In an important appellate decision, on 6 August 2013 the majority of the Full Court of the Federal Court upheld, for the first time, a damages award for breach of an implied term of mutual trust and confidence [Commonwealth Bank of Australiav Barker [2013] FCAFC 83].
The Full Court held by a 2:1 majority that a term of trust and confidence can be implied into all contracts of employment unless the implication of such a term would be inconsistent with the express terms of the contract.
This has significant implications for employers who should now review the terms of their employment contracts and carefully consider their pre-termination processes.
In April 2012, the New South Wales Court of Appeal in Shaw v State of NSW [2012] NSWCA 102 refused to strike out a claim for damages for breach of an implied duty of mutual trust and confidence. It was the Shaw decision that first sent an alarm signal to employers.
Further uncertainty around the implication of the term arose a few months later when the Federal Court in Barker v Commonwealth Bank of Australia [2012] FCA 942 ordered the Commonwealth Bank of Australia (CBA) to pay damages for breach of an implied term of mutual trust and confidence. In that case, Mr Barker was an executive manager at CBA who was advised that his position was redundant effective immediately. Mr Barker alleged, among other things, that in failing to make proper efforts to redeploy him, CBA had breached an implied term of trust and confidence in his employment contract. At first instance Justice Besanko found that the implied term existed, and it was breached by CBA when it breached its redeployment policy.
On appeal, a majority of the Full Court (Jacobson and Lander JJ) found that:
Interestingly, the majority considered that the term of trust and confidence satisfied the test of "necessity", consistent with the approach of the High Court for implication of contractual terms by operation of law.
The majority also held that the content of the implied term was not co-extensive with an obligation on the CBA to observe its redeployment policy, even though the content of the policy informed the operation of the implied term.
The majority awarded Mr Barker damages of $335,623.57 for financial loss suffered as a result of a breach of the implied term.
In dissent, Justice Jessup of the Full Courtcanvassed the history of cases touching on the issues in Englandand Australiaand rejected the view that the implied term satisfied the "necessity" test. In particular, Justice Jessup noted the fact that the term was first referred to in a UKcase in 1978 "raised a real doubt about the proposition… that the implication of the term was necessary to give contracts of employment commercial and industrial validity". All 3 judges, however, agreed that the term was not applicable to the termination itself.
Given the carefully reasoned dissent of Justice Jessup, there are real prospects that there will be further consideration of this issue by the High Court in Barker v CBA or in some other case.
However, until there is a definitive statement from the High Court on the implication of the term of trust and confidence, employers should be careful in a range of situations that precede termination of employment to avoid doing anything to undermine the employment relationship.
In light of this, employers should also consider drafting or amending contracts of employment to expressly exclude the operation of the implied term.
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