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Implied duty of mutual trust and confidence: what does this mean for your employment contracts?

In an appeal from the Federal Court decision in Barker v Commonwealth Bank of Australia [2012] FCA 942, the majority of the Full Federal Court of Australia (Full Court) has confirmed the existence of the implied term of mutual trust and confidence in Australian contracts of employment.

As set out in our earlier eAlert, Mr Barker claimed that the Commonwealth Bank of Australia (CBA) breached the implied term of mutual trust and confidence by failing to follow its own policies regarding redeploying him to another role after his position was made redundant.

In the initial decision, Justice Besanko held that the implied term exists in employment contracts unless expressly excluded, and that CBA breached the implied term by failing to follow its redundancy policy. Mr Barker was awarded $317,500 in damages for economic loss.

On appeal, the Full Court confined its decision to the following two issues:

  1. whether the contract of employment contained the implied term of trust and confidence
  2. if it did, whether CBA’s breach of its own policies constituted a serious breach of the relationship of trust and confidence upon which the term is founded.

The implied term of mutual trust and confidence

While the Full Court accepted that the High Court is yet to determine whether or not the implied term exists in Australia, it held that the “weight of authority points in favour of the acceptance of such a term”. In coming to this view, the Full Court relied on a number of English authorities such as Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 and Johnson v Unisys Ltd [2003] 1 AC.

English case law has limited the operation of the implied term to matters during the employment relationship up until termination of employment. This was recognised by the Full Court, but the key issue in this case (relating to redeployment) related to CBA’s actions in the period prior to the termination of Mr Barker’s employment. The Full Court held that an employee can pursue a claim for breach of the implied term that arises from the events leading up to termination of employment. This would include the conduct of disciplinary processes.

Having recognised the existence of the implied term, the Full Court noted that it can be expressly excluded in a contract of employment.

CBA’s breach of the implied term

In contrast to Justice Besanko’s decision, the Full Court found that CBA did not breach the implied term of trust and confidence merely by failing to follow its own redundancy policy. This is because CBA’s policies expressly stated that they were not contractually binding. Therefore, while the Full Court accepted that CBA’s redundancy policy was incapable of conferring a contractual benefit, an express clause in Mr Barker’s most recent employment contract contemplated the possibility of redundancy and redeployment as an alternative to termination. It was this benefit that gave rise to the operation of the implied term in relation to Mr Barker’s redundancy.

The Full Court held that what the implied term requires an employer to do will depend on the circumstances of the case. In this case, the Full Court took into account Mr Barker’s 20 year plus tenure with CBA and the high chance of alternate positions within CBA becoming available due to its size. The Full Court concluded that the implied term required CBA to take positive steps to consult with Mr Barker about the possibility of redeployment and to inform him of suitable alternative positions within CBA. CBA failed to do this and thus breached the implied term.

The Full Court increased the award of damages for breach of the implied term (by consent and due to an initial miscalculation) from $317,000 to $335,623.57.

Enter the ‘Trojan Horse’

The decision was not unanimous. In his detailed dissenting judgment, Justice Jessop concluded that the implied term should not be imported into all employment contracts in Australia for a number of reasons, including that:

  • there is no need for its implication due to existing duties already incorporated within employment contracts (such as the duty to co-operate) and the statutory regimes in place
  • if the term were implied into all employment contracts, it would be impossible to determine the obligations that arise from the implied term until after a dispute had arisen.

Notably, Justice Jessop described the implication of the implied term as akin to that of a Trojan Horse for employers ‘in the sense of revealing only after the event the specific prohibitions which it imports into the contract’. On this reasoning, the Full Court decision puts employers in an extremely difficult position of potentially breaching obligations in circumstances where their obligations are unclear.

Lessons for employers

The High Court has not determined whether the implied term of trust and confidence forms part of employment contracts in Australia. It remains to be seen whether or not this decision will be appealed to the High Court and, if not, whether the High Court will be asked to consider the issue and provide some greater certainty for employers in the future.

In the meantime, employers should consider expressly excluding the implied term of mutual trust and confidence in contracts of employment. Careful consideration will be needed, and advice should be sought, before making this exclusion in employment contracts as this could result in unintended consequences. For example, the exclusion could damage your brand as an employer of choice. Further, if the exclusion also applies to employees, you could unintentionally permit employees to engage in misconduct that breaches the employer’s trust without having recourse to termination.

If you do not seek to exclude the term then you need to ensure that all workplace investigations, disciplinary processes, and redundancy and redeployment processes are conducted appropriately, fairly and in accordance with all contracts, procedures and policies.

We recommend that employers consider removing references to redundancy and redeployment processes from contracts of employment, to limit any potential operation of the implied term in these situations.

Consistent with our previous advice on this issue, we also remind employers to ensure that contracts of employment exclude policies from being incorporated into those contracts.

Further information

If you would like any further information about the matters raised in this article, please contact a member of our Employment, Safety and People team.