November 21, 2014

High Court Overrules Finding of Duty of “Trust and Confidence” in Employment Contracts

The High Court has overruled a decision of the Full Court of the Federal Court in relation to whether a mutual duty of trust and confidence is implied in employment contracts.

In 2012, the Federal Court in Barker v Commonwealth Bank of Australia (CBA), awarded damages to an employee in relation to a breach by the employer of an implied term of “mutual trust and confidence” arising from an employment contract.

In overruling the Federal Court’s decision, the High Court found that, under Australian common law, employment contracts do not contain an implied term of mutual trust and confidence.

IMPLIED TERMS

Implied terms are found in most, if not all, contracts. Parties to a contract do not, and cannot, expressly provide for all events that may arise in their course of dealings with each other. There are gaps which courts may be asked to fill, by implying a term in favour of one of the parties.

There are number of types of implied terms, the most common being those implied by law, and those implied in fact (or, to give business efficacy to the agreement).

THE FEDERAL COURT DECISION

Our article on the background of this case and the Federal Court’s decision can be accessed by following this link.

In summary, in a two-to-one majority, the Full Court of the Federal Court implied the following term into Mr Barker’s contract with CBA:

‘…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.”

The majority went on to find that CBA had breached the duty arising from this implied term.

The dissenting judge disagreed that Australian law required the implication of such a term into employment contracts.

OVERRULED BY THE HIGH COURT

In its appeal to the High Court, CBA argued that the term implied by the Full Court of the Federal Court was not necessary to give business efficacy to the contract.

The High Court agreed and unanimously overturned the Federal Court’s ruling, commenting that the implication of such a term into employment contracts involved a range of complex policy considerations and, for that reason, the question was a matter more appropriate for the legislature rather than the courts.

WHAT DOES THIS MEAN FOR EMPLOYERS?

The Federal Court’s decision in 2012 created considerable uncertainty for employers.

This uncertainty was removed by the High Court’s determination that the duty implied by the Federal Court will not apply to employment contracts. Accordingly, an employer will not need to take into consideration an implied term of “mutual trust and confidence” when taking steps to terminate a contract. Of course, employers must still be weary of avoiding other types of claims when terminating employment, such as failure to observe notice periods and potential adverse action claims.

Other relevant articles:

Employment Update: the Fair Work Amendments Act 2012
Employment Contracts & Cascading Restraint of Trade Clauses