The High Court in the Commonwealth Bank Australia v Barker [1] has unanimously allowed an appeal from a decision of the Full Court of the Federal Court and held that, in Australia, a term of mutual trust and confidence should not be implied by law into all employment contracts.

In this Alert, Partner Andrew Tobin and Solicitor Claire Tuffield summarise the key elements to the decision and the immediate background to it.

Key points

  • Since the late 1990’s Australian courts, influenced by English case law, have accepted that a term of mutual trust and confidence is, as a matter of law, implied into Australian employment contracts.  
  • However, the scope of the term and its practical implications for and in employment relationships has been very uncertain.  Multiple attempts, with varying outcomes, have been made over the years by dismissed employees to recover damages from their former employers, based upon alleged breaches of the term.
  • As a result of the decision in Barker, those uncertainties are now behind us.  In most, if not all, cases, Australian law will no longer recognise an implied term of mutual trust and confidence in employment contracts.

The Barker case involved a long term employee of the Bank, Mr Barker (Executive Manager).   Mr Barker was told by the Bank that his position would be made redundant in four weeks’ time unless he could be redeployed to an alternative position.  In practical terms, Mr Barker’s employment ceased on the day he was informed about the redundancy of his position.  His access to his Bank email account, voicemail and the intranet was all terminated from that day and he was also required to return his work-provided mobile phone.

The result of the practical arrangements was that Mr Barker did not receive any communications from the Bank in relation to the prospect for his redeployment over the following notice period (although various unsuccessful attempts were made to contact him).  At the end of that period, he was dismissed on redundancy grounds.

Mr Barker sued the Bank, alleging that by failing to offer him redeployment opportunities – according to their own redundancy policy – they had breached a term of mutual trust and confidence implied into his employment contract as a matter of law.  That claim was upheld in the Federal Court and Mr Barker was awarded damages in excess of $300,000 for breach of contract (including the implied term of trust and confidence) based upon past and future economic loss.

The case found its way on appeal to the Full Court of the Federal Court where it was decided (amongst other things) by a majority of 2:1, that a term of mutual trust and confidence was implied by law into all Australian employment contracts and, that by failing to take positive steps to consult with Mr Barker to inform him of suitable employment options prior to his termination, the Bank had breached the term that term.  The original damages award was upheld, with a slight upward adjustment to correct a miscalculation.

The Bank appealed this decision to the High Court.  

According the judgment, published 10 September 2014, “The primary question raised by the appeal is whether, under the common law of Australia, employment contracts contain a term that neither party will, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence between them.”   The High Court has answered in the negative.  They held that “...generally, contracts of employment do not require such an implication for their effective operation”.  The implication of the trust and confidence term is not necessary in the sense that it would be justified to imply it by law into all employment contracts.

Mr Barker lost almost all of the damages awarded to him previously, except for an amount conceded by the Bank of approximately $12,000.

The decision is significant, resolving an uncertainty in Australian employment law that has existed, at least, since the 1997 decision of the English House of Lords in Malikv. Bank of Credit and Commerce International SA (In Compulsory Liquidation) [2].

Since the Malik decision, the existence of the implied term in employment contracts in Australian law has been broadly accepted in multiple decisions in multiple jurisdictions.  There have been a number of attempts – with varying degrees of success – by former employees to establish a cause of action against their former employers in Australian courts, relying upon alleged breaches of the implied term.

The decision of the High Court makes it clear that in most – if not all – cases, the term will not be implied, taking the prospect for such claims off the table.

However, some uncertainties remain for another day.  In particular, some members of the Court in Barker indicated that their rejection of the implied term “should not be taken as reflecting upon the question whether there is a general obligation to act in good faith in the performance of contracts”, that question having not been resolved in Australia.