A recent decision of the New South Wales Court of Appeal1 has, consistent with the High Court decision in Barker2 , overturned a first instance decision which implied a term of mutual trust and confidence into the contracts of two teachers during their probation period.


Mr Shaw and Ms Salt (a married couple) were teachers engaged by the State of New South Wales and assigned to Bourke Public School. During their 12 month probationary period a number  of performance issues were identified. This led the school principal, Mr Loxley, providing one of the teachers with an envelope containing a petition signed by numerous staff with allegations in relation to the performance of both teachers.

After receiving the petition, both Mr Shaw and Ms Salt walked out of the school. Both teachers failed to follow subsequent directions to return to work on the basis that they felt this conduct amounted to racial discrimination. However, they did attend one meeting as directed and continued to accept their regular salary payments.

Mr Shaw and Ms Salt were then notified that the State was considering terminating their employment. They were invited to provide a response, which they failed to do. Their employment was subsequently terminated.

Mr Shaw and Ms Salt commenced proceedings in the District Court of New South Wales alleging a breach of the implied term of mutual trust and confidence in their employment contracts, repudiation of their employment contracts, and a breach of the Teacher’s Handbook, which they asserted was incorporated into their employment contracts.

At first instance, the District Court found that there had been a breach of the implied term of mutual trust and confidence due to Mr Loxley’s handing the allegations to Mr Shaw and Ms Salt in the manner he did. It also accepted that the Teacher’s Handbook was incorporated into, and formed part of, their contracts.

The State then took its case to the Court of Appeal.

Was there a breach of the implied term of mutual trust and confidence or good faith?

After the District Court judgment was given, the High Court handed down the Barker decision, holding that there was no implied term of mutual trust and confidence in employment contracts in Australia.

On appeal, given the decision in Barker, the teachers amended their claim, substituting a breach of an implied term of mutual trust and confidence with a breach of an implied term of good faith. The existence of such a term in employment contracts generally was left open in Barker. The teachers argued that the State acted unfairly towards them by providing the allegations to them in the manner it did, and that the allegations should have been provided as part of a formal process with the presence of a support person, particularly given the significant power imbalance between the parties.

The Court of Appeal rejected this argument, finding that it was not necessary to imply a term of good faith into the contracts in order for them to operate effectively, given the existence of a statutory and industrial regime which covered the employees’ contracts of employment and provided appropriate grievance resolution procedures.

The Court also said even if this duty was implied, there was nothing to suggest that it had been breached. In particular, it was relevant that, prior to being handed the envelope, Ms Salt had been made aware that allegations had been made against her. Ms Salt had then failed to follow up or engage in discussions, despite requesting further details about the allegations.

Was there a repudiation of the employment contract?

The Court of Appeal upheld the District Court’s decision that there was no repudiation of the teachers’ employment contracts by Mr Loxley having handed the allegations to one teacher in an envelope.

The Court of Appeal held that no reasonable person would have construed Mr Loxley’s conduct in handing the petition and allegations to one of the teachers to be a renunciation of the contracts. This was particularly true because around the same time, Mr Loxley had put in place support  and an improvement plan for Ms Salt, clearly indicating that the State was not unwilling to perform the contract of employment.

Was the Teacher’s handbook incorporated as part of the employment contract?

The Court of Appeal overturned the decision of the District Court on this point, finding that the Teacher’s Handbook (in particular provisions covering performance evaluations of teachers) was not incorporated into the teachers’ employment contracts. In reaching this conclusion, the Court of Appeal examined relevant case law on this point, in particular the test provided in the decision of Nikolich,3  which states that the parties’ objective intention must be examined to determine whether they intended to be contractually bound by statements contained in a policy or procedure.

Bottom line for employers

  • Although an implied term of good faith was not implied on the facts of this case, it is yet to be determined if such a term should be implied into employment contracts generally.
  • Even if an implied duty of good faith exists, it is unlikely to be applicable in circumstances where a detailed statutory or industrial regime regulates the employees’ employment contracts.
  • Employees serving the probationary period of their employment contracts do not fall into a special category, and should be treated no differently from other employees.