Employment Law Update: Implied Term of Mutual Trust and Confidence rejected by High Court

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In the recent case of Commonwealth Bank of Australia v Barker [2014] HCA 32 the High Court overturned the earlier Federal Court decision that a term of mutual trust and confidence was implied into employment contracts.

Background
The employment contract in question provided for compensation upon termination if the employee was made redundant and could not be given another position with the employer. Mr Barker asserted that an implied term of mutual trust and confidence also existed. He claimed the Bank breached this implied term because it failed to find him another position within the Bank.

Federal Court Accepted Implied Term
The Federal Court, following Malik v Bank of Credit and Commerce International SA (In Compulsory Liquidation) [1998] AC 20, decided that the term of mutual trust and confidence was implied by law into the employment agreement. On appeal the High Court examined whether it was appropriate to imply the term into employment contracts.

The High Court Rejected Implied Term
The High Court refused to imply the term. The Court said that to do so would be to “trespass into the province of legislative action” and therefore the Court could not endorse it.

The joint judgment stated that the complex policy considerations of Australian employment law made it a matter for the legislature. Justice Gageler said that “common law obligations in contract…ought not to be developed by courts other than in a manner that is sensitive to their interaction with legislation”. He was concerned that the consequences of the term would not be appreciated by the parties until a dispute arose.

Only Necessary Clauses to be Implied
The High Court emphasised that only necessary terms can be implied into contracts. The implied term of mutual trust and confidence was not necessary for the “effective performance of the class of contract”.

In Mr Barker’s case, the term was not necessary because the contract was effective without it. Justice Kiefel explained that the “only difference is that the compensation…is more limited than the damages sought, but that is not a matter to which the requirement of necessity is addressed”.

Possible Obligation of Good Faith Performance
The Court declined to examine the question of whether there is a duty of good faith in the performance of contracts. This implied duty would be an extension of the existing duty on contractual parties to co-operate.

In Secured Income Real Estate (Australia) Ltd v St Martins Investments P/L (1979) 144 CLR 596 the High Court affirmed Butt v McDonald (1896) 7 QLJ 68 where the Court said that “[The duty to cooperate] is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.”

How is this different from the term in question in CBA v Barker?
In CBA v Barker the Court found that the duty of mutual trust and confidence varied from the duty to cooperate for several reasons. First, it imposed obligations wider that what was necessary for the contract. Second, the duty to cooperate relates to contractual performance, but the implied term of mutual trust and confidence relates to the maintenance of the relationship between the parties.

How is this duty to cooperate different from a duty of good faith?
In Australis Media Holdings P/L v Telstra Corp (1998) 43 NSWLR 104 the Court said that “there cannot be a duty to cooperate in bringing about something which the contract does not require to happen. An ‘implication, arising as it does from necessity, must be limited by the extent of the need’: Board of Fire Commissioners (NSW) v Ardouin (1961) 109 CLR 105 at 118”. In Secured the Court found that the duty only requires reasonable acts of cooperation.

The implied duty to cooperate comes close to the duty of good faith (Alcatel v Scarcella (1998) 44 NSWLR 349) and will overlap to an extent. However it is narrower that the duty of good faith. The duty to cooperate requires parties to act reasonably regarding enforceable obligations. Good faith is a broader concept that includes honesty and fairness (Renard Constructions (1992) 26 NSWLR 234), seeks to exclude acts of bad faith, and targets parties exercising their rights or powers under the contract for extraneous purposes (Alcatel).

Conclusion
Employers can defend a claim that relies on this implied term of trust and confidence. However, employers should be careful when including redeployment clauses because breach can lead to a damages claim. Mr Barker ultimately recovered under the express term despite losing the implied term argument.

If you need help with your employment agreements contact us:

Stipe Vuleta – Practice Manager – Dispute Resolution, Insolvency & Reconstruction

E stipe.vuleta@chamberlains.com.au

P 02 6215 9100

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