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Duty of Mutual Trust and Confidence – an Implied Term in Australian Employment Contracts

By   /   December 6, 2013  /  

mutual trustThe existence of an implied term of mutual trust and confidence in Australian employment contracts has been confirmed by a recent majority decision of the Full Federal Court in Commonwealth Bank of Australia v Barker [2013] FCAFC 83.

The majority, agreeing with the decision of the primary judge, confirmed the view that there was enough authority in the common law, both in England and Australia, to accept the existence of the implied term on the basis of the evolving, contemporary nature of the employment relationship.

The Facts of the Case

Mr Barker was a long standing employee of the bank. His employment contract included a brief redundancy clause providing compensation if his role was made redundant and the bank was unable to redeploy him. His contract did not expressly exclude any implied terms. The bank’s HR Manual included a redundancy policy setting out a redeployment process as well a disclaimer informing employees it did not form part of their contracts of employment.

In March 2009, Mr Barker was told his position was redundant and the bank’s preference would be to redeploy him. Despite this, Mr Barker was almost immediately asked to clear his desk and leave work and his access to email and intranet facilities was withdrawn. Mr Barker did not return to work and more than a month later he was informed in writing that his employment was terminated by reason of redundancy.

Mr Barker made a number of claims against the bank including a claim that the bank had breached his contact of employment by not complying with the redundancy policy.

The Decision of Primary Judge Beskano J

Accepting that the implied term of mutual trust and confidence had become part of the common law, Beskano J found that the bank had breached Mr Barker’s contract of employment.

He held that, although the redundancy policy was not a term of Mr Barker’s employment contract (because of the disclaimer in the HR Manual), the bank’s failure to follow its own policy amounted to a breach of the duty of mutual trust and confidence that was implied into Mr Barker’s employment contract. Beskano J awarded Mr Barker over AU$300,000 in damages for loss of opportunity.

Appeal

The bank appealed Beskano J’s findings that there existed an implied term of mutual trust and confidence in Mr Barker’s employment contract and that the bank’s failure to follow its policy amounted to a breach of that implied term.

The bank’s appeal was dismissed, with two of the three judges of the Full Federal Court confirming there was an implied term of mutual trust and confidence in Australian employment contracts. The majority decision applied a different reasoning to Beskano J, however, and it also considered that the bank had alternatively breached a second (related) implied term – the duty of co-operation.

Majority Decision – Jacobson and Lander JJ

The majority held that the implied term of mutual trust and confidence had obtained a sufficient degree of recognition that it ought to be accepted. On the basis of the developing contemporary employment relationship, they considered the term to be implied by necessity.

However, the majority did not adopt Beskano J’s reasoning that the breach arose because the bank had not acted in accordance with its redundancy policy. They held that once the existence of the implied term is accepted, the content of the duty (or what the duty requires) will depend on the circumstances. The relevant considerations in this case were:

  • the long term nature of Mr Barker’s employment (over 27 years);
  • the bank’s large size as a corporate employer; and
  • the reference in Mr Barker’s employment contract to termination on redundancy grounds if the bank was unable to place him in an alternative position.

Given these circumstances, the majority found that the implied term of mutual trust and confidence required the bank to take positive steps to consult with Mr Barker about alternative positions and give him the opportunity to apply for them before terminating his employment.

The majority also considered, in the alternative, the duty of co-operation from which the implied term of mutual trust and confidence arguably developed. Applied to all contractual relationships, the duty of co-operation is the principle upon which a party to a contract is required to do all things necessary to enable the other party to have the benefit of the contract. The majority reasoned that the failure of the bank to take positive steps to allow Mr Barker to enjoy the benefit conferred by the contract (i.e. the redundancy policy) amounted to a breach of the implied duty of co-operation.

Dissenting Decision - Jessop J

Jessop J did not accept that there was any consensus in Australian common law about the existence of the implied term of mutual trust and confidence. He argued that the introduction of an implied term of mutual trust and confidence would take the law of contract beyond any principled development in the duty of co-operation. He examined each relevant Australian case as well as the leading English authorities and concluded that there was no solid basis for applying the implied term in Australia.

In any event, Jessop J argued that an employer’s breach of a non-contractual policy could hardly amount to a breach of an implied term of mutual trust and confidence.

Regarding the difficulty of establishing the content of the implied term in different circumstances, Jessop J said that the fact that the identification of the obligations imposed are open ended went against the proposition that the implied term is necessary. He reasoned the implied term of mutual trust and confidence was not necessary in order to give an employment contract commercial and industrial validity. Importantly, Jessop J raised a range of concerns with the practical application of the implied term in the employment context including its interaction with various pieces of legislation and the existing fabric of the common law and equitable remedies.

Conclusion

Given the contentious nature of this decision, it may go to the High Court on appeal and be overturned. Until such time, Australian employers must be aware that their dealings with employees are subject to an implied term of mutual trust and confidence unless it is expressly excluded in the contract of employment.

 

By
squire sanders

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