Implied term of mutual trust and confidence deemed a part of Australian employment contracts

26 September 2013

In a recent Full Bench majority decision of Commonwealth Bank of Australia v Barker [2013] FCAFC 83, the Federal Court has upheld that the term of mutual trust and confidence is capable of being implied into employment contracts. 

In its decision the Court determined that, although an employer’s policy may be expressly excluded in an employment contract, a failure by the employer to comply with such policy may nonetheless constitute a breach of a term of mutual trust and confidence which is to be implied into the contract.

The facts

Mr Barker was a long-standing employee of the Commonwealth Bank of Australia (“CBA”), having been employed by them since 1981.  In 2009, CBA underwent a restructure, and made Mr Barker’s position redundant.  CBA’s redundancy and redeployment policies clearly provided that they were not to be incorporated as terms of the employment contract.

On 9 April 2009, CBA terminated Mr Barker’s employment. However, other than emailing Mr Barker towards the end of his redeployment period to inform him of a relevant interstate position, there were no other noteworthy attempts by CBA to explore appropriate redeployment.

At Trial

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 to assign Mr Barker to a new position, following his redundancy.  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 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 lost opportunity of being redeployment pursuant to CBA’s redeployment policy.

On Appeal

CBA brought an appeal submitting that there was no such breach, and that Justice Besanko had erred in finding the existence of the implied term in Mr Barker’s contract. 

In a 2:1 majority decision, the Federal Court Full Bench found that there was a basis (namely a “necessity” test) for upholding the existence of the implied term of mutual trust and confidence in the employment contract between the parties.  The Court reasoned that the development of an implied term is consistent with a contemporary view of the employment contract.  The Court also considered, as relevant circumstances, the fact that Mr Barker had been a loyal and long-standing employee of CBA; that CBA was a large and wide-spanning organisation throughout Australia; and that the employment contract contained a clause which provided for his dismissal, should CBA be unable to assign or redeploy him to another position.  As such, the Court found that CBA was required, from the time of Mr Barker being notified of his redundancy, to take positive steps to provide him with opportunities to apply for other positions in the bank. 

Although the Court found the relevant policy was excluded from the employment contract, it determined CBA had nevertheless breached the implied contractual term of mutual trust and confidence.  Whilst the primary Judge’s decision was based on a breach of CBA’s policy amounting to a breach of the implied term, the Full Bench majority found that the general duty of co-operation (arising from UK law) was the basis for such implied term.  For the duty to operate, it was necessary to identify a benefit conferred under the employment contract and that the possibility of redeployment within the Bank being referred to in the contract conferred such a benefit.

The Full Bench accordingly dismissed CBA’s appeal.

Lessons for employers

This case places significant obligations on employers to follow their own policies in their dealings with their employees.  Even if a policy provides that it does not form part of an employee’s contract and/or such contract specifically excludes obligations being imposed on an employer by way of a policy, the employer may still not be “out of the woods” and will still be required to treat the employee fairly (which would include not terminating the employment relationship capriciously).  However, each case will depend on its own facts and circumstances as to whether an implied term of mutual trust and confidence has been breached giving rise to a claim for damages.

Furthermore, extra care needs to be taken by employers to ensure that rights or benefits (expressly or impliedly) conferred on an employee in a contract are not disregarded, particularly where they are related or referrable to a policy.

Finally, it is arguable whether an employer can avoid a finding of an implied term of mutual trust and confidence by specifically excluding such term in a contract.  The downside for an employer in doing so would be that it would itself not be able to rely on such term in taking disciplinary action against an employee.