Australia: New life breathed into implied term of mutual trust and confidence in employment contracts

Last Updated: 9 October 2012
Article by Charles Power

Most Read Contributor in Australia, September 2016

Over recent decades Australian courts and tribunals have wrestled with the notion of whether parties in an employment relationship owe a contractual duty to each other not to unreasonably harm the trust and confidence relationship that necessarily underpins the employment relationship. Courts in the United Kingdom and New Zealand have accepted that a term giving rise to such a duty is implied by law into employment contracts. While the position in Australia is not as clear, the recent decision in Barker v Commonwealth Bank of Australia on 3 September 2012 has breathed new life into in the mercurial implied term of mutual trust and confidence.

The mutual trust and confidence term

The mutual trust and confidence term has been asserted to give rise to a duty by both parties not to, without reasonable and proper cause, conduct themselves in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. For example, this term has been found to have been breached where an investigation into alleged misconduct was unreasonably prolonged. The authorities supporting the existence of such an implied term also recognise a so-called "exclusion zone", namely that the term does not apply at the point of dismissal.

Mr Barker alleged that his employer, the Commonwealth Bank of Australia (CBA), breached the mutual trust and confidence term in his employment contract in selecting him for redundancy and in failing to make sufficient efforts to redeploy him before deciding to retrench him. This conduct was alleged to have amounted to a serious breach of a policy that CBA adopts in relation to redundancy, redeployment and retraining (Redeployment Policy). The Redeployment Policy is promulgated to all CBA employees and contains the disclaimer that it was "not in any way incorporated as part of any industrial award or agreement entered into by the Bank, nor does it form any part of an employee's contract of employment."

Besanko J rejected all the arguments that the Redeployment Policy formed part of the employment contract, either expressly or by implication. However His Honour held that the CBA's employment contract with Mr Barker contained the implied term of mutual trust and confidence and that this term had application to CBA's conduct before it elected to retrench Mr Barker (i.e. the alleged breach of the mutual trust and confidence term did not fall with in the dismissal "exclusion zone").

Besanko J then considered whether CBA had breached the Redeployment Policy and, for the purposes of compliance with this implied term, whether that breach was a "serious breach". Besanko J held that this was the required threshold before there was a breach of the implied term. Besanko J was also clear in pointing out that the decision did not turn on whether the policy was a term and condition of the employment contract, which it was not, or go to the question of qualifying the Bank's power to terminate Mr Barker's employment in accordance with the terms of the employment contract. Besanko J emphasised that the question concerned whether the implied term was breached prior to the event of the termination of the employment. In this context, Besanko J stated that this implied term was not a "back door method" of avoiding the provisions of the policy and contract that provided the policy was not a contractual document.

Besanko J found that the decision to make Mr Barker's position redundant was not a serious breach of the Redeployment Policy. In making this finding, Besanko J noted that allowing the implied term of mutual trust and confidence to affect a retrenchment decision would go further than how the principle has been applied in other jurisdictions and also, would be contrary to the express power to terminate the contract at any time that was contained in Mr Barker's employment contract.

Besanko J then considered whether CBA had complied with its Redeployment Policy and found that it had not done so. Besanko J stated: "The Bank's almost total inactivity within a reasonable period means that its breach of its Redeployment Policy was a serious breach and that it was a breach of the implied term of mutual trust and confidence."

What is the consequence of a breach of this term?

Where the term is breached damages can be awarded. In this context, the Court considered what would have occurred but for the breach of the Redeployment Policy. The Court held that on the balance of probabilities it was not satisfied that if the Bank had followed the Redeployment Policy Mr Barker would have been redeployed. On the other hand, the Court found that there remained a real and not insubstantial chance that Mr Barber could well have been redeployed, based on the identification of a number of available roles at or about the time of Mr Barker's retrenchment. The Court assessed that chance of redeployment as being 25%.

Based on this assessment, the Court determined the economic loss suffered by Mr Barker up to the date of the decision and assuming he continued working up to a retirement age set between 60 and 65 years as $1,270,000.00. This meant he was awarded damages for economic loss of $317,500.00.

Key implications for employers

This is a significant decision for employers as it illustrates the scope of the implied term of mutual trust and confidence.

  • It will mean that employers must now focus more carefully on the terms of the policies to ensure they are complied with even if the employment contracts contain provisions specifying that policies do not have contractual force and do not form part of any employee's employment contract. It should also mean that employers must revisit the wording of their policies to ensure they are not drafted in terms that are too prescriptive and which can too easily lead to allegations of breach and, particularly, serious breach.
  • This decision also has broader ramifications for employers. The analysis applied in this decision can be applied to the context of bullying and harassment policies, consultation provisions in enterprise agreements as well as other contexts. A failure to follow the processes identified may now more readily lead to allegations of a breach of this implied term.
  • It should also not be forgotten that this implied term operates in respect of the employment contract. It is therefore open to employers to exclude its operation by an express provision in their employment contracts. Many employment contracts and policies contain exclusionary provisions, such as that contained in CBA's Redeployment Policy, which seek to clarify that policies do not form part of the employment contract. Employers should consider whether to extend this provision to make it clear that the employer's compliance with the policy does not affect any duty or obligation owed to the employee under the employment contract.

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.

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