For several years Australian courts have flirted with the idea that contracts of employment include an implied term of mutual trust and confidence, a concept that is readily accepted in England. In a recent decision, the Federal Court of Australia has definitively stated that Australian law automatically implies a term of mutual trust and confidence into contracts of employment and found that a serious breach of a workplace policy will amount to a breach of the implied term and give rise to damages: Barker v Commonwealth Bank of Australia [2012] FCA 942. This is so even if the contract and/or the policies themselves expressly state that policies have no contractual force.

Background

Mr Barker commenced employment with the Commonwealth Bank of Australia (CBA) in November 1981 in a junior role. Over the next 20 years, Mr Barker worked his way up to the role of Executive Manager. In 2004, he executed a new contract of employment, which included clauses relating to termination of employment and redundancy.

In late 2008, CBA conducted a nationwide "segmentation exercise" to standardise the various Executive Managers' portfolios and spans of control. As a result of the segmentation exercise, Mr Barker's position was made redundant. Mr Barker was advised of this decision on 2 March 2009. He was also told that in line with CBA's redundancy policy, CBA's preference was to redeploy Mr Barker to another position rather than terminate his employment, and as such he would be commencing a redeployment process.

Mr Barker was directed to not attend work during the redeployment process. His access to CBA's intranet and email was cut and his CBA supplied mobile phone taken from him.

Mr Barker's employment with CBA terminated on 9 April 2009. Between 2 March and 9 April 2009 Mr Barker argued CBA made minimal efforts to redeploy him to another role.

Incorporation of policies

Before the Federal Court, Mr Barker argued that a number of CBA's policies, including the redundancy policy, were incorporated into his contract of employment and that by acting in breach of those policies (and in particular, the redundancy policy), CBA had breached Mr Barker's contract of employment. Justice Besanko rejected this claim as CBA's HR Reference Manual (where all policies are found) specifically stated that the Manual did not form any part of an employee's contract of employment. Justice Besanko considered that such a statement shows an unambiguous intent that the policies in the manual were not to have contractual force, in line with the Full Court of the Federal Court's decision in Yousif v Commonwealth Bank of Australia (2010) 193 IR 212.

The implied term of mutual trust and confidence

Mr Barker also claimed that by acting in breach of its policies CBA had breached the implied term in his contract of employment of mutual trust and confidence.

Justice Besanko decided that given the number of English cases recognising the existence of an implied term of mutual trust and confidence in contracts of employment, and the comments made in support of those decisions by four judges of the High Court (McHugh, Gummow, Hayne and Heydon JJ) in Koehler v Cerebos (2005) 222 CLR 44, Australian law does include an implied term of mutual trust and confidence.

Justice Besanko found that the implied term of mutual trust and confidence is only breached if an employer or employee acts without reasonable and proper cause for their conduct, and the conduct is likely to destroy or seriously damage the relationship of confidence and trust between the employer and the employee. He also stated that the implied term could be excluded by the express terms of a contract of employment (though we doubt that many employers would consider this a palatable option – which may have unintended consequences anyway).

Despite finding that the parties had expressly agreed that the redundancy policy was not to form part of Mr Barker's contract of employment, Justice Besanko held that by failing to attempt to redeploy Mr Barker, CBA had seriously breached the redundancy policy and therefore the implied term, though not an express term of the contract.

Justice Besanko considered that Mr Barker would have had a 25% chance of redeployment if CBA had taken active steps to redeploy him. Finding that Mr Barker had suffered loss and damage given that he was not redeployed by CBA and has been unable to find a new position, Justice Besanko awarded economic damages of $317,500 to Mr Barker. Mr Barker's claim for damages for hurt, distress and loss of reputation was rejected.

Lessons for employers

CBA has already lodged an appeal against the decision to the Full Bench of the Federal Court and employers should be on the lookout for further developments. In the meantime, you should:

• continue to ensure that contracts exclude polices from being incorporated as express terms of the contract
• review workplace policies to confirm that they are workable, up to date and utilised across the organisation
• ensure and document that all workplace policies are followed; removing or updating those that are not

We do not recommend expressly excluding the implied term in employment contracts as this could result in unintended and unpalatable consequences. Not only could you damage your brand as an employer of choice, but you could possibly unintentionally be permitting employees to engage in serious misconduct that breaches the employer's trust, without repudiating the contract, normally justifying summary dismissal.