A decision of the Federal Court has awarded a former Bank executive $317,500 in damages for breach of an implied contractual term of mutual trust and confidence in his employment contract. 

The Bank breached the implied term by failing to follow its redeployment policy prior to retrenching the executive.  This was the case even though the policy did not form part of the executive’s employment contract.

The decision (if it survives an inevitable appeal) is potentially a game changer as it is the first decision in Australia to award substantial damages for breach of the implied term of trust and confidence.  While this term has been recognised before it has not been relied on to award substantial damages.

In short, Justice Besanko found that:

  • the Bank’s redeployment policy did not form part of the executive’s contract of employment (primarily because the policy contained an express statement that the policy was not incorporated into the contact) – this confirms the benefit of including a statement to this effect in employment documentation;
  • a term of mutual trust and confidence is to be implied by law in all contracts of employment, unless expressly or impliedly excluded by the terms of a contract itself, which was not the case here;
  • the term operates “where a party does not have reasonable and proper cause for his or her conduct and the conduct is likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”.  A “serious breach” by the Bank of its redeployment policy (even though it was not part of the contract) was capable of constituting a breach of the implied term;
  • the Bank had breached its redeployment policy by, amongst other things, failing to consult with the executive or to develop or implement a redeployment plan, and its “almost total inactivity to promote the redeployment process under the policy within a reasonable period” meant that the breach was serious enough to breach the implied term; and
  • a breach of the implied term is capable of and did sound in damages.  In this case, the damage was the loss of a chance of redeployment, assessed by the judge at 25%.  The damages amount of $317,500 was calculated as 25% of the remuneration the executive would have earned until normal retirement age (somewhere between 60-65) discounted by 30% to take account of residual earning capacity.

Although his Honour stated that the implied term was “not a ‘back door’ method” of giving a policy contractual effect to override the statement that the policy did not form part of the executive’s contract, it will potentially operate in precisely this way.

The decision means that you should:

  • make sure you comply with your policies in practice!
  • review your discipline, grievance or redundancy procedures to consider whether any promissory language contained in the policies can be softened;
  • ensure your employment documentation makes it clear that the policies do not have contractual effect;
  • consider inserting a clause into your standard employment contracts which excludes the term of mutual trust and confidence from the contract – based on the decision this would be an effective way of avoiding problems caused by the implied term.