The Trojan clause? Appeal court confirms the implied term of trust and confidence, but its content remains uncertain
In a split decision, the Full Court of the Federal Court has held that a term of ‘trust and confidence’ is implied into all employment contracts by law. However, significant uncertainty remains for employers attempting to determine what conduct will breach the implied term. Whilst the decision may be destined for an appeal to the High Court, employers should act now if they wish to expressly exclude this term from their contracts.
The decision at a glance
The majority, Justices Jacobson and Lander, found that the Commonwealth Bank breached an implied term of trust and confidence by not properly exploring the redeployment of one its executives, Mr Barker, before dismissing him for redundancy.
All of the Judges on appeal disagreed with Justice Besanko’s primary decision which had held that the company had breached the implied term by committing a serious breach of its redundancy policy. In this regard, the Court found that this could not be the case because the redundancy policy was not part of the employment contract and contained no benefits to which the employee was legally entitled.
The majority on appeal however went on to decide that the implied term exists and that the Bank breached the term by its conduct and omissions in the lead up to Mr Barker’s dismissal. This breach did not arise from a breach of the bank’s redundancy policy, but rather because the bank failed to do what the implied duty required in these circumstances.
Justice Jessop dissented and found that the implied term does not form part of the common law in Australia, and that the Bank’s failure to comply with its policies would not amount to a breach in any event.
Mr Barker was awarded $335,623.57 in damages for the loss of opportunity to be redeployed within the Bank.
Rationale for the implied term
The implied term in question is as follows:
The employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.
It is agreed that the clause does not apply at the point of dismissal, but rather to conduct anterior to dismissal. A distinction which is sometimes difficult to draw.
The majority in this case held that this term is necessary for employment contracts and is consistent with the ‘contemporary view of the employment relationship’ which is about common interest rather than subordination.
As an alternative argument, the majority held that the contract and surrounding circumstances gave rise to an implied obligation of co-operation. In summary, because the contract contemplated redeployment, the Bank was obliged to take steps to afford Mr Barker the benefit of that process.
In stark contrast, Justice Jessop could find no necessity for the term, either in a strict sense or broad policy sense. Justice Jessop agreed that employees are entitled to have trust in their employer, for example, trust that the employer will provide a safe working environment and will not require an employee to perform an unlawful act, however stated this is reflected in other existing implied obligations.
His Honour also stated that the term would sidestep existing limits on common law and equitable remedies and overlap with the vast field of legislative regulation of the workplace.
What conduct does the implied term prevent?
The majority recognised that the duty created by the implied term is unclear given the ‘open-ended’ way the duty is expressed. In this regard, it was stated that the ‘content of the implied contractual duty must be moulded according to the nature of the relationship and the facts of the case’ and that that the precise duties required of an employer are ‘still being developed’.
In the present case, given that Mr Barker was a long-term employee of a large corporate employer, and that his contract contemplated redeployment as an alternative to dismissal, the majority held that the Bank was required ‘take positive steps to consult with Mr Barker about alternative positions and to give him the opportunity to apply for them.’ Instead, the Bank failed to make contact with Mr?Barker and this failure breached the implied term.
Justice Jessop was more critical of the practical limitations of the purported implied term. His Honour described the application of the implied term as like a ‘biological enzyme’ being utilised to achieve the desired outcome. In relation to the practical difficulties of the implied term, his Honour stated:
‘[T]he term is content-free and has the potential to act as a Trojan horse in the sense of revealing only after the event the specific prohibitions which it imports into the contract.’
Even assuming the existence of the implied term, Justice Jessop found that the Bank had not breached the term as Mr Barker had no reason to trust that the redundancy policy contained benefits to which he was entitled (given the express reservation in the policy that it was not contractual).
Implications for employers
Whilst the debate about the existence and scope of the implied term is likely to continue, employers should assume for the time being that the implied term exists and can result in significant contractual damages.
This case demonstrates that the real difficulty is determining what conduct may breach the term. Almost inevitably, attempts to explain the term resort to equally imprecise statements, for example, that the term require ‘fair treatment’ of employees and prevents employers from ‘abusing their powers’.
Interesting, this decision arguably provides less guidance than the decision at first instance given that the breach did not arise from the employer’s breach of policy – but rather because of a more general finding that the employer should have acted in a particular way in these circumstances.
In addition to being mindful of the general principles propounded by the implied term, employers should consider taking concrete steps to limit their scope for liability. Primarily, this will include ensuring that employment contracts expressly exclude the implied term and ensuring that appropriate qualifications are placed on any benefits referred to within company policies.
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.