Expensive implication: court rules implied term exists and awards $335,000

22 August 2013

A major bank failed to consider and consult about alternative employment options with an executive manager whose position was redundant, a majority of the Federal Court has found, resulting in a payment to the employee of over $300,000.

Underpinning this was the Court’s finding that the implied term of mutual trust and confidence applies in Australian contract law, and that the bank had breached this trust.

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 its 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.

The employee was employed as an executive manager in Adelaide under a written contract of employment. The contract permitted the Bank to terminate the contract for any reason by providing four weeks’ written notice. He had been employed by the Bank since 1981.

When the employee’s position became redundant, he was told that his employment would be terminated in one calendar month if another position was not found within the Bank. This time was extended by a week, after which he was told that his employment was terminated.

The employee commenced a breach of contract claim (as well as a trade practices claim, which failed because there were no representations found in trade or commerce). Relevantly, he argued that the Bank’s conduct breached an implied term of mutual trust and confidence — that is, it was likely to destroy or seriously damage the relationship of confidence and trust between them.

In the first instance, the judge found that the Bank had been “almost totally inactive” in applying its redeployment policy within a reasonable period of notifying the employee about his redundant position.

The Judge found that the redeployment policy was not incorporated into the employee’s contract of employment. However, the policy was not expressed in merely descriptive or aspirational terms — the parties had a legitimate expectation that the specific processes set out in the redeployment policy would be complied with.

Because of this, the Judge found that the Bank’s conduct in not applying the policy was a serious breach of the redeployment policy which breached an implied term of mutual trust and confidence.

The Judge awarded damages for loss of opportunity to be redeployed to a position within the Bank (which was $317,500 on the calculations at first instance). The employee’s claim for damages for hurt, distress and loss of reputation was rejected.

The Bank appealed the decision, in particular whether the implied term applied to the contract and whether its conduct in failing to apply the policy breached such a term.

The appeal judges found that “the implied term has obtained a sufficient degree of recognition, both in England and Australia, that it ought to be accepted by an intermediate court of appeal”.

Since the conduct was before the termination (rather than at the point of termination itself, to which the implied term does not apply) and the damages sought were for lost opportunity (rather than damages flowing from the termination itself), their Honours found that the implied term did apply in the circumstances and that the damages sought were recoverable.

However, their Honours took a different approach to the original judge in relation to what conduct breached the implied term. They disagreed that a serious breach of the redeployment policy could be a breach of the implied term of mutual trust and confidence when the policy was not part of the contract.

Rather, the appeal judges held that the circumstances required the Bank to take positive steps to consult with the employee and inform him of suitable employment options. It was these obligations which fell within the content of the implied term. The contract contemplated the possibility of redundancy and redeployment within the Bank as an alternative to termination. Failing to take positive steps to consult with the employee and other actions over the relevant period (eg cutting off his email and phone before termination) therefore breached the implied term.

Having found in favour of the employee, their Honours also amended the damages awarded to $335,623.57 (due to an error in the previous calculation).

A third appeal judge, however, delivered a dissenting view in which he extensively considered the authorities and was unable to conclude that the implied term was a part of Australian contract law.

The bank has already lodged an appeal against the decision to the Full Bench of the Federal Court.

In relation to employment policies, until now, employers have generally been able to escape liability for failing to follow their own policies, where the employee’s employment contract/employer’s policy manual specifically states that its policies do not form part of the employment contract.

The Federal Court decision no longer guarantees that employers will be excluded from liability where they act in breach of those policies. Based on this decision, a court can now determine that, irrespective of whether the employer’s policies form part of the employment contract, damages can be awarded to an employee/former employee for a serious breach of a policy.

The Court’s decision leaves the door open for an employer to have the implied term of mutual trust and confidence expressly excluded. His Honour stated that the term can be excluded “by the express terms of the contract or it may be excluded because it would operate inconsistently with the express terms of the contract”, although it is cautioned that this action could have negative unintended consequences.

Moreover, this case reiterates that a policy must be more than a piece of paper. Policies should be thoroughly considered documents which are updated regularly, communicated effectively to staff and consulted for guidance or clarification when appropriate. iHR Australia advises that employers need to be mindful of the terms contained within their own policies and procedures and ensure that they do not engage in behaviour that could ultimately be viewed as a serious breach of those policies. Otherwise, they face the prospect of a damages action for breach of the implied term of mutual trust and confidence.

For advice on policies, contracts and agreements, iHR Australia offers Workplace Relations advice and HR Support Services which can be tailored to suit the needs of your organisation.

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