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19 Sep 14
High Court finds no mutual duty of trust and confidence in Australian employment relationships

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Commonweath Bank of Australia v Barker

Last week, the High Court handed down its long-awaited ruling in relation to whether a mutual duty of trust and confidence is implied into all employment contracts. 

The Full Court of the Federal Court had last year found that an employer must not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

The High Court overruled this finding.  It found that, under Australian common law, employment contracts do not contain such an implied term.

The Claim
An executive manager employed by the Commonwealth Bank of Australia (CBA) claimed that CBA had breached his employment contract when making him redundant in March 2009.  The manager claimed that CBA had failed to actively consult with him about his redeployment prior to terminating his employment as the CBA’s redeployment policy required, and that this failure amounted to a breach of a mutual duty of trust and confidence that the manager argued should be implied into the employment contract.

Full Court of the Federal Court - found the term was implied
Last year, by a two-to-one majority, the Full Court of the Federal Court agreed with the manager that the following duty was implied into the manager’s employment contract:

‘that the employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee’.

The majority went on to find that CBA had failed to take active steps to consult with the manager, and in doing so had breached the implied duty.  The dissenting judge dissected leading cases and disagreed that Australian law required the implication of such a term into employment contracts.

High Court - no such implied term
Before the High Court, CBA argued that, before a term could be implied into a contract, the party seeking the implication of the term needed to prove that the implication of the term was necessary to prevent the enjoyment of rights conferred by the contract being rendered nugatory or seriously undermined.

The High Court agreed with CBA’s argument.  It unanimously overturned the finding of the Full Court of the Federal Court.  It concluded that the term was not ‘necessary’ to give business efficacy to the contract, and therefore could not be implied into it. 

While acknowledging the rise of the implied term of mutual duty of trust and confidence in the United Kingdom, the High Court highlighted that its evolution in that jurisdiction was due to peculiar background of case law and statutory protection relating to dismissal.  It went on to caution that ‘implications in law … are a species of judicial law-making and are not to be made lightly’. 

The High Court commented that the inclusion of such a term into employment contracts involved a range of complex policy considerations and, for that reason, the question was a matter more appropriate for the legislature than the courts.

Implications for employers
The previous findings that an employer must not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between it and its employees created significant uncertainty for employers looking to terminate employees in accordance with contractual notice periods.  The implied term was being used in many instances as a basis for aggrieved former employees to make demands for significant sums as damages for breach of the term.

Employers can now rest assured that the previously poorly defined implied duty will not apply to their employment contracts and will not need to be considered when seeking to terminate those contracts.  Obviously employers still need to be careful of avoiding other types of claims when terminating employment, such as breach of contractual notice periods, discrimination and adverse action.

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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