High Court: no implied term of mutual trust and confidence

September 2014

The High Court has unanimously found that employers are not bound by an implied term of mutual trust and confidence.

The finding overrules the Federal Court decision in Commonwealth Bank of Australia v Barker. There, a 2-1 majority had decided that, unless expressly excluded, employment contracts contain an implied term 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 the employer and employee".

Facts

Mr Barker joined the Bank as a junior teller in 1981. Over the next 28 years, he was promoted to Executive Manager. In 2009, his position became redundant. The Bank said it would consult and seek to redeploy him, consistent with its redeployment policy (which, importantly, stated that it did not form part of an employee's contract).

Mr Barker handed back his mobile phone and was not required to attend work. His intranet and email access ceased. Unfortunately, Human Resources continued to try to contact him through his email and mobile phone(unaware he no longer had such access). No contact was made until it was too late and Mr Barker was then retrenched.

Federal Court decisions

Mr Barker was not able to bring an unfair dismissal claim as his remuneration was above the high income threshold for employees not covered by an industrial award or agreement.

Instead, Mr Barker claimed a breach of an implied contractual term of mutual trust and confidence. He said this term required the Bank to apply its redeployment policy or at least take greater steps to assist with redeployment.

The Bank, to its credit, accepted it had "dropped the ball", but denied there was any implied term of mutual trust and confidence. The Bank denied that it was under any contractual obligation to try to redeploy Mr Barker (whether in accordance with its policy or at all).

Justice Besanko found that a term of mutual trust and confidence should be implied in employment contracts, and that it required the Bank to apply its redeployment policy. Mr Barker was awarded $317,500 for loss of a chance of redeployment.

The Bank appealed. In a 2-1 majority decision, a Full Court of the Federal Court found that a term of trust and confidence should be implied into Australian employment contracts, unless specifically excluded. The majority disagreed with Justice Besanko's finding that the implied term required the Bank to follow its redeployment policy (noting that the policy was not incorporated into the contract). The majority also held the term did not apply to conduct at the time of dismissal, or to steps connected to dismissal. Nevertheless, the majority still held it required the Bank to take positive steps to consult about redeployment and permit Mr Barker to apply for alternative positions.

In a strong dissenting decision, Justice Jessup held that United Kingdom cases implying a term of mutual trust and confidence should not be applied in Australia (especially given the existence, in Australia, of unfair dismissal laws and other statutory remedies).

High Court decision

A five member bench of the High Court unanimously found that a term of mutual trust and confidence is not automatically implied into Australian employment contracts. Although three separate decisions were delivered, all Judges agreed the implication of such a term was not necessary to give business efficacy to an employment contract. This is a crucial requirement before any contractual term is implied as a matter of law. The Court confirmed that it was up to Parliament to decide if such a term was required in employment contracts.

The High Court separately upheld a small award of compensation which the Bank had already conceded was owed in respect of notice of termination under the contract.

The Judges left open the possibility that Australian employment contracts may require employers to act in good faith. The Judges did not consider it was appropriate to decide this issue. This door is, therefore, left unlocked and it may lead to future arguments that unfair or inconsistent conduct by an employer will give rise to a breach of contract.

What does the decision mean in practice?

Many employers will breathe a sigh of relief. The decision means there will be less scope for employees, particularly senior managers who are excluded from unfair dismissal laws, to bring claims about conduct claimed to be unfair or destructive of mutual trust and confidence. It is critical, however, that employers remain vigilant that:

  • written terms of employment contracts are not drafted so as to oblige the employer to follow prescriptive processes prior to implementing a dismissal (whether due to redundancy or other reasons); and
  • policy and procedure documents contain specific statements that they do not form part of employment contracts (this is particularly important for policies which deal with redeployment, redundancy entitlements, or other investigative or pre-termination procedures).

It is also very important for practitioners to remember that, where an employee is covered by unfair dismissal laws, a failure to apply fair redeployment processes in accordance with policy would almost certainly give rise to significant exposure.

A copy of the High Court's decision can be viewed by clicking here.