Employment contracts: The implied term of mutual trust and confidence

By Emma Goodwin and Lauren Wiese.

Key Points:
Employers should be wary of the possibility that a court could imply the term of mutual trust and confidence into an employment contract, and that a breach could bring consequences.

In February 2010, the Full Court of the Federal Court of Australia in the case of Yousif v Commonwealth Bank of Australia [2010] FCAFC 8 dismissed an appeal from a decision of a single judge of the Federal Court. Ms Yousif was employed by the Commonwealth Bank (the CBA) as a mobile lender until her employment was terminated in December 2008.

Ms Yousif claimed the CBA had breached various express and implied terms of her employment contract, including the implied term of "good faith, trust and confidence". The trial judge dismissed her application. In relation to the implied term, he decided that there had been no breach, assuming the term existed.

On appeal, the Full Federal Court refused to determine the issue of whether or not the implied term of mutual trust and confidence exists in Australian employment contracts, exhibiting a scepticism consistent with that of many other Australian appellate courts.

What is the term?

The term originated in English law and is now generally understood as:

"An employer will not, without reasonable or proper cause, conduct itself in a manner calculated to destroy or seriously damage the relationship of trust and confidence between the employer and employee."

It is possible that this may extend to a general duty on the employer's part to act in good faith.

How can the term be breached?

The term can be breached by capricious and unreasonable conduct by the employer. Whether or not particular conduct will breach the term depends on the circumstances, but cases where breach has been found to have occurred include:

• suspending an employee surgeon on full pay pending him undergoing a psychiatric examination, when there was no contractual mechanism to do so and this prevented the employee earning from his private practice (Bliss v South East Thames RHA [1987] ICR 700);
• appointing an employee to a significantly inferior position on her return from parental leave, when the original position still existed (Thomson v Orica Australia Pty Ltd (2002) 116 IR 186);
• terminating an employee for allegedly supplying marijuana in the workplace when there was no evidence that this had occurred (Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186);
• operating a business corruptly, so that redundant former employees experienced difficulty finding new employment as a result of stigma attaching to them because of the employer’s corrupt conduct (Malik v Bank of Credit and Commerce International SA (In Liquidation); Mahmud v Bank of Credit and Commerce International SA [1998] AC 20); and
• suspending an employee in highly unreasonable circumstances, including in some cases fabricating evidence against the employee (Eastwood v Magnox Electric Plc; McCabe v Cornwall County Council [2005] 1 AC 503; Gogay v Hertfordshire CC [2000] IRLR 703).

However, in Australia at least, it seems that the term does not necessarily amount to a duty to be procedurally fair in dealings with employees (Intico (Vic) Pty Ltd v Wamsley [2004] VSCA 90; Morton v Transport Appeal Board (No 1) 168 IR 403, 431; Russell v The Trustees of The Roman Catholic Church for the Archdiocese of Sydney (2008) 72 NSWLR 559).

What are the consequences for the employer of a breach?

Potentially, an employee may access damages for breach of contract. However, this depends on the situation. Over time, courts and tribunals have determined that:

• a breach of the term can enable an employee to claim constructive dismissal and access a statutory remedy for unfair dismissal (as occurred in Thomson v Orica Australia Pty Ltd);
• in some (generally more "extreme") cases, damages may be recoverable at common law for a breach of the term itself (such as in Malik v Bank of Credit and Commerce International SA In Liquidation); Eastwood v Magnox Electric Plc; McCabe v Cornwall County Council; Gogay v Hertfordshire CC);
• an employee who has access to the statutory unfair dismissal scheme must rely upon that scheme rather than making a common law breach of contract claim (for example, Johnson v Unisys [2003] 1 AC 518 and New South Wales v Paige (2002) 60 NSWLR 371);
• damages can only be recovered in respect of loss or damage suffered as a result of an employer's breach before a dismissal, but not for loss or damage stemming from the dismissal itself (Eastwood v Magnox Electric Plc; McCabe v Cornwall County Council; Gogay v Hertfordshire CC); and
• damages may be available where breach of the term results in physical or psychiatric injury, physical inconvenience or disappointment and/or the subject matter of the contract is the provision of pleasure or enjoyment (which is unlikely to be the case in relation to most employment contracts) (Burazin v Blacktown City Council (1996) 142 ALR 144).

It should be noted that it is possible that an employee may be able to make a claim for breach of a duty of care in tort law in the case of psychiatric or physical injury (to the extent that this is not limited by workers' compensation legislation).

What is the present attitude of Australian courts to the term?

It appears that Australian courts are increasingly sceptical about the existence and operation of the term in this country. The decision of the Full Federal Court in Yousif is consistent with a number of recent decisions of Australian State Full Courts (State of South Australia v McDonald (2009) 185 IR 45; Russell v The Trustees of The Roman Catholic Church for the Archdiocese of Sydney).

In State of South Australia v McDonald, the South Australian Court of Appeal also held that the term should not be implied where the employment relationship is governed by statutory and regulatory instruments (ie. legislation, Awards and Enterprise Agreements) which contain mechanisms for pursuing grievances.

Given the prevalence of legislation and industrial instruments with dispute resolution and grievance mechanisms in Australia, if other courts adopt this approach the range of employees who might have the term implied into their contracts is likely to be considerably reduced.

Some Australian courts (including, before Yousif, the Full Court of the Industrial Relations Court of Australia in Perkins) have viewed the term favourably. However, most of these decisions have been those of single judges of the Federal Court, Federal Magistrates' Court or State Supreme Courts. The trend at appellate court level seems to be to be to question the term's existence and to confine its operation. Crucially, the High Court has not definitively determined the issue.

Implications for Australian employers

It is evident that there is currently considerable uncertainty about the existence and operation of the term in Australia. However, until the High Court provides a definitive decision on these matters, it would be unwise for employers to ignore the potential for the term to apply. Employees should seek advice about the potential for breach of the term in a particular case and should remain mindful of:

• the need to handle events leading up to a termination with care, to minimise the ability of an employee to claim for psychiatric or other injury resulting from conduct prior to dismissal;
• the fact that a reach of the term may ground a claim of unfair dismissal on the basis of constructive dismissal;
• the potential extra risk associated with an employee who has no alternative statutory or contractual mechanism available for raising a dispute or grievance and/or who does not have access to the unfair dismissal jurisdiction; and
• the need to refrain from taking action which may unreasonably affect an employee's future employment prospects (for example, the situation in Malik v Bank of Credit and Commerce International SA (In Liquidation), outlined above).

For further information, please contact Emma Goodwin.