High Court: No Implied Term of Mutual Trust and Confidence = Confidence for employers?

Publication | September 2014

Summary

Employers can breathe a sigh of relief now that the High Court has unanimously held that a term of mutual trust and confidence is not implied by law into Australian employment contracts.

Commonwealth Bank of Australia v Barker [2014] HCA 32 is the much anticipated appeal decision of the decision of the Full Federal Court which found that an implied term of mutual trust and confidence existed in employment contracts. The High Court has allowed the appeal, dismissing the necessity for an implied term of mutual confidence to prevail in Australia’s highly regulated employment space and overturning the award of damages of $317,000 awarded to Mr Barker.

However, is this the confidence employers have been waiting for?  Has the ‘Trojan horse’1 really been dismantled or do employers need to continue to be cautious? 

Background to the decision

Mr Barker was a long term employee of Commonwealth Bank of Australia (CBA), having worked at the bank from 1981 to 2009. Throughout his time at CBA, Mr Barker rose through the ranks, becoming an Executive Manager. In 2009, CBA advised Mr Barker that his position had been made redundant. Mr Barker was placed on paid leave and later advised that his employment was to be terminated. CBA had a redeployment policy that provided that certain steps should be taken by CBA to ensure that employees affected by redundancy were redeployed. Mr Barker’s employment contract expressly excluded this policy.

Mr Barker claimed that CBA had breached an implied term of mutual trust and confidence through its alleged failure to make proper efforts of redeployment. At first instance, the Federal Court found in favour of Mr Barker, deciding that an implied term of mutual trust and confidence did exist in his employment contract.

The Federal Court decision was subsequently upheld on appeal by the Full Federal Court. Special leave to appeal to the High Court was granted. The High Court, for the reasons articulated in further detail below, has held, that no implied term of mutual trust and confidence exists.

The Full Federal Court drew on United Kingdom legal developments in reaching its decision.

United Kingdom vs Australia

The High Court contrasted Australia’s workplace environment and framework to that of the United Kingdom (where the implied term exists) and determined that “the history of the development of the term in the United Kingdom is not applicable to Australia” [35].

While noting that there is a background of approving references to UK law in decisions of Australian state and federal Courts, their honours stated that “…this Court must determine the existence of the implied duty by reference to the principles governing implications of terms in law in a class of contract” [35].

Implied term not necessary – no gap to fill

The High Court went on to canvass the long standing principle that terms are normally implied into contracts only where a necessity exists to fill a “gap” which the express terms may leave open. Contrasting the necessity of the already clear implied duty to cooperate, Chief Justice French and Justices Bell and Keane found that “the implied term of mutual trust and confidence, however, imposes mutual obligations wider than those which are “necessary”, even allowing for the broad considerations which may inform implications in the law…” [37].

The Justices outlined that in the present case implication of such a term was not necessary “to give business efficacy” to the contract.

The High Court commented on the need for a cautious approach to implying terms into a contract, confirming that an element of necessity must exist if the common law is to impose an implied term.

Is legislative intervention required?

In the opening paragraph of the judgment, Chief Justice French and Justices Bell and Keane note that the implication of the term of mutual trust and confidence into all employment contracts “is a step beyond the legitimate law-making function of the courts”.  This is a recurring theme throughout the judgment. Is this then “a matter more appropriate for the legislature than for the courts to determine2 as the High Court has suggested?  And, if so, is a legislative response on the horizon? 

Although a legislative response may at first seem like an unusual concept, a legislative approach has been taken by New Zealand by incorporating an object into the Employment Relations Act 2000 (NZ), being the “promotion of good faith in all aspects of the employment environment and of the employment relationship … by recognising that employment relationships must be built not only on the implied mutual obligations of trust and confidence, but also on a legislative requirement for good faith behaviour.”3

As the High Court of Australia has ruled out judicial recognition of the implied term of mutual trust and confidence, it remains to be seen whether Parliament will act to fill the space.  A legislative response is inevitably subject to the political landscape in place and given the Prime Minister’s commitment not to introduce changes to the existing workplace relations laws in this Government’s first term, legislation at the Federal level seems unlikely in the next few years. 

Incorporation of mutual trust and confidence obligations in awards or enterprise agreements

Given that the door has been shut on a common law implied term of mutual trust and confidence, it will be interesting to see how employees and unions react. 

Will unions try to achieve similar outcomes by insisting on the inclusion of clauses in enterprise agreements imposing express obligations of mutual trust and confidence on employers? Alternatively, will unions seek to include such terms in awards as part of the modern award review process?

Were such a clause to be incorporated and an employee considered that the employer had acted other than in accordance with that clause in any aspect of the employment relationship, the employee could utilise the dispute resolution procedure in the applicable enterprise agreement or award which could lead to a multitude of disputes being raised.

If this approach is taken by unions, employers should carefully consider the implications for their workplace and seek legal advice. Inclusion of such obligations in an enterprise agreement could expose employers to penalties for breach.

Management of current and potential proceedings alleging breach of the implied term

How does this decision impact on current proceedings on foot alleging a breach by the employer of the implied term? What action can be taken by employers if employees continue to lodge claims alleging breach of the implied term? 

Australian courts will be bound by the High Court’s decision and if a court were to find that such a term was implied by law, this would constitute an appealable error. It does not necessarily follow that employees will cease making such claims and no longer press claims currently on foot. For example, specific terms in a particular contract may make it easier to argue for implication of the term than was the case in Barker. 

If a proceeding alleging breach of the implied term is commenced against an employer or is currently on foot, employers should seek legal advice in relation to the implications of the High Court’s decision on the proceeding.

Concluding comments

While the High Court’s decision has provided some much needed confidence for employers, the full impact of the decision remains to be seen. 

Employers should continue to remain vigilant to ensure that they act consistently with their contracts, policies and procedures to minimise the risk of legal claims. The High Court has made it clear that the rejection of the implied term is not a reflection on the question of whether there is a general obligation to act in good faith in the performance of contracts.


  • 1 In the Full Federal Court decision Commonwealth Bank of Australia v Barker [2013] FCAFC 83 Jessup J in dissent described the implied term as a ‘Trojan horse’, at [79].
  • 2 Commonwealth Bank of Australia v Barker [2014] HCA 32 at [40] per French CJ, Bell and Keane JJ.
  • 3 Employment Relations Act 2000 (NZ) s 3(a)(i)
Top

Contacts

Martin Osborne

Martin Osborne

Brisbane
Jason Noakes

Jason Noakes

Sydney Grosvenor Place
Sarah Ralph

Sarah Ralph

Melbourne
Helene Lee

Helene Lee

Melbourne