In a ground-breaking development, an Australian court has, for the first time, incorporated an implied term of mutual trust and confidence into an employment contract and awarded damages as a result of a breach of that term. In doing so, the Court adopted a position established by the House of Lords some 14 years ago.
On 3 September 2012, Justice Besanko of the Federal Court ordered the Commonwealth Bank of Australia (“CBA”) to pay $317,500 in damages to one of its former executives for CBA’s breach of this implied contractual term of mutual trust and confidence. His Honour held that the actions of CBA – advising the executive of his impending termination by way of redundancy and finally terminating his employment – constituted a “serious breach” of CBA’s Redeployment Policy.
Whilst fleeting reference was made by the High Court of Australia in an earlier decision to the issue of an implied term of mutual trust and confidence in a negligence case in 2005, the High Court did not need to imply the inclusion of such a term in that case. Hence, this CBA decision establishes new law in Australia, with potentially serious ramifications for employers in the future.
The Court confirmed that, in the absence of express contractual terms to the contrary, an employment contract contains “an implied term of mutual trust and confidence”. It also clarified that this term can be expressly excluded by parties to a contract and that the term “only operates where a party does not have reasonable and proper cause for his or her conduct and that conduct is likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”. Further, the judgment states that it is “only a serious breach that could give rise to a breach of the implied term”.
In this case, the executive had been a long-time employee, having commenced employment with CBA in 1981. He was promoted on a number of occasions and ultimately worked his way up to the position of Executive Manager.
In 2009, an internal restructure by CBA of its operations led to a decision to reduce the number of employees at his level, and the decision was made to make the executive’s position redundant.
CBA’s employment policies, including the CBA Redeployment Policy, were detailed in its HR Manual. Interestingly, the HR Manual contained a specific clause which said:
This manual is not in any way incorporated as part of any industrial award of agreement entered into by the Bank, nor does it form any part of an employee’s contract of employment.
The Court accepted that the HR Manual and the policies it contained did not form part of the executive’s contract of employment as a result of that clause.
However, the actions of CBA, after advising the executive of his redundancy, were stated to be a blatant departure from CBA’s own policies. The Court held that CBA did not take the requisite steps to comply with its own policy in relation to the executive. Specifically, CBA failed to consult with the executive, raise or discuss with him the opportunity to retrain, seek advice about redeployment options for him, or develop or implement a redeployment plan.
The Court found that “although it was not incumbent on the Bank to redeploy [the executive], it was incumbent on it to take timely and meaningful steps to comply with its own policy. It did not do that”. Further, the Court determined that CBA’s “almost total inactivity within a reasonable period meant that the breach of its Redeployment Policy was a serious breach and that it was in breach of the implied term of mutual trust and confidence”.
The evidence before the Court suggested that the executive “did very little” to seek redeployment. Notwithstanding this, the Court concluded that in light of the way the executive was treated after being advised of the redundancy, it was “reasonable” for him to conclude there was no prospect of redeployment.
IMPACT OF DECISION
The decision is important for two reasons:
- The Court has opened the door for a new general ground of damages to be added to claims for breach of contract, namely, breach of the implied term of trust and confidence.
- In relation to employment policies, until now, employers have been able to almost completely escape liability for failing to follow their own policies, where the employee’s employment contract/employer’s policy manual specifically states that its policies do not form part of the employment contract.
Such a statement no longer guarantees that employers will be excluded from liability where they act in breach of those policies. Based on this decision, a court can now determine that, irrespective of whether the employer’s policies form part of the employment contract, damages can be awarded to an employee/former employee for a serious breach of a policy.
WHAT SHOULD EMPLOYERS DO?
Employers need to be mindful of the terms contained within their own policies and procedures and ensure that they do not engage in behaviour that could ultimately be viewed as a serious breach of those policies. Otherwise, they face the prospect of a damages action for breach of the implied term of mutual trust and confidence.
The Court’s decision leaves the door open for an employer to have the implied term of mutual trust and confidence expressly excluded. His Honour stated that the term can be excluded “by the express terms of the contract or it may be excluded because it would operate inconsistently with the express terms of the contract.”
As a result, we recommend that employers:
- review and, if necessary, amend the wording of their employment contracts and policies to reflect an intention to expressly exclude the implied term of mutual trust and confidence, where this is intended; and
- seek advice before adopting any process (such as a redundancy or redeployment programme) that is not strictly in accord with a relevant policy.