An Implied Duty of Mutual Trust and Confidence

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In 2013, we saw the Federal Court of Australia determine that a term of mutual trust and confidence is necessary and can be implied in contracts of employment in Australia.[1] Recently, however, this decision was appealed to the High Court.[2]

The High Court asked: can a duty of mutual trust and confidence be implied in all contracts of employment? Or can it only be implied in specific factual circumstances, when particular requisite requirements have been met?  

  1. Facts

This case involved an employee, Mr Barker, who had been employed by the Commonwealth Bank of Australia (“CBA”) for some 23 years, as an executive manager in the corporate banking section.

Under his contract of employment, the CBA was permitted to terminate his employment by providing four weeks’ written notice , and without giving a reason for termination. The Bank exercised this option and notified Mr Barker in writing of his redundancy. However, also included within its letter was a note indicating that the CBA would attempt to redeploy him to another position in the Bank and would notify him of this.

Mr Barker was informed that if he was not redeployed within the bank, his employment would be terminated within four weeks. This was later extended by a week, upon which he was told that his employment was terminated.

However, Mr Barker did not receive any notification of redeployment opportunities, because his prospective termination meant that Mr Barker was not given access to work email and mobile phone facilities.

  1. Initial proceedings in the Federal Court

Mr Barker brought an action for breach of contract and sought damages pursuant to section 82 of the Trade Practices Act 1974 (Cth) (the now Competition and Consumer Act 2010). The claim under the TPA failed as no representations were made in trade or commerce. Mr Barker’s claim included the fact that written policies of the CBA which related to the issue of redundancy, were breached, in that the Bank had failed to inform him of possible alternative positions in the Bank. This argument was rejected by the primary judge. His Honor found that this policy was not incorporated into the employment contract.

However, the court found that the policy was not merely expressed in entirely aspirational or descriptive terms. There was a legitimate expectation that the policy would be complied with. The primary judge held that there was a serious breach of an implied term of mutual trust and confidence, where their conduct in failing to follow the policy was likely to destroy or seriously damage the relationship of confidence and trust between them. Mr Barker was prima facie awarded damages of $317,000 for loss of the opportunity to be redeployed to a suitable position within the Bank (rather than for the termination).

  1. Appeal to the Full Court of the Federal Court

The CBA subsequently appealed the matter. The Court considered the matter further and noted UK case authorities from which this notion of an implied term of mutual trust and confidence was derived, particularly the case of Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 (“Malik”). Justices Jacobson and Lander held that according to Lord Nicholls’ in Malik this “term is one that is implied by law as a matter of necessity in the modern employment context” for the purpose of preserving the employment relationship.

The Justices decided that the weight of the relevant existing cases favoured a finding of this implied term in relation to an ongoing relationship of employment. The Justices agreed with the Full court in South Australia v McDonald [2009] SASC 219 at [231] which stated that:

The development of the implied term can be seen as consistent with the contemporary view of the employment relationship as involving elements of common interest and partnership, rather than of conflict and subordination.”

The Full Federal Court, by majority, also held that a term of mutual trust and confidence was implied by law into the Agreement.

  1. Further appeal to the High Court

The CBA again appealed the decision, after seriously doubting that under the common law of Australia, employment contracts contain a 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.[3]

The High Court could not agree with the existence of this implied duty. While the court does have the power to set precedents and develop laws, there are constraints on this power. Law-making by judges should not be made lightly.

4.1 A duty of mutual trust and confidence in employment contracts generally?

Importantly, the High Court recognised that a term should only be implied where it is necessary for the effective working of contracts of that class;[4] necessary in the sense that without it, “the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or perhaps, be seriously undermined or the contract would be “deprived of its substance, seriously undermined or drastically devalued.”

The High Court confirmed that no term will be implied if the contract is effective without it and that any implied term must be so obvious that it “goes without saying”.[5]

In reaching that conclusion, the High Court referred to examples of implied terms actually recognised at law, namely:

  1. The implied duty imposed on an employer to provide the employee with a safe system of work;[6]
  2.  The implied duty imposed on a landlord for quiet enjoyment of the land in the case of a contract between a landlord and tenant; and
  3.  The implied duty imposed on each party to a contract to co-operate in the doing of acts necessary to performance, or to enable the other party to secure a benefit provided by the contract.[7]

The High Court acknowledged that there were no cases of the High Court which acknowledged the existence of an implied duty of mutual trust and confidence in employment contracts generally, or as the court in Malik put it, an implied duty on an employer not to engage in “trust-destroying conduct”.[8]  And the UK case of Malik could not be applied in the circumstances as, “the regulatory history of the employment relationship and of industrial relations generally in Australia differs from that of the United Kingdom”.[9] The decision of Malik arose in different circumstances, and the emergence of the implied term in the UK of this implied term was a product of particular statutory circumstances in the UK, which have no analogue in Australia.[10]

4.2 A duty of mutual trust and confidence in particular employment contracts?

The employee tried to argue that the long-standing relationship with his employer required that term to be implied. The Court considered that the concept of ‘necessity’ is not satisfied simply by demonstrating the reasonableness of the implied term. The relevant test of necessity is an objective one.[11] It was not a matter of considering the particular relationship of the parties. “It is the relationship of the employer and employee more generally which identifies what is necessary to the operation or fulfillment of employment agreements”.[12]  If a term of mutual trust and confidence were to be implied in that particular Employment Agreement and not in all employment contracts, the problem of inconsistency would arise.

The employee also tried to argue that a clause of the Employment Agreement meant that the term could be implied. In particular, the employee referred to a clause 8 which contemplated that the employee’s employment might be terminated if the employer was unable to place him on an alternative position. The court found that there would be no point in implying a term if there was a term which essentially required employer to take steps to attempt to re-deploy the employee (and thereby ensuring that trust and confidence was not destroyed). The prescriptive content of an implied term could not be spelt out in the terms of a contract.[13]

The High Court therefore concluded that contracts of employment are not rendered futile because of the absence of a term to this effect, and therefore this term cannot be implied in employment contracts, either generally or in particular circumstances.

The High Court considered that to imply such a duty would be a “step beyond the legitimate law-making function of the courts”. Thus this would probably only be a matter for the legislative branch of Government to consider.

Implications

This decision is of great significance for employers because uncertain and undefined claims by employees, that their employer’s conduct has “destroyed or seriously damaged the relationship” are not likely to be sustained.[14] Employers should find some comfort in the fact that employment relationships will be determined primarily within the confined and defined terms of:

  1. contract law (which, note, does include some implied terms but which are not as liberal as the implied duty of mutual trust and confidence could be);
  2. the express terms of a contract; and
  3. legislation
  4. Contact our team of specialist Brisbane Employment Lawyers, and we can offer you assistance in relation to any stage of the employment relationship, whether it be the pre-selection and contract formation stage, the relationship between employee and employer, or when the employment relationship is coming to an end.

[1] Commonwealth Bank of Australia v Barker [2013] FCAFC 83.

[2] Commonwealth Bank of Australia v Barker [2014] HCA 32.

[3] Commonwealth Bank of Australia v Barker [2014] HCA 32 at [15].

[4] see Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450; [1995] HCA 24.

[5] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283.

[6] Koehler v Cerebos (Australia) Ltd [2005] HCA 15; (2005) 222 CLR 44 at 53, [19].

[7] Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 at 584 [14], 628 [156]. See also Commonwealth Bank of Australia v Barker [2014] HCA 32 at [37].

[8] Malik v Bank of Credit and Commerce International SA (in Compulsory Liquidation) [1998] AC 20 at 34.

[9] Commonwealth Bank of Australia v Barker [2014] HCA 32 per French CJ, Bell and Keane JJ at [18].

[10] Commonwealth Bank of Australia v Barker [2014] HCA 32 at [116].

[11] Commonwealth Bank of Australia v Barker [2014] HCA 32 at [85].

[12] Commonwealth Bank of Australia v Barker [2014] HCA 32 at [86].

[13] Commonwealth Bank of Australia v Barker [2014] HCA 32 at [117].

[14] Note that an employer’s conduct can still be said to have “destroyed or seriously damaged the relationship” where the issue at hand relates to an unfair dismissal and a constructive dismissal – see Commonwealth Bank of Australia v Barker [2014] HCA 32 at [73].