Australia: Implied term of trust and confidence extinguished by the High Court

The High Court of Australia ("High Court") has unanimously found that the term of mutual trust and confidence should not be implied by law into all Australian employment contracts.

In doing so, the High Court overturned two previous decisions in the same case at a lower level which had opened the door for a new ground of damages that could be brought independently of, or added to, claims for breach of an employment contract.

Damages can no longer be claimed on these grounds.

BACKGROUND

The High Court's decision overturns the findings of both a single judge of the Federal Court and the Full Court of the Federal Court ("Full Court") that the duty of mutual trust and confidence was implied by law into the written employment contract ("Agreement") that existed between Mr Barker and the Commonwealth Bank of Australia ("CBA").

On 3 September 2012, Justice Besanko of the Federal Court found that the term of mutual trust and confidence was implied into the Agreement and that the CBA's failure to comply with its redeployment policy constituted a breach of the implied term. For the factual background to the case and the decision at first instance, see our earlier article.

On appeal, the Full Court affirmed the decision at first instance, also finding that the term of mutual trust and confidence was implied by law into the Agreement. For an analysis of that decision, see our earlier article.

HIGH COURT DECISION

The primary question considered by the High Court was whether, under the common law of Australia, a term of mutual trust and confidence is implied in all employment contracts, that the parties will not, without reasonable cause, conduct themselves in a manner that is likely to destroy or seriously damage the relationship of trust and confidence between them.

Chief Justice French and Justices Bell and Keane reasoned that to include such a term would involve taking a step beyond the "legitimate law-making function of the courts".

The High Court did not follow English case precedents on this issue, which had been adopted by the Full Court, distinguishing the House of Lords' decision in 1997 which implied a term of mutual trust and confidence into English employment contracts (Malik v Bank of Credit and Commerce International SA (In Compulsory Liquidation).

The High Court in CBA v Barker found that "the implied duty of trust and confidence as propounded in Malik is directed, in broad terms, to the relationship between employer and employee rather than to performance of contract... It depends upon a view of social conditions and desirable social policy that informs a transformative approach to the contract of employment in law. It should not be accepted as applicable, by the judicial branch of government, to employment contracts in Australia".

The High Court overturned the Federal Court's order of damages in the sum of $317,000 and in lieu ordered damages in favour of Mr Barker of $11,692.31 with interest, an entitlement which had already been conceded by the parties and related to a separate issue.

WAS MUTUAL TRUST AND CONFIDENCE 'NECESSARY'?

The High Court applied the test of necessity in determining whether the term of mutual trust and confidence should be implied into the class of contracts in question, all employment contracts.
The concept of necessity was broad, defined by reference to what "the nature of the contract itself implicitly requires". Although French, CJ and Bell and Keane, JJ found that the duty to cooperate satisfied the necessity criterion, they found that the implied term of mutual trust and confidence "imposed mutual obligations wider than those which are necessary".

Justice Kiefel in a separate judgment noted that, in determining the requirement of necessity, "it is not the particular relationship of the parties to the contract which is in question...It is the relationship of employer and employee more generally which identifies what is necessary to the operation or fulfilment of employment agreements".

Justice Gageler considered that implying a term of mutual trust and confidence into all employment contracts, "in its intersection with the law of unfair dismissal,...would intrude a common law policy choice of broad and uncertain scope into an area of frequent, detailed and often contentious legislative activity".

The High Court acknowledged the need for a cautious approach to be taken, given the possible implications of implying the term of mutual trust and confidence into all employment contracts, including the imposition of obligations not only on employers but also on employees, whose "voices...[were] not heard in this appeal", and the extension to a broader positive obligation. "The complex policy considerations encompassed by those views of the implication mark it, in the Australian context, as a matter more appropriate for the legislature than for the courts to determine."

The High Court also rejected the notion that the terms should be implied in fact into Mr Barker's employment agreement on other grounds including Mr Barker's seniority, long and distinguished career with the CBA and the silence of the contract on matters of trust and confidence.

IMPACT OF DECISION

Breach of the mutual trust and confidence term has applied where an employer significantly fails to follow requirements in its own policies and those policies are found not to form part of the employment contract.

The option for a claim by an employee no longer exists on these grounds.

A narrower option may still exist where it can be claimed that the employer failed in its duty of co-operation to an employee.

The decision may create some impetus for proposed legislative amendments to incorporate a mutual duty of trust and confidence into all employment contracts. However, this is not a matter that is likely to be high on the agenda of the coalition government nor even of the labor opposition (given that such a remedy would most commonly be used by higher paid employees who do not have access to the statutory unfair dismissal regime).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.