High Court Rules: No implied term of mutual trust and confidence

The High Court of Australia has overturned the Full Court of the Federal Court of Australia find that there is no implied duty of trust and confidence in Australian employment contracts.

A recap on the facts

Mr Barker had been employed with CBA for approximately 28 years.  During this time he had risen to the position of Executive Manager.  In 2009, Mr Barker was advised that his position was being made redundant.  He received a letter following a meeting at which he was advised of this redundancy which confirmed that CBA’s policy was to redeploy staff where possible as opposed to making them redundant.

Barker was placed on leave whilst CBA attempted to source a position for his redeployment.  During this time, Barker was made to return company property and was denied access to CBA information technology.

CBA’s redeployment policy stated:

• CBA was to notify any affected employee at the earliest practicable time of the likelihood of redundancy, redeployment and possible retrenchment.
• Redundant employees were to be reassigned and retrained as appropriate.
• Any decisions about redeployment and retrenchment were to be based on merit.

The redeployment policy was not incorporated into Mr Barker’s employment contract. Previously, in fact, workplace policies had been expressly excluded from employees’ contracts by a statement to that affect contained in the HR Policy Manual.

The Decision at First Instance

The decision of Justice Besanko at first instance was significant as it held that an implied term of trust and confidence existed in Australian employment contracts.  It was held that CBA had breached its duty due to its inactivity between advising Mr Barker of his redundancy and the pending investigation into redeployment opportunities on 2 March 2012 and the offer to apply for alternative employment on 26 March 2012.  Justice Besanko went on to find that Mr Barker had sustained a significant loss as a result in the form of past economic loss and future economic loss totalling $317,500.00.

The Appeal

CBA appealed the decision.   A 2:1 majority of Jacobsen and Lander JJ (‘the Majority’) agreed to dismiss the appeal of CBA with Jessup J dissenting.

In considering whether a term of trust and confidence is implied by law in Australia, the Majority concluded that ‘… the weight of authority points in favour of the acceptance of such a term’.

The Majority then went on to confirm that the implied term is relevant to employment contracts as:

“… it is well accepted that terms implied by law are implied into all contracts of a particular class as a legal incident of that class of contract… Employment contracts are such a class but a term will not be implied where it has been expressly excluded or is inconsistent with the express terms of the contract.”

The Majority argued that factors including that Mr Barker was a long term employee and that CBA’s redeployment policy contemplated Mr Barker’s termination if redeployment was not feasible, were relevant circumstances that informed the operation of the implied term.

Taking these surrounding matters into account, the Majority determined that the implied term in this particular circumstance ‘… required the Bank to take positive steps from 2 March 2009 to consult with Mr Barker about the possibility of redeployment and to provide him with the opportunity to apply for alternative positions within the bank’. 

The Majority pointed out that this position differed to Justice Besanko’s decision in the initial proceedings where he held that the CBA had breached the relevant redeployment policy which was a breach of the implied term.  The Majority disagreed on this point, saying that the redeployment policy was not a part of the contract of employment, and therefore did not provide a benefit that was contractually binding.

The Majority considered that there was a breach of the implied term in the case.

The High Court decision

By unanimous decision, the High Court determined that the Federal Court was incorrect in finding that a term of mutual trust and confidence was implied into Australian employment contracts.  In doing so, this meant that Mr Barker was not entitled to the $317,500 damages claim awarded by the Federal Court.

The High Court held that the Federal Court was wrong to draw from United Kingdom precedents to impose the implied term into contracts in Australia.  In its opening statement, the joint judgement of Chief Justice French and Justices Bell and Keane held:

“The employment relationship, in Australia, operates within a legal framework defined by statute and by common law principles, informing the construction and content of the contract of employment. This appeal raises the question whether, under the common law of Australia, there is a term of mutual trust and confidence to be implied by law in all employment contracts. For the reasons that follow, that implication is a step beyond the legitimate law-making function of the courts. It should not be taken.”

The High Court contemplated that to imply the term would be akin to ‘judicial-law making’.  It stated that:

“The common law in Australia must evolve within the limits of judicial power and not trespass into the province of legislative action. This Court and, to a lesser extent, intermediate appeal courts have a law-making function. That function can only be exercised as an incident of the adjudication of particular disputes.”

The judgment of French CJ, Bell and Keane JJ distinguished the development of the Australian law with respect to the implied term from that of the history of the term in the UK, and in particular the Malik decision.  Relevantly, they stated:

“Importantly, the implied duty of trust and confidence as propounded in Malik is directed, in broad terms, to the relationship between employer and employee rather than to performance of the contract. It depends upon a view of social conditions and desirable social policy that informs a transformative approach to the contract of employment in law. It should not be accepted as applicable, by the judicial branch of government, to employment contracts in Australia.”

The joint judgment also noted that this decision did not decide whether an implied term to act in good faith for the performance of contracts existed, stating:

“The above 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. Nor does it reflect upon the related question whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law. Those questions were not before the Court in this appeal.”

Implications for Employers

This decision puts an end to the ongoing uncertainty in Australia regarding whether the implied term of mutual trust and confidence exists in Australian employment contracts.  It is an argument that has been used by employees in increasing numbers of recent times and the High Court of Australia has conclusively determined its inapplicability in Australia.

It is important, however, employers still remain mindful of their obligations under contracts and policies, as a Court will have cause to scrutinise the manner in which an employer conducted themselves throughout a performance management, redundancy, termination or similar process under other causes of action.