24 August 2010
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  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:
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  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:
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: