In one of the most significant decisions in the history of Australian employment law, the High Court of Australia (HCA) has today 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 in fact or an argument based on a term of good faith.

Key points

  • The implied term upheld by the FFCA was a term 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).
  • The HCA has rejected the FFCA majority’s position and has concluded that the Implied Term, which originated in English employment law, is not automatically implied by law into all Australian employment contracts. This is the case as it is neither necessary to imply the term in order for such contracts to be effective, nor is it appropriate having regard to the Australian statutory context.
  • It may still be possible to argue that the Implied Term is implied in fact in a particular case.
  • It remains possible that a term may be implied requiring the parties to an employment contract to act in good faith.

Recommended steps for employers

  • Risks associated with potential claims based on the Implied Term are now substantially lessened.
  • Nevertheless, employers concerned about the potential for implication of the term in fact, or about arguments based on a possible term of good faith, may wish to consider inserting into their employment contracts an express clause to the effect that such terms do not apply.
  • Where employers do not wish to take this step or it is not feasible to do so, employers should consider the potential for scrutiny of their conduct through the lens of “good faith”, in particular where actions may have adverse consequences for the employee.

Facts

The employee, Mr Barker, was a long serving senior manager with the Commonwealth Bank (CBA).

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. Access to the CBA office and facilities (including his CBA email and mobile phone) were removed. Redeployment activities failed as those seeking to contact Mr Barker relied on his CBA email and phone. Eventually, on 23 March 2009, the relevant CBA staff became aware of the problem and 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. 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 the Implied Term.

Earlier decisions

At first instance, Justice Besanko of the Federal Court found in favour of Mr Barker, concluding that the Implied Term existed in Australian law and been breached when CBA did not comply with its own (non-contractual) redeployment policy. Mr Barker was awarded damages.

On appeal to the FFCA, Justices Lander and Jacobson agreed with Justice Besanko that the Implied Term existed in Australian law and had been breached (although they reasoned that this was due to failure to comply with a redundancy provision in the employment contract, not the non-contractually binding policy). Damages were increased to $335,623.57 (the increase was due to miscalculation in the initial judgment). However, Justice Jessup issued a strong dissenting judgment, holding that the Implied Term did not exist in Australian law and even if it did, had not been breached.

CBA appealed to the High Court.

The High Court

The High Court unanimously concluded that the Implied Term does not form part of all Australian employment contracts. This is because:

  • such an implication is beyond the legitimate law-making function of the courts, which can be exercised only “as an incident of the adjudication of particular disputes”. Chief Justice French and Justices Bell and Keane observed that implication of the Implied Term depends on a particular view of social policy. Taking that step should be left to Parliament;
  • the Implied Term evolved in the United Kingdom in a very different statutory context, which does not translate into the Australian situation. It has the potential to circumvent existing limitations on common law and equitable remedies. Further, Justices Kiefel and Gageler noted that the Australian Parliament has prescribed how remedies for unfair dismissal should be obtained in legislation. In that context, there is no room for implication of the Implied Term;
  • a fundamental principle is that contractual terms may only be implied in law (into a group of contracts) or in fact (into one specific contract) where this is necessary. A necessary term is one which is justified because it is required for effective performance of all of the contracts in a relevant class, or of all contracts generally. A term will only be necessary where the contract would be ineffective without it. The fact that a term may be reasonable does not mean that it is necessary;
  • it is not necessary to imply the Implied Term into all employment contracts. Employment contracts are effective without it. The Implied Term goes to the maintenance of a relationship and is inherently uncertain. In this regard, Justice Gageler noted Justice Jessup’s observation in his dissenting judgment in the FFCA that the Implied 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”. It would impose obligations on both employers and employees, and may have wide-ranging effects; and
  • it is not possible to imply the Implied Term as an evolution of the existing implied duty of cooperation (which is a duty implied by necessity as it relates to contractual performance), as was suggested by Justices Lander and Jacobson in their FCA judgment. The Implied Term goes well beyond this.

However, the HCA left some room for an argument that the term the term could be implied in fact into a specific contract (rather than by law into all employment contracts). The argument was rejected in Mr Barker’s case. However, this does not mean that it might not be accepted in another situation (where, for example, the employee was able to satisfy the necessity test).

Further, the HCA expressly 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 this, we anticipate that the good faith argument in particular is likely to arise in future cases.