A recent case has confirmed the existence of an implied term of mutual trust and confidence in every Australian employment contract. This is a highly significant employment law decision which places new obligations on employers towards their employees. The case is Barker v Commonwealth Bank of Australia, and was a decision of the Full Federal Court of Australia.
For several years Australian courts have flirted with the idea that employment contracts include an implied term of mutual trust and confidence, a concept that is readily accepted in England.
The Full Federal Court of Australia (Full Court) has now confirmed that Australian employment contracts include an implied term of mutual trust and confidence. In doing so, they upheld the earlier decision of Justice Besanko of the Federal Court. You can read the Full Court's decision here.
Although the case law surrounding the implied term is still developing in Australia (and special leave has been sought to appeal the Full Court decision to the High Court of Australia (High Court), the Full Court's recognition of the implied term in this case places obligations on employers to treat employees fairly.
Cleardocs customers should be aware of the implied term, and how it applies, when dealing with employees. An employer who fails to act in accordance with the implied term may be exposed to claims for damages.
In November 1981, Mr Barker started as a junior employee with the Commonwealth Bank of Australia (CBA). Over the next 20 years, Mr Barker worked his way up to the role of Executive Manager. In 2004, he executed a new employment contract, which included clauses relating to termination of employment and redundancy. The redundancy clause contemplated redeployment within CBA as an alternative to termination of employment.
On 2 March 2009, Mr Barker was told that his position was redundant. He was also told that in line with CBA's redundancy policy, CBA's preference was to redeploy Mr Barker to another position rather than terminate his employment, and as such he would start a redeployment process.
However during the 'redeployment process' Mr Barker was directed not to attend work, his access to CBA's intranet and email was cut and he had to return his CBA supplied mobile phone. CBA made minimal efforts to redeploy him to another role before his employment terminated on 9 April 2009.
Following his dismissal, Mr Barker commenced proceedings in the Federal Court of Australia before Justice Besanko with two main lines of argument.
Mr Barker's first argument was unsuccessful, but highly relevant to his second argument. He first argued that:
Justice Besanko rejected this claim as CBA's HR Reference Manual specifically stated that the manual did not form part of an employee's contract of employment.
Mr Barker's second argument was that by acting in breach of its policies CBA had breached the implied term of mutual trust and confidence in his employment contract.
Justice Besanko accepted that Australian law does include an implied term of mutual trust and confidence. Despite finding that the parties had expressly agreed that the redundancy policy did not form part of Mr Barker's employment contract, Justice Besanko held that by failing to attempt to redeploy Mr Barker, CBA had seriously breached the redundancy policy and therefore the implied term, even though it was not an express term of the contract. Mr Barker was awarded economic damages of $317,500.
A further claim by Mr Barker for damages for hurt, distress and loss of reputation was rejected.
CBA appealed Justice Besanko's decision to the Full Court. On appeal, the Full Court confined its decision to two issues:
While the Full Court accepted that the High Court is yet to determine whether or not an implied term exists in Australia, it held that the "weight of authority points in favour of the acceptance of such a term". In coming to this view, the Full Court relied on a number of English authorities.
The Full Court found that, consistent with authority for implying terms into a contract, the implied term satisfied the test of 'necessity' – which turns on implying terms into private contracts by reference to considerations of public policy. Here this led the Full Court to recognise an implied term as part of the modern relationship between employer and employee.
Having recognised the existence of the implied term, the Full Court noted that it can be expressly excluded from a contract of employment.
The Full Court provided some additional guidance about what the implied term requires an employer to do (or prevents them from doing).
Not to act to damage the employer/employee relationship
The Full Court noted that an employer's duties under the implied term are still being developed, but recognised the most common statement of the duty is that:
"...the employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee".
However, in each case, the content of the implied contractual duty must be 'moulded' according to the nature of the relationship and the facts of the case.
Employment period to which the implied duty applies
English case law has limited the application of the implied term to the period up until termination of employment, but states that the implied term does ot apply to the dismissal itself.
This was recognised by the Full Court, but the key issue in this case (relating to redeployment) related to CBA's actions in the period prior to the termination of Mr Barker's employment.
The Full Court held that an employee can pursue a claim for breach of the implied term that arises from the events leading up to termination of employment. In practice, this line is difficult to draw but would include, for example, the conduct of disciplinary processes.
Adherence to policies not determinative
In contrast to Justice Besanko's decision, the Full Court found that CBA did not breach the implied term of mutual trust and confidence merely by failing to follow its own redundancy policy. This is because CBA's policies expressly stated that they were not contractually binding.
Instead, the Full Court found that the operation of the implied term was triggered due to Mr Barker's 20 year plus tenure with CBA; the fact that CBA is a large corporate employer; and because the redundancy clause in his employment contract contemplated redeployment.
The Full Court concluded that the implied term required CBA to take positive steps to consult with Mr Barker about being redeployed and to inform him of suitable alternative positions within CBA. As CBA failed to do this, the Full Court held that the implied term had been breached. The Full Court increased the award of damages for breach of the implied term (by consent and due to an initial miscalculation) from $317,000 to $335,623.57.
The Full Court's decision was not unanimous. In his detailed dissenting judgment, Justice Jessup concluded that there is no need for the implied term to be imported into all employment contracts due to existing duties already incorporated within employment contracts (such as the duty to co-operate) and the statutory regimes in place.
Notably, Justice Jessup described the implied term as something of a Trojan Horse for employers "in the sense of revealing only after the event the specific prohibitions which it imports into the contract". On this reasoning, the Full Court decision puts employers in an extremely difficult position of potentially breaching obligations in circumstances where their obligations are unclear.
Maddocks understands that CBA has applied for special leave to appeal the judgment to the High Court and Cleardocs customers should be on the lookout for further developments. If special leave is granted, a decision by the High Court will provide certainty for employers in relation to whether there exists an implied term of mutual trust and confidence in Australia, and how far it reaches into the employer/employee relationship.
In the meantime, Cleardocs customers need to ensure that all workplace investigations, disciplinary processes, and redundancy and redeployment processes are conducted appropriately, fairly and in accordance with all contracts, procedures and policies.
In accordance with our usual recommendation, the Cleardocs Standard Employment Contract already excludes policies from being incorporated into the contract. The contract also does not include references to redundancy and redeployment processes, which limits the potential operation of the implied term in those situations.
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Employment, Safety and People team.
You can read earlier ClearLaw articles on HR topics here.
Order Cleardocs Employment & HR document packages
  FCAFC 83.
 Malik v Bank of Credit and Commerce International SA (in liq)  AC 20 and Johnson v Unisys Ltd  1 AC.
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.