An important decision by the New South Wales Court of Appeal provides some reassurance to employers concerned about a rising number of employee claims based on implied contractual duties.
The New South Wales Court of Appeal found that the scope and extent of any implied duty of good faith or trust and confidence in Australian employment contracts was uncertain, and that even if the duties do exist, a breach of such duties will not generally give rise to damages for distress, humiliation, injury to feelings or loss of reputation in what can be called unfair dismissal circumstances.
Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney  NSWCA 217
While each case turns on its own facts, this case supports the general propositions that:
- The existence, scope and extent of any implied duty of good faith or mutual trust and confidence in Australian employment contracts is uncertain.
- Employees cannot recover contractual damages for injury to feelings, humiliation, distress or lost employment prospects associated with an unfair dismissal.
- This is the position regardless of whether the injury or loss arises out of the dismissal itself or some step taken prior to dismissal such as suspension, or an adverse finding arising out of an employer's investigation.
Mr Russell had been the Director of Music at St Mary's Cathedral, Sydney, since 1976.
In 2000, a former sacristan at the Cathedral (Mr O'Grady) was prosecuted and ultimately convicted of charges of sexual misconduct. One of the charges included allegations that Mr Russell had walked into a room while Mr O'Grady was engaged in intimate sexual behaviour with two boys (choir members referred to in the proceedings as Mr Buckley and 'Mr X') and said 'Oh, I see that you're busy, I'll come back later'.
On 5 September 2002, the Church appointed a lawyer (Mr Cooke) to investigate Mr Russell's conduct. Mr Russell was provided with Mr Cooke's draft preliminary findings and given an opportunity to respond. In a letter to the Church dated 18 December 2002, Mr Russell alleged that the Church had failed to provide him with procedural fairness. In particular, Mr Cooke had not spoken to the witness Mr X during the investigation until making telephone contact on 27 November 2002. It was alleged that Mr Cooke was prepared to make an adverse finding against Mr Russell in relation to a statement of Mr X without even speaking to Mr X. When Mr Cooke did contact Mr X it was by telephone. Mr Cooke, it was alleged, took no steps to gauge, by face-to-face interview, the veracity of Mr X's evidence.
On 31 January 2003, the Church terminated Mr Russell's employment with six months' payment in lieu of notice. Mr Russell was reinstated after bringing successful unfair dismissal proceedings pursuant to section 84 of the Industrial Relations Act 1996 (NSW).
On 7 February 2005, Mr Russell commenced proceedings in the Supreme Court of New South Wales for breach of contract. He sought damages in relation to:
- Distress, humiliation, injury to feelings or loss of reputation.
- Costs of the unfair dismissal proceedings.
- Costs of a public relations consultant.
Justice Rothman at first instance found implied duties of good faith and mutual trust and confidence existed in the contract of employment. He also found that the dismissal had been in breach of contract but rejected the claims for damages.
On 8 September 2008, the NSW Court of Appeal also dismissed Mr Russell's appeal for damages.
Existence of implied terms of good faith and trust and confidence?
In the appeal, Justice Basten considered whether the employment contract contained implied contractual duties of good faith and trust and confidence (ie the duty not to act in a manner calculated to destroy or seriously damage the relationship of trust and confidence between employer and employee). Justice Basten considered that it was probably sufficient to identify those terms as a single obligation to treat employees fairly.
Justice Basten observed (emphasis in italics added):
'Recognising that an employer may act with reasonable and proper cause to pursue its own interests, whether or not they are adverse to those of the employee, and may terminate the employment at any time without cause on giving notice, casts some uncertainty on the scope and extent of the implied terms. In Australia, they have enjoyed more limited recognition than in the UK...'.
Justice Basten did not have to determine the existence, scope and extent of such implied terms because he found that, even if such duties existed, the Church had not acted in bad faith or in such a way as to seriously damage mutual trust and confidence. While a telephone interview may not have been the best means of assessing credibility, the fact that Mr X lived in Perth and was a police officer were material considerations for Mr Cooke in determining how to proceed. The fact that more could, and even should, have been done fell short of demonstrating any lack of good faith or conduct destructive of mutual confidence.
Justice Giles and Justice Campbell did not determine whether these implied terms should be recognised in Australia but merely assumed that they existed for the purposes of agreeing with Justice Basten's overall findings.
Damages for breach of implied terms?
Justice Basten clarified the present state of the law, being that damages for loss of reputation or injured feelings are not recoverable unless a breach of contract1 (including an employment contract) gives rise to either:
- A physical injury, psychiatric illness or physical inconvenience (which did not apply to Mr Russell)2.
- Disappointment where the subject matter of the contract is the provision of pleasure or enjoyment, (which does not apply to an employment contract)3.
Counsel for Mr Russell argued that these principles should be understood as being limited so that employees could not recover damages (for breach of contract in respect of injured feelings and loss of employment prospects) arising from the harsh and humiliating manner of dismissal. Counsel for Mr Russell contended, however, that employees could recover damages that flowed from, say, the adverse finding of an inquiry conducted by the employer, even if the inquiry ultimately led to dismissal.
Justice Basten disagreed, as such an approach would 'sidestep' existing authorities and create significant anomalies. For example, it may create a right for an employee to recover damages for injured feelings or loss of employment prospects in the less serious case of suspension of employment, but not in the case of dismissal.
Overall Justice Basten found that even if there was an implied contractual term that was breached by the Church, there was no basis for an award in the present case of general damages for distress, humiliation, injury to feelings or loss of reputation.
Implications for employers
Employees who are aggrieved by a dismissal will find it difficult to successfully claim damages against an employer for alleged breaches by the employer of implied duties of good faith and mutual trust and confidence. This is because:
- The Russell decision voices uncertainty as to the existence, scope and extent of any implied duty of good faith and mutual trust and confidence in Australia.
- Any finding by a court that an employer has breached an implied duty in the course of an unfair dismissal will not sound in damages for distress, humiliation, injury to feelings or loss of reputation unless the employee has experienced a physical injury, psychiatric illness or physical inconvenience.
1 Addis v Gramophone Co Ltd  AC 488.
2 Baltic Shipping Company v Dillon  HCA 4.
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