‘Water under the bridge’ – High Court decision on damages for psychiatric injury in employment cases

• Mr Elisha commenced employment with Vision Australia in 2006.
• Mr Elisha’s employment was governed by a written employment contract signed on 27 September 2006. 
• Between December 2014 and July 2015, Mr Elisha was treated for anxiety and depression, although Vision Australia was not aware of this. 
• On 23 and 24 March 2015, Mr Elisha was involved in an incident while he was staying at a hotel on a work trip. It was alleged that he had been aggressive and intimidating to one of the hotel proprietors, Ms Trch (Incident). 
• Subsequent to the Incident, two other Vision Australia employees stayed at the hotel and were advised by Ms Trch of the Incident. The two employees reported the Incident to their manager who escalated it to Mr Elisha's manager, Ms Hauser.
• Since 2011 or 2012, Mr Elisha and Ms Hauser had a poor working relationship; however, Mr Elisha had not been subject to disciplinary action prior to the Incident.
• After becoming aware of the Incident, Ms Hauser:
  • on 8 May 2015, informed Mr Van Dyk (Human Resources Manager) and Ms Eagle (a member of the People and Culture team) that she had previous verbal reports of Mr Elisha's ‘aggressive behaviour’; and
  • on 10 May 2015, informed Mr Garwood (General Manager of Vision Australia) that she has been aware that Mr Elisha’s ‘behaviour has deteriorated’ and ‘[she] felt that [the Incident] is gross misconduct and should be addressed accordingly’.
• On 29 May 2015, Mr Elisha’s employment was terminated because of the Incident. While not known or put to Mr Elisha at the time of termination, Ms Hauser’s claims that Mr Elisha had been aggressive prior to the Incident formed part of the reason for termination. 
• Following Mr Elisha’s dismissal, he was diagnosed with a major depressive disorder and adjustment disorder with depressed mood and was found to have no capacity for work for the foreseeable future.
• Mr Elisha also commenced unfair dismissal proceedings, which settled on 9 July 2015 for $27,248.68, being the maximum amount to which he was entitled in respect of those proceedings.
• On 27 August 2020, Mr Elisha commenced the proceedings, the subject of this decision, in the Supreme Court of Victoria. 

The HCA considered the following questions:

1. Was Vision Australia’s disciplinary procedure (Disciplinary Procedure) incorporated into Mr Elisha’s employment contract and if so, did Vision Australia breach Mr Elisha’s employment contract for failing to follow the Disciplinary Procedure? 

   The HCA majority answered Yes to this question.
    

2. Can damages for a breach of contract extend to a psychiatric injury?

   The HCA majority answered Yes to this question.
    

3. Is liability for a psychiatric injury too remote?

   The HCA majority answered No to this question.

Each limb is considered below. 

The HCA accepted that the Disciplinary Procedure formed part of the employment contract and Vision Australia had breached the employment contract by failing to follow the steps set out in the Disciplinary Procedure.

Relevantly, the employment contract contained the following clauses: 

‘Other Conditions: Employment Conditions will be in accordance with regulatory requirements and Vision Australia Policies and Procedures. Breach of the Policies and Procedures may result in disciplinary action.’

‘Acceptance: ...I agree to comply with these terms and conditions of employment and all other Company Policies and Procedures.’

The employment contract did not expressly exclude policies and procedures forming part of the employment contract. Consequently, and adopting the HCA’s reasoning, a reasonable person would have concluded that the intention of the ‘Other Conditions’ clause was to be contractually binding. 

Given that the Disciplinary Procedure formed part of the employment contract, Vision Australia had a contractual obligation to follow the Disciplinary Procedure. 

Specifically, Vision Australia was required under paragraph 2 of the Disciplinary Procedure, to provide Mr Elisha with a letter before the disciplinary meeting that contained the relevant allegations, which should have included allegations related to his pattern of aggressive behaviour, which it failed to do.

Vision Australia relied on the House of Lords decision, Addis v Gramophone Company Ltd[1909] AC 488 (Addis), which in effect established that damages for a psychiatric injury were beyond the scope of any contractual term.

The HCA rejected this argument, observing that:

1. Addis did not decide that damages can never be recovered for a psychiatric injury but rather found that compensation cannot be awarded for injured feelings or the loss sustained because of dismissal and the difficulty finding new employment. 
    
2. Addis was decided more than a century ago in a different social context. In both the United Kingdom and Australia ‘a great deal of water has passed under the bridge’ and has since seen the establishment of legislation to protect employees. 
    
3. In Baltic Shipping Co v Dillon (1993) 176 CLR 344, the HCA accepted damages could be awarded for a psychiatric injury following a breach of contract and did not exclude employment contracts from this position. 

Therefore, subject to remoteness, the HCA accepted that an employee is entitled to damages for a psychiatric injury resulting from a breach of contract.

The majority of the HCA commented that:

The circumstances of breach, as found by the primary judge and upheld by the Court of Appeal, were serious…the discipline meeting was described as a ‘sham’ and a ‘disgrace’. The decision to prefer Ms Trch's account of the hotel incident had been made by Ms Hauser and Ms Eagle prior to the discipline meeting. The real reason for Mr Elisha's dismissal was not mentioned at the discipline meeting. That real reason was based on allegations by Ms Hauser that had been shared with Ms Eagle, Mr Van Dyk and Mr Gow-Hills, who had rarely dealt with Mr Elisha. And, although those allegations lacked any foundation, they were never raised with Mr Elisha.

The majority of the HCA accepted that an unfair termination process for alleged misconduct can impact an employee’s livelihood, identity, and self-esteem.

It was accepted that the precise psychiatric injury suffered by Mr Elisha did not have to be contemplated at the time of entering the employment contract, but rather it was reasonable for Vision Australia to expect that Mr Elisha would have suffered distress because of the employer’s conduct. Specifically, ‘the psychological impact of the breach that could reasonably be supposed to have been in the parties' contemplation included not only the grave effect of Mr Elisha's wrongful dismissal for alleged misconduct, but also the "unfathomable nature" of what occurred.’