider be reinstated as CEO.
Furthermore, the inconsistency between the termination clause in the contract and the statutory obligation to afford the CEO natural justice justified the partial severance of the termination clause. The Judge held that the “no reason” clause must be “read down” (or struck out) in the contract to exclude it as a ground of termination. This effectively rendered Council with no contractual right to terminate the CEO for “no reason”.
Implications for Council
The decision in the Schneider case illustrates the risks for Councils seeking to rely on termination clauses in CEO and Senior Officer employment contracts which allow for termination for “no reason” or which may otherwise be inconsistent with the Act, without considering issues of natural justice.
Any provisions in CEO and Senior Officer contracts which seem to grant Council the right to dismiss for “no reason” should be treated with caution and are very likely to be invalid. These contracts will most likely need to be read as if the relevant clauses have been struck out.
If the contracts include the ability to terminate “at any time” by giving a specified period of notice, the rules of natural justice including procedural fairness still need to be applied. The reasons for termination need to be put to the officer and the officer should to be given the chance to respond, before Council makes a decision about their employment.
While the Local Government Act 2020 (Vic) significantly changed the governance of CEO and Senior Officer appointments, the same language that was relevant in the Schneider case still appears in the 2020 legislation. As such, the lessons from this case will apply to existing contracts made under the 1989 legislation as well as more recent contracts made under the new Act.
If you would like any advice in this area, please contact our employment law and local government specialists at Hunt & Hunt.
~ with Michelle Nguyen, Lawyer
