In one of the most significant decisions in the history of Australian employment law, the High Court of Australia (HCA) has unanimously reversed an August 2013 majority decision of the Full Federal Court of Australia (FFCA), concluding that there is no implied duty of mutual trust and confidence implied by law into Australian employment contracts. However, the HCA has left open the possibility of implication of the term in fact, or implication of a term requiring the parties to act in good faith.

Implications for employers

Employers can now take comfort that the long-standing debate as to whether there is, in Australia, a term implied into all employment contracts 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” (Implied Term) has been resolved in the negative.

However, an argument remains open that the Implied Term could be implied in fact into a specific employment contract (rather than by law into all employment contracts). Further, the HCA left undetermined the question of whether there is a general obligation to act in good faith in performance of employment contracts (or contracts generally).

In light of the remaining uncertainties, employers may wish to consider including clauses in their contracts expressly excluding the possibility that the Implied Term may be implied in fact or that there is an obligation of good faith on the part of the employer.

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 disabled.

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 disabled CBA mobile phone and email address. Eventually, the relevant CBA staff became aware of the problem and on 23 March 2009 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 brought a claim alleging (among other things) that CBA’s conduct constituted a breach of the alleged Implied Term.

Decision at first instance

At first instance, Justice Besanko found in Mr Barker’s favour, finding that the alleged Implied Term existed and had been breached by CBA when it failed to follow the Policy. He awarded Mr Barker damages of $317,500 for loss of chance of redeployment.

CBA appealed to the FFCA.

Decision of the FFCA

Justices Lander and Jacobson gave a majority judgment in Mr Barker’s favour. They held that the Implied Term existed and that its operation would need to be “moulded” to the circumstances of each case. The FFCA majority found that the failure to follow the Policy was not the relevant breach (as the Policy did not have contractual effect). Instead, the redeployment obligation in Mr Barker’s contract was relevant. Mr Barker’s damages were increased slightly, due to an earlier miscalculation.

Justice Jessup handed down a comprehensive dissenting judgment. He held (among other things) that the alleged Implied Term was too uncertain; was not appropriate in the Australian statutory context; and was not necessary for the operation of employment contracts. He went on to say that even if he was wrong in this respect, he did not believe the Implied Term had been breached in Mr Barker’s case.

CBA appealed to the HCA.

Decision of the HCA

The HCA unanimously found in CBA’s favour, albeit by way of three separate judgments: one by French CJ, Bell and Keane JJ; one by Kiefel J; and one by Gageler J. The HCA held that:

  • the common law in Australia must evolve within the limits of judicial power and not trespass into the province of legislative action (all judges);
  • the context for development of the Implied Term in the UK (essentially, as a way of developing the law of constructive dismissal for statutory purposes) does not exist in Australia (French CJ, Bell and Keane JJ; Gageler J);
  • emergence of a common law remedy for unfair dismissal by way of the Implied Term is inappropriate given (via unfair dismissal laws) “the evident intention of the legislature to provide a remedy, but limit its application and intent” (Kiefel J; see also French CJ, Bell and Keane JJ and Gageler J);
  • a term must not be implied in law into a class of contracts (or into contracts generally) unless it isnecessary. Necessity is satisfied not by demonstrating the reasonableness of the term, but by demonstrating that the contract is not effective without it (all judges);
  • employment contracts, like all contracts, include an implied duty to cooperate (essentially, the obligation for a party to do all things necessary to enable the other party to have the benefit of the contract in question). However, the proposed Implied Term cannot be supported as a development of the implied duty of cooperation (French CJ, Bell and Keane JJ);
  • the proposed Implied Term cannot be implied in law because it imposes mutual obligations wider than those which are necessary. It goes to the maintenance of a relationship. It would impose wide-ranging obligations on both employers and employees to refrain from engaging in trust-destroying conduct and could potentially work against parties. It is inherently uncertain and may circumvent established limits of common law and equitable remedies. As Jessup J said in his dissenting judgment in the Full Federal Court, the term has "the potential to act as a Trojan horse in the sense of revealing only after the event the specific prohibitions which it imports into the contract” (Gageler J). The mutuality of the obligation “locates the propounded implication close to the boundary between judicial law-making and that which is within the province of the legislature” (French CJ, Bell and Keane JJ; see also Kiefel J and Gageler J);
  • acceptance of the proposed Implied Term depends on “a view of social conditions and desirable social policy that informs a transformative approach to the contract of employment in law” (French CJ, Bell and Keane JJ). The complex policy considerations mark the matter as more appropriate for the legislature to determine (all judges);
  • Kiefel J further noted that Mr Barker’s contract actually contained a term requiring attempts to redeploy in any case. She observed that a contract clearly is effective where it already contains a term to the effect sought. In the contract “the parties provided for the very circumstance now sought to be made the subject of an implication”.

The majority of the judgments also expressly acknowledged that employees have now, and continue to have after this judgment, an implied duty of fidelity, not to engage in conduct which is destructive of the necessary confidence between employer and employee (French CJ, Bell and Keane JJ; Kiefel J). Accordingly, this decision does not affect that employee duty.

Finally, the following comments were made on the questions of implication of the Implied Term in fact and on the possibility of implication of a term of good faith:

  • it was held that there was no particular feature of Mr Barker’s agreement that would support an implication of the proposed implied term in fact (all judges). This leaves open the possibility of an argument that the term may be implied in fact in a particular case; and
  • the questions of whether there is a general obligation to act in good faith in the performance of contracts, or whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law, were left undetermined as they were not raised in this appeal (French CJ, Bell and Keane JJ; Kiefel J). Again, this leaves open the possibility of an employee bringing an argument based on an alleged implied term of good faith in future.

Commonwealth Bank of Australia v Barker [2014] HCA 32