The High Court of Australia has unanimously held that under Australian common law, employment contracts do not contain an implied term of mutual trust and confidence, thus providing some useful clarification of previous uncertainty around the existence of such a term, particularly for employers.  The decision is important not only in an employment law context but also as confirming the High Court’s approach to the implication of contractual terms.

Mr Barker was a long serving senior manager with the Commonwealth Bank of Australia (CBA) and was made redundant on 2 March 2009.  Mr Barker commenced proceedings alleging breach of an implied term of mutual trust and confidence in the employment contract.  The Full Court of the Federal Court held that:

  • there was an implied term which required 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”;
  • such term required CBA, after giving Mr Barker notice of his redundancy, to take positive steps to consult with him about alternative positions within the CBA and give him the opportunity to apply for the positions; and
  • in breach of the implied term, the CBA failed to make any contact with Mr Barker for an unreasonable period of time.

The High Court of Australia unanimously overturned the decision of the Full Court of the Federal Court and found that no such term of mutual trust and confidence was implied into Mr Barker’s employment contract, or employment contracts generally.  The High Court held that:

  • the implication of such a term by the House of Lords in the United Kingdom was not relevant in Australia and it was more appropriate for the implication of such a term to be directed to the legislature;
  • terms implied in law must fall within the limiting criterion of ‘necessity’ and are not to be made lightly – necessity may be defined by reference to what the contract itself implicitly requires and would not be satisfied by merely demonstrating the reasonableness of the implied term;
  • by contrast with the duty to co-operate (which is implied), an implied term of mutual trust and confidence imposes mutual obligations wider than those which are necessary even allowing for the broad considerations which may inform implications in law – the duty to co-operate is directly related to contractual performance, whereas the proposed implied term goes to the maintenance of the relationship; and
  • the implication of a term of mutual trust and confidence into employment contracts does not meet the necessity criterion.

The High Court also emphasised that this decision should not be taken as reflecting upon the question of whether there is a general obligation to act in good faith in the performance of contracts, or the related question of whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law.

See the case.