Implied contractual term of mutual trust and confidence: is there a future for trust and confidence in employment?

Implied contractual term of mutual trust and confidence: is there a future for trust and confidence in employment?

Introduction

During the last few years employers have faced a number of novel claims brought against them by disgruntled employees.  Previously, employers commonly encountered claims such as for unfair dismissal, discrimination and breach of contract after the termination of employment.  However, over the last few years and most relevantly during 2008 and 2009, employees have attempted to use alternative remedies to redress employer conduct, both during and after the employment relationship ends.  We have recognised a particular focus in 2008 and again 2009 on breach of contract claims, particularly claims which have attempted to rely on an implied term of mutual trust and confidence, i.e. a term implied into employment contracts to the effect that an employer must not act in a manner which damages or destroys the relationship of mutual trust and confidence.  This has led to the Courts considering whether all employment contracts contain such an implied term and if so, what conduct will constitute a breach and what effect this has on the employer.

Recognition of Implied Term of Mutual Trust and Confidence

In being presented with claims by employees for breach of the implied term of mutual trust and confidence, Courts have variously analysed the historical background to the implied term.  This has led Australian Courts to recognise that the term is indeed implied by law into employment contracts in jurisdictions such as England and Wales and in New Zealand.  For instance, the term has been used in those jurisdictions to apply to various employment scenarios, such as the offer of enhanced redundancy packages 1 and the failure to provide a performance based bonus even where there was no contractual obligation to do so 2.

In Australia, the High Court has not delivered a decision directly on the matter, but has in the past made statements conducive to the implication of the term in Australian employment contracts 3.   Other superior courts have expressed similar views 4. 

Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney

Finally in 2008, in the high profile case of Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney 5 the Supreme Court of New South Wales (Rothman J) considered the issue and concluded that the term of mutual trust and confidence was implied by law into all Australian employment contracts, unless expressly excluded. In this case, the breach arose from procedures adopted by the employer during an investigation into allegations made against Mr Russell.  Notwithstanding that landmark recognition, the Court did not award damages for this breach because it related to the manner in which Mr Russell’s employment was terminated.  Compensation with respect to the termination of employment is squarely covered by the statutory unfair dismissal regime and to award compensation for this outside of that statutory regime would be a subversion of the statutory process. This is consistent with well established principles 6.

On appeal, the New South Wales Appeal Court 7 did not echo the definitive recognition given to the term at the Court of First Instance.  Instead, the Appeal Court concluded only that, if in fact the term was implied, then the employer’s investigation processes did not breach it. 

Other cases

Since this decision a number of further decisions in superior Courts have gathered momentum for the recognition and development of the implied term.  For instance in Downe v Sydney West Area Health Service (No. 2) 8 , a further New South Wales Supreme Court decision, the Court concluded that the indefinite suspension of an employee and a direction to perform work at another location amounted to a breach of the term of mutual trust and confidence. 

In McDonald v State of South Australia 9, the South Australian Supreme Court (Anderson J) recognised the existence of the implied term and found that an education authority had breached the term because it failed to properly manage a teacher’s performance, it failed to consult with him about changes to the workplace and it did not contact him during a prolonged period of illness.  2009 saw the appeal of this decision to the Full Court of the Supreme Court of South Australia 10.  The appeal decision was that the term was not implied into the teacher’s employment contract as a matter of fact, rather than law. 

Developments in 2009

Apart from the appeal decision in the Downe case referred to above, further decisions published in 2009 considered the existence of the implied term of mutual trust and confidence and its ambit.  The Victorian Supreme Court in Quinn v Gray 11 recognised the existence of the term in Australian employment contracts and concluded that a failure to provide natural justice to an employee during an investigation process could result in a breach of the implied term.  In this case the employer failed to provide an employee with an opportunity to respond to all the material received by an investigation committee and it did not inform him that the outcome of the investigation could lead to the termination of his employment.  Unusually, the Court confirmed that it was possible that the implied term of mutual trust and confidence operated specifically to provide peace of mind to the employee, so that breach of the term could lead to damages for distress.  This is an exception to the usual rules relating to the recovery of damages 12.

In a decision of North J, the Federal Court in Yousif v Commonwealth Bank of Australia (No.2) 13 recognised the implied term of mutual trust and confidence, but found that factually it had not been breached.  In this case the breach the employee claimed was a failure by the employer to appoint and promote her to a particular position.  The Court found that the employer did not promote the employee for strategic business reasons.

Similarly, in The Australian Licensed Aircraft Engineers Association v Qantas Airways Limited 14, the Australian Industrial Relation Commission considered whether the term was implied into a collective agreement and accepted that it was implied into individual employment contracts, but rejected the argument that it was imported into a certified agreement.

In the Federal Magistrates’ Court decision of Rogers v Millennium Inorganic Chemicals Limited & Anor 15 (Federal Magistrate Lucev), the Court concluded that while the term was implied into Australian employment contracts by law, there was no factual breach in the present circumstances.  The breaches claimed by the employee in this case again related to investigation procedures adopted by the employer and included considering terminating employment prior to conducting the investigation, refusing to disclose the identity of a witness and details of how their account differed to the employee’s.

Lastly, in an appeal from the New South Wales Administrative Decisions Tribunal, the Appeal Panel in St Joseph`s Hospital Limited v Corey (No. 2) 16 confirmed the existence of the implied term of mutual trust and confidence in Australian employment contracts and found that a breach of anti-discrimination legislation could indeed constitute a breach of this term. 

Conclusion

The 2009 cases indicate a general acceptance by the Courts not only of the existence of the implied term of mutual trust and confidence, but also demonstrate a willingness to expand and develop the notion, particularly in the context of employer initiated investigation processes.  While the implication of the term provides employees with an avenue of complaint in relation to the employment relationship, the issue of costs in the common law courts are a prohibitive factor for employees as is the general prohibition against claiming damages relating to the manner in which employment was terminated. For employers, breach of contract proceedings are expensive and protracted and adverse costs orders a real concern.

These issues do not arise with respect to the general protections provisions contained in the Fair Work Act 2009 (Cth) which became operative in July 2009.  For instance, an employee may now claim that an employer has taken “adverse action” against them on the basis of a “workplace right” 17.  What constitutes a workplace right is restricted, but could include a scenario where an employee makes a complaint in relation to their employment 18 and claims that action taken by an employer afterwards constitutes adverse action because the action discriminates against them, injures them or prejudicially alters their position 19.  Clearly, the ambit of this type of claim is broad and could encompass many of the factual scenarios described in the cases discussed above.  In addition to that, adverse action claims are simpler and more cost effective for an employee with the added advantage that any compensation award is not capped.

2010 will tell whether contractual claims such as those based on the implied term of mutual trust and confidence will continue to occupy the Courts.  In all likelihood, employees will opt for the less expensive and less formal option of bringing an adverse action claim, but keep their options open by adding a breach of contract claim as an additional or alternative cause of action.  For employers this means a dispute may have to be defended on a number of fronts, with little likelihood of recovering costs even in successful defences.

End notes

1 British Gas Plc v O’Brien [2001] IRLR 279 (EAT)

2 Clarke v Nomura International Plc (2000) IRLR 266

3 Concut Pty Limited v Worrell [2000] HCA 64; (2000) 176 ALR 693 Kirby J at 706 stated “the ordinary relationship of employer and employee at common law is one importing implied duties of loyalty, honesty, confidentiality and mutual trust”.

4 Burazin v Blacktown City Guardian [1996] IRCA 371

5 2007 NSWLR 198

6 Addis v Gramaphone Co. Limited [1909] Ac 488

7 [2008] NSWCA 217

8 Downe v Sydney West Area Health Service (No. 2) (2008) 218 FLR 68; [2008] NSWSC 159

9 McDonald v State of South Australia [2008] SACS 134

10 State of South Australia v McDonald [2009] SACS 219

11 [2009] VSC 136

12 Addis v Gramaphone Co. Limited [1909] Ac 488

13 [2009] FCA 656

14 [2009] AIRC 268

15 [2009] FMCA 1

16 [2009] NSW ADTAP 58

17 Division 3, Fair Work Act

18 Section 341, Fair Work Act

19 Section 342, Fair Work Act