Implied terms in employment contracts

High Court ends the debate: no implied term of mutual trust and confidence in Australian employment contracts

Overview

For years Australian courts and tribunals have tangoed with and side-stepped around the sticky issue of whether Australian law recognises an implied term of mutual trust and confidence in employment contracts. On more than 10 occasions, Australian appellate court decisions have considered the term’s existence in Australia, without deciding one way or another.

At last…the High Court’s hotly-anticipated decision in Barker v Commonwealth Bank of Australia [2014] HCA 32 has silenced the debate, deciding that the term is not implied into Australian employment contracts.

The implied term in purgatory

Long-established as part of UK law, the implied term of mutual trust and confidence has increasingly crept into Australian judgments over the past decade.

The implied term requires that an employer must not conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between employer and employee, unless the employer has reasonable and proper cause (‘implied term’).

Recognition of the implied term under Australian law has been debated in cases from the Fair Work Commission to appellate courts in the State and Federal spheres. This has resulted in a very unsatisfactory state of uncertainty for employers (and their lawyers) needing to understand the extent of their obligations to employees. UK cases tell us that the implied term can have a broad operation, imposing an additional and somewhat nebulous duty of fairness on the actions of the employer towards its employees.

Barker is the first case in which the High Court has had to decide, once and for all, whether the term of mutual trust and confidence is implied into employment contracts in Australia. Settling the debate, in a decision handed down today, the High Court has unanimously held that the implied term does not form part of Australian law.

Mr Barker’s journey

In September 2012, a Federal Court judge ordered CBA to pay Mr Barker, a former Bank executive, damages of $317,500 for breaching an implied contractual term of mutual trust and confidence. The breach resulted from the Bank failing to comply with its redeployment policy when making Mr Barker’s role redundant. This resulted in Mr Barker losing the opportunity to be redeployed into another position with the Bank.

The Court rejected Mr Barker’s arguments that the Bank’s redeployment policy:

• was incorporated as an express term of his employment contract; or
• was implied as a term of his employment contract as a matter of fact by practice and usage within the Bank.

However, Mr Barker argued that his employment contract contained an implied term of mutual trust and confidence and that a serious breach by the Bank of its own policies amounted to a breach of the implied term.

Having canvassed the authorities, and acknowledging the divergent decisions within Australia as to recognition of the implied term in this country, Besanko J held that:

• there is an implied term of mutual trust and confidence in contracts of employment in Australia;
• it is a term implied by law, rather than by fact, and can be excluded by the express terms of the contract;
• it was not necessary to decide whether the implied term applied at the point of dismissal (a limitation on the operation of the implied term derived from its application under UK law, described in the cases as the ‘Johnson v Unisys exclusion area’). This was because the alleged breach of the implied term here related to the period of redeployment before the Bank had given notice of termination;
• the Bank had, by its ‘almost total inactivity’ in relation to the steps outlined in the Redeployment Policy, committed a serious breach of the policy which amounted to a breach of the implied term;
• Mr Barker had a 25% chance of redeployment within the Bank had the Bank followed its own Redeployment Policy. Accordingly, Mr Barker was awarded 25% of the financial loss he had suffered.

The Bank appealed …

The Bank appealed the first instance decision. A majority of a full court of the Federal Court (Justices Jacobson and Lander) upheld the decision and concurred that the implied term of mutual trust and confidence had become entrenched in Australian law.

The majority accepted the UK position that the implied term does not operate at the point of dismissal (that is, in relation to the termination itself). They acknowledged that it may sometimes be difficult to draw a line between acts occurring prior to the dismissal and the dismissal itself.

The judges found that the operation of the implied term was, in Mr Barker’s case, informed by his 23 years of service with a large corporate employer and a clause in his employment contract that said his employment may be terminated if the Bank was unable to redeploy him.

However, the Full Court did not agree with the trial judge that a serious breach of the Bank’s Redeployment Policy amounted to a breach of the implied term in circumstances where the policy was found not to be part of the contract of employment. Taking a different approach to reach the same conclusion, the appeal court found that the operation of the implied term in Mr Barker’s case required the Bank to take positive steps to consult with the manager and inform him of suitable employment options. By failing to contact Mr Barker about possible redeployment for an unreasonable period of time after first notifying him of the redundancy, the Bank had breached the implied term.

The full court also accepted that damages were recoverable for a breach of the implied term where the breach occurred prior to and independent of the termination.

Yet even at this stage, the Full Court was not of one mind. In a strong dissenting judgment, Justice Jessup rejected the existence of the implied term, finding no basis for implying a duty of trust and confidence on an employer beyond the duties already associated with employment contracts. He referred to the inherent uncertainty of what obligations such a term would impose, describing it as having the “potential to act as a Trojan horse in the sense of revealing only after the event the specific prohibitions which it imports into the contract”. Jessup J found that even if the implied term did exist, the Bank had not breached it in any event.

The Bank appealed the Full Court decision to the High Court, which granted leave to appeal in December 2013 and heard the case in April this year.

High Court says implied term is a ‘step too far’

In a unanimous judgement, the High Court held that the implied term of mutual trust and confidence should not be implied into employment contracts in Australia.

Allowing the Bank’s appeal, the High Court held that:

• implying the term into employment contracts was a step beyond the legitimate law-making function of the courts;
• implying the term was not ‘necessary’ in a sense that would justify implying it into all employment contracts. The implied term imposed mutual obligations which were wider than those which are ‘necessary’ to maintaining an employment relationship;
• regulation of employment in the UK differs to Australia, including as to the levels of protection for employees and employers which have changed over time. The development of the implied term in the UK (a product of a particular UK statutory regime) must be considered in the context of UK society and the legal environment which led to its existence. The history and development of the term in the UK is not applicable in Australia;
• the Courts have a limited law-making function and recognising the implied term went beyond the limits of judicial power, particularly given the degree of regulation already in place in relation to employment contracts in Australia. The High Court said that the creation of a new standard of that kind ‘is not a step to be taken lightly’ ;
• the complex policy considerations involved in implying a term which imposes a ‘mutual’ obligation on both employers and employees make it a matter more appropriate for the legislature than for courts to determine. The High Court pointedly left open the question of whether Parliament might enshrine the implied term in statute.

The Bank had conceded that Mr Barker was entitled to a payment for four weeks’ notice and the High Court ordered the notice to be paid in the amount of $11,692.31. The Bank had also given undertakings that it would bear its own and Mr Barker’s costs of the High Court appeal, even if successful.

Good news for employers

With the controversy over, employers can now rest easier.

In the UK where the implied term has been part of the law for many years, it is commonly argued by employees in constructive dismissal and other employment claims that an employer who has acted in a way that the employee considers unfair has breached the implied term. The wide variety of ways in which the implied term has been argued in the UK demonstrates the nebulous nature of the implied term and the difficulties employers face in understanding what conduct will breach the term.

Unless and until Parliament decides there is a need to include the implied term in the law books (a question left open in Barker), the High Court’s decision will end such claims in Australia, relieving employers from the taxing task of defending such claims in the context of uncertain and ill-defined law.
The Employment team at Hall & Wilcox has particular expertise in employment contract disputes and employment-related litigation.