Do Policies Create Mutual Obligations?

Two recent decisions have illustrated that company policies may give rise to contractual obligations on an employer. In both cases, the employer had detailed policies outlining the standards of behaviour required of its employees, however the language used meant that the policies, perhaps unintentionally, were incorporated into the employment contract and therefore also bound the employer.

The cases at a glance

Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177 (22 December 2014)
Ms Romero was the second officer aboard a supply ship. Ms Romero had a substantial falling out with her Captain, following which she raised complaints about discrimination. Ms Romero left it open to Farstad to decide how to handle the issue.

Farstad published and promoted several policies, including a Workplace Harassment and Discrimination Policy. The policy set out standards of behaviour, various procedures for raising complaints, and how these complaints would be addressed.

At first instance, the Judge found that the policy was not contractual but contained ‘aspirational’ language as to how the employer will act. This finding was overturned on appeal. The Full Court noted that the language of this policy was sufficiently clear, it also noted that the:

  • employees were required to submit to an education program in relation to company policies;
  • employees were required to sign the policies;
  • policies were regularly enforced; and
  • the employee’s letter of offer stated ‘all Farstad Shipping Policies are to be observed at all times.;

The Full Court found that the context of the policy, and the language used, made it clear that the policy gave rise to mutual obligations, that is, ‘in return for the employee complying with the terms of the policy, the employer gives a responsive assurance that complaints of non-compliance by other employees will be treated in a certain way.

In relation to compliance with the policy, the Court accepted that:

  • the company improperly treated the complaint as a formal complaint (whereas the policy provided that this would be the employee’s decision);
  • the company failed to properly document the complaint and interview relevant witness; and
  • the investigation improperly combined the complaints of discrimination with the Captain’s counter allegations regarding Ms Romero’s competence.

In summary, the failure to carefully and systematically investigate the complaints amounted to a breach of the policy, and therefore a breach of contract.

Christos v Curtin University of Technology [No 2] [2015] WASC 72 (27 February 2015)
In May 2002, a lecturer activated the Curtin University of Technology’s grievance policy by making a formal complaint that he was being marginalised and humiliated by his department and school heads.

The University’s response to the complaints was impacted by:

  • a period of relative inaction from May to September 2002;
  • a complaint being raised against the lecture in September 2002, resulting in the lecturer being stood down;
  • the lecturer being on various forms of leave from November 2002;
  • the University’s reluctance to proceed with an investigation while he was on sick leave; and
  • disagreements in 2003 as to who should conduct the investigation, and whether the lecturer had adequately specified his complaints.

Ultimately, the investigation was abandoned when the Lecturer was dismissed in September 2004 in connection with pornographic material and illegally downloaded music being discovered on his lap top.

Following the decision in Farstad, the Court found that the University’s grievance policy imposed mutually binding obligations. However, in this case, the Court found that the actions taken by the University were reasonable responses and did not breach the policy. While some decisions may have been wrong in hindsight, they were not negligent, nor did they amount to a breach of contract.

Importantly, the Court found that claims relating to the period before February 2003 were statute barred. Accordingly, the University’s inaction was, ironically, not actionable.

Lessons learned

These cases serve as a reminder that policies are not always a ‘one way street’. In the absence of an express statement that policies are not contractual, they may well create obligations on the employer. For this reason, employers should review their policies and consider if they may be binding and if they offer the employer appropriate flexibility.


This article was written by Jonathan Wright, Director and Principal of Workdynamic Australia. The information in this article is for information purposes only and does not constitute legal advice. You should obtain specific advice relevant to your circumstances.