For the first time the Federal Court of Australia has
found an implied term of mutual trust and confidence to exist in an
employment contract under Australian law. What does this mean for
employers everywhere, ask Dr Graham Smith and Ned
For the first time the Federal Court of Australia has found an
implied term of mutual trust and confidence (the Implied Term) to
exist in an employment contract under Australian law.
The contract of employment
The relevant contract considered by the Court provided that, if
the Executive's position was made redundant and the employer
was unable to redeploy him in its operations, he was to receive a
redundancy entitlement commensurate with his service. An appendix
to the contract provided that the employee should be familiar with
policies of the employer which applied to his employment. Those
policies included the Redundancy, Redeployment, Retrenchment and
Outplacement Policy (the Redeployment Policy).
It was specifically stated in the manual that held the
Redeployment Policy that these polices do not form part of the
employment contract. In this regard Justice Besanko followed the
decision of Yousif v Commonwealth Bank of Australia (2010) 193 IR
212 that held, in the absence of countervailing factors, a policy
did not form part of the contract where it (the policy) expressly
Despite holding that the Redeployment Policy did not form part
of the employment contract Justice Besanko still found that a
serious breach of that policy would gave rise to a breach of the
Implied Term and therefore to a claim for damages.
The implied term of mutual trust and confidence in
contracts of employment?
Justice Besanko relied on the English decsion of Malik v Bank of
Credit and Commerce International (in liq.)  AC 20 which
received support from the High Court in Koehler v Cerebos (Aust)
Ltd (2005) 222 CLR 44 in deciding that the Implied Term did exist
in a contract of employment in Australia and that such a term would
be breached in circumstances where:
an employer does not have a reasonable and proper cause for
their conduct; and
such conduct is likely to destroy or seriously damage the
relationship of confidence and trust between the employer and
Justice Besanko noted that not every breach of an employment
policy would give rise to a breach of the Implied Term, what was
required was a serious breach.
A serious breach of employment policies will not only be
considered a breach of the Implied Term but may result in a Court
awarding damages to an employee;
Expressly excluding policies from the contract of employment
will not prevent a breach of the Implied Term in situation where
there is a serious breach of the policy; and
Following this decision it will not be enough to generally
exclude employment policies or specific policies from a contract of
employment to avoid breaching the Implied Term the Implied Term
itself will need to be expressly excluded from the contract.
Next steps for employers
To avoid inadvertently breaching the Implied Term employers
systematically review their employment policies;
monitor compliance with their policies;
consider expressly excluding the Implied Term from contracts of
employment by an express written term; and
look out for developments in the area, including a potential
We can assist by advising on how to vary existing contracts of
employment to exclude the Implied Term and on clauses to include in
new contracts offered by employers.
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.
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