Partner, David Ey, reviews the recent High Court decision in Commonwealth Bank of Australia v Barker, in which the High Court unanimously rejected the implied term of mutual trust and confidence.

An  interesting  chapter  in  Australian employment law came to a close with the High Court’s decision in Commonwealth Bank of Australia v Barker [2014] HCA 32, delivered  on  10  September  2014.

The case did not involve the application of any statutory provisions at all. It was purely about the common law of employment contracts.

The issue was whether, under the common law of Australia, a term was implied by law in all employment contracts that neither the employer nor the employee will, without reasonable cause, conduct themselves in a manner likely to destroy or seriously damage the relationship of trust and confidence between them (the trust and confidence term).

The five judges of the High Court unanimously held that there is no such implied term under Australian law. In doing so, it overturned a majority decision of the Full Federal Court.

The facts

Mr Barker was a long-term senior employee of Commonwealth Bank. His employment was terminated by reason of redundancy. His contract of employment provided for compensation payable on termination if his position became redundant and he could not be redeployed.

The Bank’s HR manual contained a Redundancy,  Redeployment,  Retrenchment and Outplacement Policy which, according to a statement in the manual, did not form part of Mr Barker’s employment contract. The Policy, in effect, said that the Bank would take meaningful steps to redeploy within the Bank an employee whose position had become redundant. In Mr Barker’s case, the Bank failed to take such steps, and his employment was terminated.

Mr Barker argued that the trust and confidence term was implied into his contract of employment, and that the Bank’s failure to take meaningful steps to redeploy him was a serious breach of the term.

The decisions

At first instance, Mr Barker was successful and was awarded $317,500 based upon past and future economic loss.

The Bank appealed unsuccessfully to the Full Federal Court, although the dissenting judge, Justice Jessup, wrote a carefully reasoned judgment explaining why he saw no valid basis for implying the trust and confidence term into employment contracts generally.

The Bank’s appeal to the High Court was successful. All five judges reached the same conclusion as Justice Jessup. Crucially, it was held that the trust and confidence term did not satisfy the criterion of necessity required to support its implication in law into employment contracts generally.

Chief Justice French, and Justices Bell and Keane in their joint judgment said that there were complex policy considerations at play that made the implication of a trust and confidence term “a matter more appropriate for the legislature than for the courts to determine”.

Interestingly though, those judges expressly said that their conclusion “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” or “whether contractual powers and discretions may be limited by good faith and rationality requirements  analogous  to  those applicable in the sphere of public law”.

Likewise, in her separate judgement, Justice Kiefel said “the question whether a standard of good faith should be applied generally to contracts has not been resolved in Australia”.

What it means for employers

For several years now, employers have been on the receiving end of arguments, and sometimes legal proceedings, alleging breaches of the trust and confidence term. Those allegations arose in a variety of circumstances where the employer allegedly did something or failed to do something during the employment relationship that breached the implied term. Examples have included allegations of a failure on the employer’s part to conduct a performance management process before dismissing an employee, or failure to take proper steps to prevent an employee from being bullied or harassed.

Now that the High Court has spoken, employers can operate in a significantly less risky legal environment in their dealings with employees. This is especially the case with the dismissal of employees whose  remuneration  exceeds  the statutory cap (currently $133,000 a year) for making an unfair dismissal claim under the Fair Work Act 2009 (Cth).

But the common law is still capable of development, so we will need to watch out for future judicial pronouncements on the question of whether an employer’s contractual powers and discretions may be limited by good faith requirements.