The implied term of mutual trust and confidence

The operation of an implied term of mutual trust and confidence has often been considered in Australia, but confirmation that the implied term operates under Australian law, particularly in employment contracts, has remained elusive.

In the recent decision of Commonwealth Bank of Australia v Barker [2013] FCAFC 83 (Barker Decision), the Full Federal Court found that a term of mutual trust and confidence will be implied into Australian contracts of employment, except where expressly excluded or ‘inconsistent with the express terms of the contract’.

The Court looked to English authority, and particularly Malik v Bank of Credit and Commerce International S.A. [1998] A.C. 20, in formulating the content of the implied term which it found meant that an employer should ‘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’.

Barker Decision – facts in brief

Mr Barker was an employee of Commonwealth Bank of Australia (CBA) for 23 years. Mr Barker’s contract of employment permitted CBA to terminate his employment with four weeks’ written notice and set out the method by which compensation was to be calculated in the event of redundancy and in circumstances where the employee could not be redeployed.

CBA had a redundancy policy which included provisions in relation to redeployment. However, it was clearly stated that the redundancy policy had no contractual effect and in Mr Barker’s case was not followed.

Mr Barker claimed that CBA had breached the implied term of mutual trust and confidence in failing to deal appropriately with redeployment options for him.

The Court agreed with Mr Barker. In this case the implied term required that CBA (as a large corporate entity) had a positive obligation to seek redeployment options for Mr Barker (who was a very long standing employee), and confer with him about them. The Court found that CBA had failed to meet this obligation.

Where to from here?

While confirmation of the existence of an implied term of mutual trust and confidence does not extend so far as to create a fiduciary relationship between employee and employer, the Barker Decision is already causing Australian employers to stop and consider the wording and likely interpretation of their employment contracts and associated corporate policies.

Although the Court’s decision gives some clarity regarding the existence of an implied term, exactly how it will be applied is considerably less certain. In commentary unlikely to give Australian employers much comfort, the Court found that the substance of the implied term should be allowed to continue to develop and ‘must be moulded according to the nature of the relationship and the facts of the case’.

It is unlikely that the Barker Decision will be the final word on the existence and nature of the implied term of mutual trust and confidence in the employment context in Australia. CBA has sought leave to appeal to the High Court of Australia and there are other decisions already in the pipeline.

In the meantime, Australian employers who are unwilling to take their chances as to exactly how the implied term of mutual trust and confidence might be “moulded” in the future are likely to look towards incorporating an express exclusion of the implied term in their employment contracts and to take steps to ensure that they are not acting in breach of their own employment policies