Australia: Groundbreaking ruling on mutual trust and confidence

A NSW Supreme Court of Appeal bench of five judges recently delivered a groundbreaking decision on implied terms of mutual trust and confidence. In Shaw v State of New South Wales [2012] NSWCA 102, a unanimous court upheld an appeal which followed the District Court judge striking out the mutual trust and confidence claim on the basis that it wouldn't lead to damages.


Each appellant was, in 1999, appointed an "officer" (as defined by the Teaching Service Act 1980) of the Education Teaching Service of New South Wales. Each appointment was made under that Act and, as a result, each appellant was employed by the Crown in right of New South Wales. Each was also subject to the Teaching Service Regulation 2007.

Under the applicable legislation, the appointment of each appellant was subject to a mandatory probationary period of 12 months. The appellants were assigned to Bourke Street Public School and commenced working there.

The appointment of each appellant was annulled by the Director-General of Education on 20 March 2000. Each annulment was in accordance with the Teaching Service Act 1980 and resulted in the person concerned ceasing to be an officer of the Education Teaching Service and a Crown employee.

In the District Court proceedings, the appellants as plaintiffs sued the respondent, the State of New South Wales, as defendant, for breach of contract, negligence and breach of statutory duty and claimed damages. The plaintiffs pleaded that there was an implied term of the employment contract that the defendants would not do anything to destroy or seriously damage the relationship of mutual trust and confidence between the parties. The plaintiffs claimed that the defendant had destroyed the mutual trust and confidence between the parties, and as such, had repudiated the contract of employment, or, in the alternative, had constructively dismissed the plaintiffs.

The primary judge ordered that the mutual trust and confidence claim be struck out on the basis that even if the plaintiffs were successful in establishing the implied term and breach thereof, they would not be entitled to damages (pursuant to the bar to damages in Addis v Gramophone Pty Ltd [1999] UKHL 1). This was on the basis that the unavailability of damages would mean that the pursuit of the claims was "a significant waste of time and costs" amounting to an abuse of process.

Grounds of appeal

The appellants submitted that the law as it stands today is not in a state where the unavailability of damages for such breach is so clear as to justify preventing a claim going to trial. Reference was made to the observation of Basten JA in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217 that the unavailability of damages for a breach of the term of mutual trust and confidence is "unclear" in light of the principle in Addis v Gramophone Co Ltd.

The respondent filed a notice of contention to the effect that the trial judge's decision should be upheld because the alleged term of mutual trust and confidence was not implied. Further, the respondent filed a notice of motion seeking an order that the pleading of the implied term be struck out.


In consideration of both the notice of appeal and notice of contention, Justice Barrett (with whom the other judges agreed) suggested that the parties should be regarded as having put into issue the triable quality of:

  1. the existence of the implied term of mutual trust and confidence;
  2. the proposition that the statutory basis of the employment of the appellants and the statutory incidents of that employment leave no scope for the operation of any such implied term; and
  3. the availability of damages, even if the implied term is included and breach of it established

Existence of implied term

Considering whether a term of mutual trust and confidence is, in the ordinary course, implied in every employment contract, Justice Barrett suggested that a positive answer for Australia may be indicated by the reference in Concut Pty Ltd v Worrell [2000] HCA 64 to "implied duties of loyalty, honesty, confidentiality and mutual trust" as incidents of the "ordinary relationship of employer and employee at common law".

Justice Barrett suggested that the existence of a term of mutual trust and confidence as a legal incident of employment contract has been recognised in England, as for example, in Malik v Bank of Credit & Commerce International SA [1997] UKHL wherein Lord Steyn saw the implied term as one requiring that an employer should not "conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust..."

Having established the existence of an implied term of mutual trust and confidence in employment contracts, his Honour ultimately determined that a pleading founded on such an implied term should be regarded as disclosing an issue that is triable at law.

Scope for the operation of the implied term

The respondent submitted that even if an implied term of mutual trust and confidence exists in employment contract, the legislation governing the appointment and tenure of officers of the Education Teaching Service of New South Wales is so detailed and comprehensive that there is no room for the operation of any such term in the contract between the parties.

In State of South Australia v McDonald [2009] SASC 219, the Court determined that the extensive regulation of employment of teachers in the State's schools by statute, regulation and binding industrial instruments made the implication of a term concerning mutual trust and confidence unnecessary.

Justice Barrett distinguished the present case from McDonald on the basis of a notable difference between the legislative circumstances under consideration in both cases. This difference came from a feature of the NSW statutory provisions that had no counterpart in SA, namely, the probationary appointments held by the appellants. As a result of their particular tenure, the appellants were governed by section 48 of the Teaching Service Act which denied them certain protective incidents favourable to employees that formed a part of the regime applicable to other teachers. His Honour felt that this gap in the statutory coverage in relation to probationary teachers allowed scope for the operation of the implied term of mutual trust and confidence.

Availability of damages

The suggestion that damages would not be awarded for breach of mutual trust and confidence was based upon the principle in Addis v Gramophone Co Ltd, namely, that an employee cannot recover damages for injured feelings or for any loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment.

The judgment provides a broad view of how the common law world has applied Addis over time. Reflecting upon the treatment of Addis by the English courts, his Honour suggested that in both Malik and Johnson v Unisys Ltd [2001] UKHL 13, the House of Lords confined Addis to wrongful dismissal cases involving breach of the implied term requiring reasonable notice of termination or payment in lieu.
Determining the position in Australia, his Honour suggested that there is no authority of the High Court or an intermediate appeal court in Australia that will unquestionably compel dismissal of the claim for damages for breach of contract. His Honour felt that the significant qualifications upon Addis created by Malik and Johnson will leave room for the appellants' claim to be addressed. His Honour said 'there is a cogent basis for arguing that damages for breach of contract may be awarded as claimed in paragraph 13 if the existence of the implied term and breach of it are established.

That is not to deny, however, that, as Lord Steyn pointed out in Malik, the "limiting principles of causation, remoteness and mitigation" may "present formidable practical obstacles to such claims succeeding"'. In conclusion his Honour considered to be remote the possibility that breach of the particular species of contractual term cannot ever sound in damages.

In summary, the court found that the following should go to trial:

  1. that the employment contract included the implied term of mutual trust and confidence;
  2. that the implied term operated despite the statutory basis of the employment of the appellants and the statutory incidents of that employment; and
  3. that damages are recoverable if breach of the implied term is established

The judgment marks a significant development of the common law approach to implied terms of mutual trust and confidence. The case provides a summary of the story so far and some further guidance on the possible award of damages for breach of such terms. This is a slowly evolving but important area of the law.

This article was first published in the Law Society Journal, July 2012

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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