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High Court to decide if mutual trust and confidence is implied in employment contracts


The High Court has granted the Commonwealth Bank of Australia (the Bank) special leave to appeal the Full Federal Court’s decision in Commonwealth Bank of Australia v Barker[2013] FCAFC 83. The case will be significant as it will be the first time the High Court has considered if an implied term of mutual trust and confidence exists in employment contracts.

 
What is the mutual duty of trust and confidence?

The Full Federal Court was the first Australian superior appellate court to consider the issue, and found that the mutual duty of trust and confidence exists as an implied term in employment contracts. It defined the implied term as providing that an:
 
… employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.
 
However, it noted that the content of the implied term must be moulded to the nature of the relationship, and the facts of each case.

Background

On 2 March 2009 the Bank advised Mr Barker (a senior executive) by letter that his position was to be made redundant from the close of business that day. The letter stated:
 
It is the Bank’s preference to redeploy you to a suitable position within the Bank and we will explore, in consultation with you, appropriate options.
 
Mr Barker was further advised that if he was not redeployed within the Bank, his employment would be terminated on 2 April 2009. Mr Barker subsequently had his employment terminated by reason of redundancy.
 
Mr Barker was successful in proceedings against the Bank. The Bank appealed, but was unsuccessful. The Bank then sought special leave to appeal, which was granted by the High Court. The appeal will be heard in 2014.
 

Decision at first instance 

 
  • certain policies of the Bank (which covered the issue of redundancy) were incorporated into his contract of employment and 
  • the Bank had breached those policies by failing to inform him of a possible alternative position within the Bank.
Mr Barker also lodged an alternative claim based upon an implied term of mutual trust and confidence between the Bank and Mr Barker in his employment contact.
 
At first instance, Besanko J found that the policies were not incorporated into, and did not form part of, Mr Barker’s contract of employment. Importantly however, Besanko J found that the implied term of mutual trust existed and had been breached by the Bank as a result of it failing to attempt to redeploy Mr Barker within a reasonable period, and awarded Mr Barker damages of $317,500.
 

Full Federal Court decision

The Full Federal Court, in a 2:1 decision, found that the implied term of mutual trust and confidence will ordinarily be implied into Australian employment contracts, unless expressly excluded.

However, as noted by the Full Federal Court, the implied term cannot be breached by the employer terminating the employment relationship per se; it can only be breached by the conduct and actions of the employer prior to the termination of employment. Jessup J (who was in dissent, but not on this point), when summarising the relevant UK law, gave the following example to illuminate the limits of the implied term:
…if the way in which the employer followed its disciplinary process was such as was likely seriously to damage the relationship of trust and confidence, the employee would be entitled to damages for any psychiatric illness which resulted, even if the result of the process was the uncontroversial conclusion that the employee should be dismissed.
The Full Federal Court found that the failure of the Bank to take adequate steps to contact Mr Barker with suitable redeployment opportunities within a reasonable timeframe was conduct that breached the implied term. Of particular relevance in reaching this conclusion was the length of Mr Barker’s service, his seniority and clause 8 of the employment contract which:
 
  • recognised the possibility of the employee’s position becoming redundant and 
  • referred to compensation that would be payable if the Bank was unable to provide an alternative position.
Mr Barker was awarded damages of $335,623.
 

Why will the decisions be important?

If the High Court confirms that the implied term exists, then employers will potentially be liable for any breaches of the implied term that occur prior to dismissing an employee. On one view, it would add another complexity to the internal redundancy, termination and disciplinary procedures of employers. On another view, the implied term would strike a balance between an employer’s managerial prerogative and an employee’s interest in not being unfairly or improperly exploited, thus providing vulnerable employees some protection against improper conduct and treatment by their employer.