In a highly significant decision, a majority of the Full Federal Court has concluded that there is an implied term of mutual trust and confidence in all Australian employment contracts.

Key points

  • In the matter of CBA v Barker [2013] FCAFC 83, a Full Federal Court majority has held that there is implied by law into all Australian employment contracts a term of mutual trust and confidence (Term).
  • The Term can be expressed as a requirement 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.
  • The Term’s boundaries are uncertain and the Term will be “moulded” according to the nature of the relationship and the facts of the case. This makes its application complex and unpredictable.
  • A breach of the Term may result in an award of damages, provided that the damages are the result of a breach which occurred prior to termination. In this case, damages exceeded $300,000. However, damages are not available for the fact of, act of or manner of dismissal, or for hurt, distress or reputational damage resulting from the dismissal.
  • A breach of an employer’s policy which is expressed not to form part of the employment contract cannot constitute a breach of the Term. A statement that a policy is not contractually binding is effective.
  • The Term can be excluded by a contrary express clause in an employment contract.
  • Justice Jessup dissented in this case and found that the Term was not part of Australian law. An appeal is therefore a real possibility and so the law in this area may yet develop further.

Recommended steps for employers

  • Given the uncertainties associated with the Term, the safest course for employers is to insert into their employment contracts an express clause to the effect that the Term does not apply.
  • However, it is accepted that inserting a suitable clause into a contract may not be feasible. Accordingly, employers should take care to ensure their actions in relation to employees are fair and reasonable having regard to the circumstances, particularly where those actions may have adverse consequences for the employee.

Background

The employee, Mr Barker, was a senior manager with the Commonwealth Bank (CBA) in Adelaide. In March 2009, Mr Barker had been with CBA for 27 years.

Mr Barker’s contract of employment relevantly:

  • provided for termination on 4 weeks’ notice, without the need to give a reason; and
  • stated that if his position became redundant and he could not be redeployed, his compensation would be calculated on the basis set out in that clause.

CBA also had a redundancy policy (Policy), which dealt with matters such as redeployment. However, it was clearly stated that the Policy did not have contractual effect.

On 2 March 2009, Mr Barker was advised that:

  • his position was redundant;
  • CBA wished to redeploy him and would work with him to explore possible redeployment options; and
  • if no redeployment was available, his position would terminate on 2 April 2009.

On the same day, Mr Barker was directed onto paid leave. CBA required that Mr Barker return his mobile phone and keys and not return to the office during the redeployment period. He was able to retain the SIM card for a short period. However, his CBA email facilities were immediately terminated.

Those within CBA charged with assisting Mr Barker with redeployment had difficulties doing so over the following month, as they sought to make contact using Mr Barker’s CBA mobile phone and email address. They were not aware that he had access to neither. Eventually, on 23 March 2009, the relevant CBA staff contacted Mr Barker using his personal email address. The redeployment period was extended to 9 April 2009, to give him opportunity to apply for a potentially suitable position.

Mr Barker was ultimately not redeployed and his employment ended on 9 April 2009.

Mr Barker claimed (among other things) that CBA’s conduct in relation to his redeployment constituted a breach of an alleged implied term of mutual trust and confidence.

Decision at first instance

Justice Besanko found in favour of Mr Barker, relevantly holding that:

  • a term requiring 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, existed and applied. It could be excluded by an express term to that effect, but no such term existed here;
  • notwithstanding that the Policy was not contractual, the Term had been breached when CBA failed to adhere to the Policy with respect to efforts to redeploy Mr Barker;
  • the breach had occurred prior to termination (prior case law indicates that the Term cannot apply at the point of termination); and
  • had CBA acted inappropriately, there was a 25% chance he would have been redeployed. He was entitled to damages of $317,500, plus interest and costs. However, no damages were available for loss of reputation, as these would essentially be damages for hurt and distress flowing from the termination itself. Prior case law indicates such damages are not recoverable.

CBA appealed to the Full Federal Court.

Mr Barker cross-appealed on the issue of damages.

Decision on appeal

The majority decision

The majority (Justices Lander and Jacobson) held that:

  • the Term, as formulated by Justice Besanko, ought to be accepted as necessarily implied by law into all Australian contracts of employment, due to the nature of the relationship between employer and employee;
  • the Term could be excluded by a contrary express term;
  • the duties of an employer under the implied term are still being developed and so the content of the implied contractual duty “must be moulded according to the nature of the relationship and the facts of the case”;
  • Justice Besanko was wrong to hold that CBA’s failure to follow the Policy constituted a breach of the Term. This was because the Policy had no contractual effect;
  • however, there was a breach of the Term in this case. This was because Mr Barker was a long term employee of a large corporate employer with a large workforce. He had a contract of employment which stated that he would be terminated if he could not be redeployed. CBA had also expressed a preference to redeploy Mr Barker. In those circumstances, the implied term required that CBA should have taken positive steps to consult with Mr Barker, inform him of suitable redeployment options and give him the opportunity to apply for positions. CBA breached the term because it failed to contact Mr Barker about redeployment for a period that was unreasonable. It failed to do so because it withdrew Mr Barker’s CBA email and mobile phone facilities and neglected to advise those assisting with Mr Barker’s redeployment of this;
  • the implied contractual obligation of cooperation required CBA to take reasonable steps to assist Mr Barker to obtain redeployment;
  • damages are recoverable for a breach of the Term, so long as:
    • the conduct which constitutes the breach occurs prior to, and independent of, termination; that is, damages do not flow from the act of, fact of or manner of dismissal; and
    • damages are not available for hurt and distress as a result of termination (prior case law prohibits this);
  • in this case, CBA’s breach occurred prior to the termination. Damages were available for that breach (not for the alleged loss of reputation) and had been largely accurately assessed by Justice Besanko (there was an error in calculation which all parties agreed resulted in the damages award being increased to $335,623.57). Other than as to the calculation error, Mr Barker’s cross-appeal on damages was not upheld.

The dissenting decision

In a comprehensive judgment, Justice Jessup took a different view. He considered the prior authorities at length, concluding that:

  • the Term, which was originally developed in the UK, should not form part of Australian law;
  • the Term should not be implied by law into all Australian employment contracts, as it fails to meet a number of critical tests:
    • it is not a necessary term - an employment contract can operate (and has in the past operated) without it;
    • implication of the Term is not justifiable as an extension of the employee’s duty of fidelity to the employer or a development of the law of implied contractual duty of co-operation;
    • the Term is effectively “content free” and has the potential to act as a “Trojan horse”, as it will reveal only after the event the specific prohibitions which it imports into the contract;
    • the Term would enable existing limits of common law and equitable remedies to be sidestepped; and
    • the Term would overlap a number of legislated prohibitions applicable to the employment relationship (for example, OHS, unfair dismissal and anti-discrimination law), compromising the steps Parliament has taken in this regard;
  • the Term may be able, in the appropriate circumstances, to be implied in fact, weakening the case for a need to imply as a matter of law; and
  • even if the Term exists, it was not breached in this case. Although in some cases the Term may apply in relation to aspects of the employer-employee relationship which fall outside the terms of the employment contract, the conduct here was not egregious and breach of a non-contractual policy cannot destroy or seriously damage the relationship of trust and confidence.

His Honour’s findings on the cross-appeal and damages were essentially consistent with those of the majority.