September 2014

David and Goliath in the High Court - no term of mutual trust and confidence implied in employment contracts

The ongoing five year David and Goliath battle to have a term of mutual trust and confidence implied into contracts of employment in Australia has been won by Goliath through a knock out. 

On 10 September, the High Court handed down its decision in the case of Commonwealth Bank of Australia v Barker [2014] HCA 32.  The Court found that there was no implied term and as a consequence, Mr Barker lost.

The argument before the Court was whether there is to be implied into all employment contracts in Australia, a term of mutual trust and confidence imposing behavioural obligations on employers.  The term had been found to exist in the United Kingdom by the UK House of Lords in Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20:

…an employer must not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

Mr Barker’s employment had been terminated by the Commonwealth Bank by reason of redundancy on 9 April 2009.  Mr Barker alleged that the conduct of the Bank was in breach of an implied term of mutual trust and confidence, which resulted in him being denied redeployment.  The Full Court of the Federal Court agreed with the primary judge that the term of mutual trust and confidence was implied in the contract of employment.  The Bank appealed to the High Court.

The High Court’s decision

The High Court allowed the Bank’s appeal, and held that a term of mutual trust and confidence should not be implied by law in employment contracts because the term did not answer the criterion of necessity required to support its implication in law in employment contracts generally.  That is, a term of mutual trust and confidence was not needed for the effective operation of employment contracts.  Further, the implication of the term would be “a step beyond the legitimate law making function of the courts”

The High Court held that the UK approach in Malik was not appropriate in the Australian context. 

The High Court had regard to the environment in which employment in Australia is regulated, by legislation and common law.  There are awards and enterprise agreements, laws dealing with unfair dismissal and other conditions of employment like discrimination and safety.  The employment contract operates within this detailed framework.

The High Court said it is an established part of the law in Australia that a term will only be implied into a class of contracts where, absent the implication, the enjoyment of rights under the contract would be rendered nugatory, worthless, or be seriously undermined. 

Necessity is required.  No term will be implied if the contract is effective without the term and the term to be implied must be so obvious as to go without saying.  It is not necessary for the employment contract to contain the implied term.  Keifel J said the term was not required to render employment contracts generally effective:

Contracts of employment are not rendered futile because of the absence of a term to this effect.  To the contrary, it would not be possible for all employers to give effect to such a term.  This tells against the application of such a requirement as a universal rule.  It cannot be said to be “necessary”…

The Court was also cognisant of the limits of its law making power.  Recognising there were complex policy considerations underlying the implication of the term (including the obligations and burdens it would impose on both employers and employees), the Court said the absence of the term was a matter more appropriately dealt with by the legislature, rather than the courts. 

Implications for employers and employees

This decision is not so much about handing a benefit to the employer, but rather not giving a new benefit to the employee.

The High Court has favoured an approach that fosters certainty with the operation of the employment contract.  It would not allow a term to be implied that has “the potential to act as a Trojan horse”.

Essentially, the traditional rights and obligations on parties to an employment contract remain the same.  There is, left for employees, a duty to co-operate imposed on the employer in which the employer is taken to agree to do all that is necessary to be done to carry out an obligation in the contract but that duty is not, like the implied term of mutual trust and confidence, a positive obligation to take all steps necessary to achieve all the purposes of employment.  It has limitations.

Notably, the Court did not determine whether there is any general duty in employment contracts on employers to act in good faith.  This issue was not raised in argument before the High Court.  Good faith in contracts may remain an avenue open to employees seeking to argue an employer has a contractual obligation to behave in a certain manner; similar arguments have been used in challenging “discretionary” bonus schemes. 

For employers, the decision means it is time to ensure your employment contracts are clear and certain, not incorporating policies or woolly statements about fairness and trust.  The actual wording of the employment contract has become more important than ever.