Australia: Implied Term Of Mutual Trust And Confidence Continues To Gain Ground

Last Updated: 20 November 2008
Article by Gerard Phillips

Originally Published 28th August 2008

Last year we reported on the decision of Justice Rothman in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney. In that case, His Honour had to determine whether under Australian law a person's employment contract contained the implied duties of mutual trust and confidence and good faith. That is, the question was whether these duties should be regarded as automatically arising in the employment relationship.

In that case, His Honour found that the employment contract did contain the two implied duties. In broad terms, the duty of mutual trust and confidence was described as an obligation that a party would not, without reasonable or proper cause, conduct itself in a manner calculated or likely to destroy or damage the mutual trust and confidence between employer and employee.

The duty of good faith was described as requiring that a party exercise any of its rights or duties honestly and reasonably, with prudence, caution and diligence, and with due care to avoid or minimise adverse consequences to the other party that are inconsistent with the agreed common purpose and expectations of the parties to the contract.

In finding that there was an implied duty of mutual trust and confidence, Justice Rothman drew on both English and Australian precedent. In that regard, his finding that the implied term arose in that case was not particularly surprising. However, his finding of an implied duty of good faith was noteworthy as it was the first time a superior court in Australia had found that such a duty automatically arose out of the employment relationship.

Since the decision of Justice Rothman in February 2007, the courts have been required to consider the implied duty of mutual trust and confidence in a number of cases. There seems to be growing acceptance of the implied term in Australian law. For instance:

  • Acting Justice Berman of the Supreme Court of New South Wales held that the implied term applies to the conduct of disciplinary investigations by an employer. Importantly, however, it does not require that the employer carry out an investigation to a standard which might be expected of the police nor does it require, generally, an obligation to afford natural justice to the employee: Morton v The Transport Appeal Board.
  • Justice Anderson of the Supreme Court of South Australia held that an employer had breached the implied term by failing to provide an employee with adequate support in circumstances where the employee was suffering from work-related stress. His Honour said that the implied term required the employer to properly train, supervise and manage the performance of the employee, all of which had not taken place in that case: McDonald v State of South Australia.
  • Justice Rothman found that an employer had breached the implied term by purporting to indefinitely "suspend" an employee from her duties: Downe v Sydney West Area Health Service.

It is worth noting that in the last decision, Justice Rothman confirmed the existence (at least in that case) of an implied term of good faith. His Honour did not elaborate as to why the duty arose in that case, other than to simply adopt his reasoning in the Russell decision.

To the best of our knowledge, there is only one other case in which the implied term of good faith has been held to exist. In Taske v Occupational and Medical Innovations Limited, Justice Moynihan of the Supreme Court of Queensland found that "[in] cases such as this there is an implied term that the parties act in good faith in a relationship of mutual trust and confidence". In support of this statement His Honour cited the Russell decision.

It is relevant to note that the Russell decision has been appealed.

Implications for employers

There appears to be a growing acceptance that under Australian law all employment contracts contain an implied term of mutual trust and confidence – that a party must not, without reasonable or proper cause, conduct itself in a manner calculated or likely to destroy or damage the mutual trust and confidence between employer and employee. However, the question is by no means settled. Until there is a definitive ruling by the High Court as to the existence of the term, there will be room to debate whether in a particular case the implied term arises.

Until that time, employers should be aware that the implied term is being increasingly used by disgruntled employees and former employees to challenge conduct by their employers. In some respects it could be said that the development of common law in this area has provided employees with an avenue to challenge the termination of their employment to replace those which might have been lost following the Federal reforms in 2006.

It is far less certain that there is an implied duty of good faith under Australian law. However, employers should expect that an employee who asserts the existence of a duty of mutual trust and confidence would also assert the existence of one of good faith.

Whether separately or combined, the implied terms would give an employee a basis to challenge any unreasonable or capricious behaviour by an employer during the employment relationship. The possibility that one or both of the duties might be found to exist in any given case should cause employers to be circumspect as to how they treat their employees, particularly in relation to matters such as performance management and disciplinary investigations.

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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