High Court Declares No Implied Term of Mutual Trust and Confidence in Australian Employment Contracts

22 September 2014

On 10 September 2014, the High Court of Australia in the case of Commonwealth Bank of Australia vBarker [2014] HCA 32, ruled that the implied term of mutual trust and confidence should not, as a matter of law, be implied into Australian employment contracts.

The High Court overturned the decision of the Full Court of the Federal Court of Australia, and, in so doing, clarified the approach to be taken by our Courts in situations where employees who fall outside the scope of the unfair dismissal jurisdiction seek to argue a breach by employers of an implied term of trust and confidence.  In essence, that term requires both employers and employees to act in such a way so as not to destroy or seriously damage the relationship of confidence and trust between them, unless they have reasonable cause.

Background and Federal Court proceedings

Mr Barker commenced employment with the Commonwealth Bank of Australia (“CBA”) in 1981 and continued with them until his employment was terminated by reason of redundancy in April 2009.  At the time of his dismissal, Mr Barker was employed as an Executive Manager of CBA and an employment contract had been in place since 2004.  CBA’s redundancy and redeployment policies clearly stated that they were not to be incorporated as terms of the employment contract.

As part of a nationwide restructure, CBA decided to make Mr Barker’s position redundant.  They advised him that the decision was not related to his performance, but that if he was unable to be redeployed within the bank, his employment would be terminated approximately four weeks thereafter.  However, the CBA failed to take steps to explore appropriate redeployment of Mr Barker, and communications with him were limited in this regard.

In the Federal Court’s initial decision, Justice Besanko found that, whilst the redeployment policy was not a term of Mr Barker’s employment contract, CBA had seriously breached the policy by failing to take active steps assign Mr Barker to a new position following the redundancy of his previous position.  It was held that, by acting in breach of its policy, CBA had in turn breached the term of mutual trust and confidence, which was to be implied as a matter of law by virtue of the employer/employee relationship.  The Court awarded Mr Barker damages in excess of $300,000.00 for past and future economic loss based on his loss opportunity of being redeployed pursuant to CBA’s redeployment policy. 

On appeal, CBA sought to have Justice Besanko’s decision overturned, submitting that there was no such breach and that the Court had erred in finding the existence of the implied term of mutual trust and confidence in Mr Barker’s contract.  Having regard to Mr Barker’s length of service with CBA and various other factors, the Full Bench found that CBA was required, from the time of notifying Mr Barker of his redundancy, to take positive steps to redeploy him to other positions in the bank.  The court reasoned that the general duty of co-operation, which was a principle which had emerged over the years throughout UK law, was the basis for such implied term.  The Full Bench therefore dismissed CBA’s appeal and upheld the original decision.

Appeal to the High Court

The primary question on appeal to the High Court was whether or not the term of mutual trust and confidence was one inherently implied into employment contracts, under the common law of Australia.

The High Court unanimously, but way of three separate delivered decisions, held that the term was not capable of being implied into employment contracts, as it failed the critical test of necessity.  That is, the term was not necessary in the sense that without it, employment contracts would “be rendered nugatory or worthless, or seriously undermined”.  In regard to Mr Barker’s contract, the High Court stated that it clearly provided for redeployment options, and that the term was not necessary to impose an obligation on the CBA to ensure that Mr Barker received the benefit under the contract, being the opportunity for redeployment.

Whilst the implied term has been recognised by the UK courts as being a term to be implied by law in all employment contracts, the High Court reasoned that the historical development of the term in the UK was not applicable to Australian employment contracts.

The High Court recognised that the implied term carried a high level of uncertainty for both employers and employees, and their respective obligations under an employment contract.  It reasoned that the implied term should not be used by employees to conveniently fill a gap in the common law, and conveniently sidestep jurisdictional issues arising from unfair dismissal laws.  The High Court expressed its concern for the potential for the term to intrude upon the common law and a well-developed legislative framework, and that such an intrusion was needless, given that contracts of employment do not require such an implication for their effective operation.

Whilst the High Court ruled that the term was not capable of being implied into employment contracts in Australia, it acknowledged that the possibility for our Courts to nonetheless import a standard of good faith in the employment relationship.  However, this issue remains unresolved.  Furthermore, in one of the separate judgments, his Honour, Kiefel, J, left open for possible application (arising from UK case authorities) the potential for a claim for damages brought by an aggrieved employee for wrongful suspension, a “capricious” failure on the part of an employer to offer the same beneficial terms of redundancy, or an improper conduct of a disciplinary process, on the basis that it was conduct of a “trust-destroying” kind which was incompatible with the employment relationship.

Ramifications for employers

This High Court decision has generally positive ramifications for employers.  In particular, it should bring to an end the increasingly common practice of employees who, for jurisdictional reasons, are not able to bring unfair dismissal claims, and instead bring civil proceedings in our Courts against their former employers based on an alleged breach of an implied term of mutual trust and confidence in terminating their employment.

However, employers will most likely still be able to rely on a breach by an employee of his/her fiduciary duty or duty of good faith and to argue that such breach has led to a loss of trust and confidence in such employee which is incompatible with the continuation of the employment relationship.

Employers should, nevertheless, be wary of the possibility of employees alleging conduct on the part of employers which could be classed as “trust-destroying” and claiming damages arising from such conduct (whether it be in a constructive dismissal claim or otherwise).  Therefore, care should still be taken by employers not to behave in a capricious or unfair manner towards their employees (including complying with their own employment policies) during the course of employment, even if such employees are statute-bared from bringing an unfair dismissal claim.