Implied term of trust and confidence - recognised by full Federal Court for the first time

Articles Written by Jan Dransfield (Partner), Polina Churilova

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.

Where does this decision leave the law on the implied term of trust and confidence?

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:

  • the term of mutual trust and confidence will ordinarily be implied into employment contracts in Australiaas a matter of law;
  • the term will not be implied where it has been expressly excluded or is inconsistent with the express terms of the contract;
  • the term is not applicable in relation to dismissal or to steps which are inextricably bound up with dismissal;
  • a breach of the term may sound in damages; and
  • the precise content of the term must be ascertained according to the nature of the employment relationship and the facts of each particular case.

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.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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