United States: Monthly Update—Australian Labour & Employment - September 2014

Last Updated: October 20 2014
Article by Adam Salter, Michael Whitbread and Andrew Berriman

On 10 September 2014, the High Court of Australia held that there is no duty of mutual trust and confidence implied by law in Australian employment contracts. In Commonwealth Bank of Australia v Barker [2014] HCA 32 ("Barker"), the High Court overturned the previous decision of the Full Federal Court and decided against applying the leading UK authority of Malik v Bank of Credit in Australia. 

The High Court ruled that the duty was not implied by law because it was not strictly necessary for employment contracts to operate in Australia. The term was not necessary primarily because it regulates an area of the employment relationship over which Parliament has already expressed control (through the Fair Work Act's unfair dismissal regime). The High Court believed that it was inappropriate for Australian court to enter this field and imply additional terms by law. 

This decision would appear to be the death knell for mutual trust and confidence claims favoured by plaintiffs' lawyers acting for senior employees who cannot access the statutory unfair dismissal regime. In particular, Barker prevents disgruntled employees and their lawyers from making ambit claims against the conduct of their former employer in the time leading up to dismissal or regarding the manner in which investigations are conducted by them. 

However, the High Court has left the door open for claims on the basis of a breach of the duty of cooperation, a breach of the implied duty of good faith in performance or even a breach of a duty implied by fact (but the latter could have problems with the business efficacy hurdle, as noted by three of the judges). Plaintiffs' lawyers may run these type of claims as alternatives to the claims that they have been running for breach of the implied duty of mutual trust and confidence.

Facts of the Case in Barker

The Commonwealth Bank ("Bank") employed Stephen Barker as an Executive Manager. Barker's employment contract contained a clause which provided that in the event of redundancy, the Bank would attempt to offer him redeployment opportunities. If he could not be redeployed and was made redundant, the Bank would pay the greater of two defined redundancy benefits.

In 2009, Bank representatives told Barker that his position was redundant and that he would soon be provided with an opportunity to apply for redeployment to available positions. On the day that he was informed of the redundancy, the Bank removed Barker's access to his work phone and email account. Despite this, the Bank continued to attempt to contact Barker on his work phone and email regarding redeployment opportunities. Unsurprisingly, Barker did not receive any of the emails relating to redeployment, and ultimately his employment was terminated. 

Barker claimed that a duty of mutual trust and confidence was implied into his employment contract and the Bank breached it by failing to inform him of redeployment opportunities. Accordingly, he sought damages beyond the redundancy payment that was made to him. 

Federal Court Proceedings

At first instance, Besanko J accepted that a duty of mutual trust and confidence was implied by law into all Australian employment contracts and ruled accordingly. The Bank appealed to the Full Federal Court but found no comfort there, with Jacobson and Lander JJ affirming the primary judgment. Only Jessup J declined to imply the term because it arose in a context peculiar to England, is vague and intruded into a realm that the legislature controlled exclusively—unfair dismissal. Having lost this appeal to the Full Federal Court, the Bank appealed to the High Court.

Before the High Court

The High Court came to its conclusion in three separate judgments. Chief Justice French and Justices Bell and Keane shared common reasons; Justices Kiefel and Gageler gave separate reasons. All judges declined to imply the duty on the same three grounds: first, the term is not necessary for employment agreements, as a class of contracts, to function; second, a general duty upon all parties to a contract could be imposed only by Parliament; and finally, the duty unacceptably overlaps with the statutory unfair dismissal jurisdiction. 

The Implied Duty Is Not "Necessary" for the Contract of Employment to Operate

The starting point is that a term is implied into a class of contracts as a matter of law only when it is necessary for that class of contracts to operate. One duty that is considered necessary for all contracts is the duty imposed upon both parties not to do anything to deprive either party of the benefit of the contract. This has become, in Australia, a duty incumbent upon all parties to co-operate. The High Court observed that the duty of mutual trust and confidence had two converging origins. 

On one line of authority, the duty of mutual trust and confidence finds its basis in that duty to co-operate and so it is necessary to identify the benefit lost by the alleged breach of duty. The benefit of the redundancy clause in this case was the monetary sum to be paid upon termination, but the implied duty would not help Barker to obtain the benefit because it was payable upon termination in any event. Accordingly, the term was not necessary, because rights arising under the contract could still be enjoyed without it. 

On another line of authority, the duty had arisen out of constructive dismissal cases in specialist employment tribunals in the United Kingdom. The High Court considered that was not a sound basis from which to adopt a duty in Australia, where we have a robust statutory unfair dismissal regime. 

The Implied Duty Is Not Consistent with the Character of the Employer–Employee Relationship

Second, the implied duty of mutual trust and confidence is not simply the employer equivalent of the duty of fidelity and good faith imposed upon employees. This is because the duty imposed upon employees is an incident of the master–servant relationship. It is necessary for the contract to operate because if the employer cannot trust the employee, work cannot be performed. In holding thus, the High Court has indicated that it is disinclined to view the employment relationship as a partnership between employer and employee. The second ground was that the duty, as a mutual duty, bound all parties to the contract in an unspecified manner. The imposition of such a duty involved questions of social policy. Parliament could impose this kind of duty, but a court could only interpret it. 

The Implied Duty Is a Matter for Parliament Instead of the High Court 

Third, the duty functions similarly to the unfair dismissal jurisdiction. However, Parliament has legislated specifically and comprehensively in respect of that jurisdiction to carefully balance competing economic rights and interests. The High Court should not interfere in that exercise. In this way, the High Court took up a line of reasoning developed in the United Kingdom. It was for these reasons that the High Court declined to imply the duty into the contract of employment. Accordingly, Barker's appeal failed, and the Bank had not breached its obligations. 

Phoenix Claims Arising from the Ashes? 

The duty to co-operate in performance of the contract may replace the duty of mutual trust and confidence as the cloak for complaints about an employer's conduct. However, unlike the English iteration of the implied duty of mutual trust and confidence, the duty to co-operate does not create a positive obligation on an employer to take all steps necessary to achieve all purposes of employment. Since the content of that term is minimal, plaintiffs' lawyers may instead rely upon the implied duty of good faith in the performance of contractual obligations. Similar arguments have been run in the context of claims in respect of discretionary bonuses. 

As to a duty implied in fact obliging employers to act in a particular manner, particular cases could give rise to an implication that is equivalent to the duty of mutual trust and confidence. Implications along these lines, however, will be difficult because a contract must be unworkable without the term that is to be implied. Furthermore, such an implication may also impose obligations upon the employee. Accordingly, the term may impose obligations that are adverse to the employee. Alternatively, plaintiffs' lawyers may argue that a term is to be implied on the ground of company policies and seek to incorporate these into the contract on the principles set down in Goldman Sachs v Nickolich [2007] FCAFC 120. Finally, employees may still resort to the use of misleading and deceptive conduct claims because that action is preferable to fact-specific conduct, representations and expectations. 

Conclusion

The decision in Barker is a welcome one for employers because it prevents plaintiffs' employment lawyers from commencing actions based on a vague legal principle that can (and regularly has) been tailored to any situation. It will affect many cases currently before the courts as well as ongoing settlement negotiations. In respect of the latter, it may precipitate a change in strategy with employers which will now have less reason to settle with senior executives who do not have access to statutory claims. However, similar claims are still available, and this decision brings them into relief.

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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Adam Salter
Michael Whitbread
 
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