High Court says 'no' to mutual trust and confidence

In the highly anticipated decision of Commonwealth Bank of Australia v Barker¹, all five members of the High Court of Australia have held that there is no term of mutual trust and confidence implied by law into all Australian employment contracts. This is welcome news for employers as the Full Federal Court's decision had raised significant concerns about the effect of incorporating employment policies as contractual terms. It had also caused uncertainty about how widely the duty would be interpreted.

Background

In late 2010, Mr Barker commenced proceedings in the Federal Court of Australia against the Commonwealth Bank, alleging that following his proposed redundancy, the Bank had failed to act in accordance with its redeployment policy and in doing so had breached an implied term of mutual trust and confidence in his contract.

The primary judge found that a term of mutual trust and confidence was implied into Mr Barker's employment contract with the Bank and awarded Mr Barker $317,500.00 in damages. A majority of the Full Federal Court upheld the primary judge's finding and increased the damages awarded to Mr Barker.

The High Court's decision

The key question for the High Court was whether all employment contracts in Australia contain an implied term that neither party will, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence between them. This term of trust and confidence had been implied in a number of English cases, most notably by the House of Lords inMalik v Bank of Credit and Commerce International SA (In Compulsory Liquidation)².

The joint judgment (Chief Justice French, and Justices Bell and Keane), along with the separate judgements of Justices Kiefel and Gageler,overturned the decision of the Full Federal Court and unanimously rejected the notion that the implied duty of trust and confidence (as formulated in Malik) applied in Australia.

All members of the High Court emphasised that the implication of a term in contracts by law must always meet the requirement of necessity. This will only arise in cases where rights or benefits would be rendered worthless or seriously undermined in the absence of such a term.

The implied term of trust and confidence did not satisfy the test of 'necessity'. Conversely, it would impose mutual obligations on employers and employees which are wider than necessary for the performance of the employment contract.

The High Court found that the duty to cooperate (which applies to contracts generally) satisfies the requirement of necessity. The duty to cooperate is sufficient to enable the performance of employment contracts in Australia³ and to prevent intentional frustration of the contract. The duty involves an obligation not to prevent or hinder the operation of an express condition on which performance of the contract depends. However, it does not impose a positive obligation to take all steps necessary to achieve the purposes of the employment relationship.

Importantly, the High Court made clear that the decision did not exclude the possibility of the implied duty to act in good faith in the performance of contracts (including employment contracts), under Australian law. That question was not required to be determined by the High Court in this case.

Implications for employers

The decision of the High Court in Barker is welcome news for employers, as it removes the current uncertainty as to the existence of the implied term of mutual trust and confidence and the extent of an employer's duties under such a term.

As a result of the High Court's decision, we expect to see applicants place greater reliance on breach of express contractual terms, as well as general protections and misrepresentation claims against employers.

To reduce this risk, we recommend that employers:

• review the express terms of employment contracts and any obligations created by those terms, including ensuring that there are express terms excluding company policies; and
• ensure that managers and other key personnel are familiar with recruitment, performance management, redundancy and termination processes.