AustLII Home | Databases | WorldLII | Search | Feedback

Precedent (Australian Lawyers Alliance)

You are here:  AustLII >> Databases >> Precedent (Australian Lawyers Alliance) >> 2016 >> [2016] PrecedentAULA 46

Database Search | Name Search | Recent Articles | Noteup | LawCite | Author Info | Download | Help

Gibian, Mark --- "Trust, confidence and good faith: where to now for employment lawyers?" [2016] PrecedentAULA 46; (2016) 135 Precedent 30


TRUST, CONFIDENCE AND GOOD FAITH

WHERE TO NOW FOR EMPLOYMENT LAWYERS?

By Mark Gibian

THE CONTRACT OF EMPLOYMENT

The rights and entitlements of an employee are, at least at common law, derived from and limited by his or her contract of employment. The difficulty commonly faced by employees is that employment contracts are, in virtually all cases, asymmetrical contracts the terms of which are imposed by the employer. Few employees are able to effectively negotiate the terms of their contracts or seek meaningful variations to the terms and conditions offered by a prospective employer. Employees rarely even turn their minds to the terms upon which a job is offered, beyond the nature of the position and the rate of pay. Implied obligations arising from a contract of employment are, in those circumstances, of particular significance to employees.

In Commonwealth Bank v Barker [2014] HCA 32; (2014) 253 CLR 169, the High Court dashed the hopes of many, including those of employment lawyers and others who hoped the common law could more effectively assist in improving fairness in the treatment of employees. All members of the Court rejected the implication into employment contracts generally of a term stipulating that neither party could conduct itself, without reasonable cause, in a manner likely to destroy or seriously damage the relationship of trust and confidence between them. In rejecting this implication, the High Court departed from the evolution of the common law in the United Kingdom[1] as well as in other common law jurisdictions.

Prior to Barker, the trust and confidence term had achieved a degree of recognition in Australia in first instance decisions and decisions of intermediate appellate courts.[2] The implied term had proved a useful tool for an employee alleging conduct on the part of his or her employer causing loss or resulting in the employment coming to an end in circumstances where it was difficult to identify a breach of an express term of the contract. The implied term was particularly used in supporting claims by employees for constructive dismissal;[3] that an employer had breached its own policies or representations as to the processes to be applied to employees;[4] or allegations that an employer had acted unreasonably in implementing disciplinary processes or suspending an employee.[5]

The implied term of trust and confidence is no longer available in this country and that avenue of seeking relief for employees has been foreclosed. Employees have been largely thrown back on to the strict terms of their contracts of employment. However, the High Court did leave open the question of whether the related, but distinct, implied duty of good faith might apply in employment contracts. French CJ, Bell and Keane JJ said:[6]

‘The above conclusion [in relation to the implied term of trust and confidence] should not be taken as reflecting upon the question whether there is a general obligation to act in good faith in the performance of contracts. Nor does it reflect upon the related question whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law. Those questions were not before the Court in this appeal.’

If an employee is to seek to imply broader duties upon his or her employer outside of the strict terms of a contract of employment in future, he or she is likely to have to rely upon an implied duty of good faith.

GOOD FAITH OBLIGATION IN CONTRACTS

The question of the existence and content of an implied obligation or duty of good faith and fair dealing in contractual performance and the exercise of contractual rights and powers has not been definitively resolved. Courts have generally been willing to imply such an obligation into commercial contracts, even if the question has not yet been the subject of clear guidance by the High Court.[7] The courts have not been reluctant to imply a good faith obligation into a commercial contract to ensure that rights under a contract are not exercised unreasonably or used to defeat the purpose of the contract.[8] There is some support for the proposition that the duty will extend to employment contracts[9] as well as decisions against the proposition.[10]

There are good reasons why a good faith obligation should be implied into employment contracts in particular. The employment relationship is, obviously enough, an ongoing relationship rather than a one-off transaction. The interests of both parties are intimately connected to and affected by the conduct of the other. Employment contracts, for example, very often confer broad discretions upon an employer with respect to matters such as the allocation of duties to be performed, consideration of salary increases, awarding of bonuses or commissions, the alteration of policies and procedures, the location of the employee’s workplace, the taking of disciplinary action and access to training, promotion or other opportunities for personal and professional development. The existence of such discretions is to some extent inevitable in an ongoing and long-term relationship.

An employee’s enjoyment of the benefits of the employment and satisfaction in the job generally are likely to be very substantially affected by the manner in which the employer exercises those discretions. It hardly seems radical to suggest that, in the context of an employment relationship, the parties might assume that contractual powers will be exercised reasonably, in good faith and for the purposes for which the contract was made. An obligation imposed upon an employer to act in good faith would also do little more than mirror the implied terms and fiduciary obligations long imposed upon employees, based upon the obligation of an employee to act in good faith and faithfully serve the employer.[11]

As Rothman J has observed in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) 69 NSWLR 198:[12]

‘There is no reason to expect that the obligations imposed on an employer under the contract are any less likely to require an act in good faith than the obligations imposed on an employee.’

It is possible that the circumstances of the employment of a particular employee may militate against the recognition of an implied duty of good faith. In New South Wales v Shaw (2015) 248 IR 206, for example, the NSW Court of Appeal expressed the view that an obligation of good faith would not be implied into the contracts of employment of two probationary public school teachers, having regard to the complex statutory and industrial regime that governed the employment.[13] This reflects the approach earlier adopted in relation to the implication of the implied duty of trust and confidence in South Australia v McDonald [2009] SASC 219; (2009) 104 SASR 344.

There is room for debate as to the standard of reasonableness required to be applied by an employer in the exercise of contractual powers. On the one hand, it may be that the constraint upon an employer is no more than that it not act arbitrarily, capriciously or unreasonably in the Wednesbury sense; that is, not so unreasonably that no reasonable employer would have so acted.[14] On the other hand, a duty to act in good faith may extend to a requirement that an employer exercise prudence, caution and diligence and take due care to avoid or minimise adverse consequences for the employee.[15]

It is also important to recognise that a duty of good faith, if it is to be implied into an employment contract, is likely to have more limited operation that the implied duty of trust and confidence. Those decisions which have rejected the implication of an implied duty of good faith in employment contracts appear to have considered whether a duty to exercise honesty and fairness is to be imposed upon an employer in all their dealings with an employee.[16] Unlike the trust and confidence term, an implied duty of good faith is much more likely to be applied to limit the exercise of an express contractual power rather than to the conduct of an employer towards an employee more generally.

APPLICATION OF THE GOOD FAITH OBLIGATION

The focus upon the exercise of express contractual powers and discretions in the application of the implied duty of good faith is demonstrated in the decisions recognising the existence of such an obligation. In Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357, for example, Ms Lindley’s contract of employment provided that her salary would be reviewed annually and that she would be eligible to receive an ’annual performance bonus’, which was entirely within the discretion of the employer. Allsop P (as his Honour then was) concluded that, although the payment of a bonus was said to be entirely within the discretion of the employer, the contract would not be construed as permitting the employer to withhold the bonus capriciously, arbitrarily or unreasonably. His Honour continued:[17]

‘The discretion is to be exercised honestly and conformably with the purposes of the contract. There may be many circumstances in which it would be legitimate, and conformable with the purposes of the contract, not to pay the bonus. There may be financial stringency or misbehaviour by the respondent or some other consideration. It is unnecessary to explore the possibilities in detail. What, however, would not be permitted is an unreasoned, unreasonable, arbitrary refusal to pay anything, come what may. This would be a denial of the very clause that had been agreed. If these parties wished to make payment under the clause entirely gratuitous and voluntary such that payment could be withheld capriciously, notwithstanding the compliance with solemnly set objectives they needed to say so clearly.’

In relation to the payment of bonuses or commissions, the implied obligation at least requires an employer to exercise a contractual discretion in a manner that is not arbitrary, capricious or unreasonable.[18] There is more controversy as to whether an employer is required to act reasonably, having regard to the interests of the employee.[19] Generally speaking, an obligation of good faith does not require a party to a contract to act in the interests of the other party or contrary to its own interest.

One area in which the implied duty of good faith has the potential to operate more broadly than the implied duty of trust and confidence is in relation to the termination of employment. The implied duty of trust and confidence has been considered by the English courts to have no application to the termination of employment of an employee. In Johnson v Unisys Ltd [2003] 1 AC 518, the House of Lords found that the existence of statutory rights to seek remedies with respect to unfair dismissal precluded the extension of the implied duty of trust and confidence to the termination of employment of an employee, itself establishing the so-called ‘Johnson exclusion area’.[20]

The same restriction does not appear to apply in relation to the implied duty of good faith. First of all, in the process leading to the dismissal of an employee, an employer will commonly exercise discretionary powers conferred by the contract of employment. For example, the contract may confer an open discretion to suspend an employee or direct the employee not to attend work. The power to suspend an employee from the performance of duties, with or without pay, is likely to have a substantial impact upon the interests, reputation and standing of the employee concerned. It is likely that a contractual power to suspend, or a power to suspend derived from statute or an industrial instrument, is required to be exercised in good faith and not capriciously or unreasonably.[21]

Further, where a contract of employment confers a right on the employer to terminate the employment in the event that the employer forms the opinion or is satisfied that the employee has engaged in misconduct, the employer is required to form that opinion or state of satisfaction reasonably and honestly. In Bartlett v Australia & New Zealand Banking Group Ltd [2016] NSWCA 30, the NSW Court of Appeal had occasion to consider the exercise of a power to terminate the employment of an employee where the employer held the opinion that the employee had engaged in serious misconduct. The Court considered that the employer was required to act reasonably, at least in the Wednesbury sense and at least as its process, as distinct from the result, is concerned.[22] The Court cited the judgment of Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 to the effect that:

‘Where one party has an express power the exercise of which will significantly affect the interests of the other party (for example, by cancellation of their supply contract) if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily to be construed ... as requiring a reasonable as well as honest state of satisfaction.’

In Bartlett, an employee had been summarily dismissed as a result of the employer forming the opinion that he had altered a confidential document and leaked its contents to a journalist. The Court was satisfied that the employer had acted unreasonably by limiting its investigation to 10 suspected employees and failing to provide the employee with the opportunity to obtain a report in response to a handwriting expert relied upon to implicate him in the leak. The failure to provide a fair process leading to the decision to dismiss the employee was sufficient to give rise to a breach of the implied obligation to act reasonably and in good faith.

These decisions demonstrate that, while more limited in scope than the trust and confidence term, an implied duty of good faith has the potential to provide useful protection for employees who suffer detriment by reason of the exercise of contractual powers by their employer in relation to awarding to bonuses or altering remuneration, changing an employee’s duties or work location and suspending or terminating their employment.

Mark Gibian is a barrister practising in Sydney primarily in the area of employment and industrial law. He holds the degrees of Bachelor of Arts (Hons) and Bachelor of Laws (Hons), both from the University of Sydney.


[1] Bliss v South East Thames Regional Health Authority [1987] ICR 700 at 713-716; Malik v Bank of Credit and Commerce International SA (in liq) [1997] UKHL 23; [1998] AC 20 at 34-5 and 45-6; Johnson v Unysis Ltd [2003] 1 AC 518 at [32].

[2] Perkins v Grace Worldwide (Aust) Pty Ltd [1997] IRCA 15; (1997) 72 IR 186 at 191; Intico (Vic) Pty Ltd v Walmsley [2004] VSCA 90 at [21]- [23]; Delooze v Healy [2007] WASCA 157 at [32].

[3] Easling v Mahoney Insurance Brokers Pty Ltd [2001] SASC 22; (2001) 78 SASR 489 at [99]; Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) 116 IR 186 at [141].

[4] Commonwealth Bank v Barker [2013] FCAFC 83; (2013) 214 FCR 450 at [129]- [132].

[5] Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198 at [120]- [134]; Morton v Transport Agency Board (No. 1) [2007] NSWSC 1454; (2007) 168 IR 403 at [154]- [155]; Downe v Sydney West Area Health Service (No. 2) [2008] NSWSC 159; (2008) 71 NSWLR 633 at [328]; Quinn v Gray [2009] VSC 136; (2009) 184 IR 279 at [13]- [14].

[6] Barker, see above note 4, at [42]. See also at [107] per Kiefel J.

[7] Ibid at [107]; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 at [40].

[8] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263-8; Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151 at 191-3; South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541; (2000) 177 ALR 611.

[9] CGU Workers Compensation (NSW) Ltd v Garcia [2001] NSWCA 187; (2007) 69 NSWLR 558 at [168]; Russell, see note 5 above, at [95]-[117];

[10] Aldersea v Public Transport Corporation [2001] VSC 169; (2001) 3 VR 499 at 511-13; Walker v Citigroup Global Markets Pty Ltd [2005] FCA 1678; (2005) 226 ALR 114 at [203]- [205]; Yousif v Commonwealth Bank (No. 2) [2009] FCA 656; (2009) 185 IR 414 at [103].

[11] See, for example, Robb v Green [1895] UKLawRpKQB 131; [1895] 2 QB 315 at 316-317; Russell, see note 5 above, at [105].

[12] Russell, see note 5 above, at [106].

[13] New South Wales v Shaw (2015) 248 IR 206 at [130]-[136].

[14] Braganza v BP Shipping Ltd [2015[ UKSC 17 at [24]; Bartlett v Australia & New Zealand Banking Group Ltd [2016] NSWCA 30 at [46]- [49].

[15] Russell, see note 5 above, at [117].

[16] See, for example, Gramotnev v Queensland University of Technology (2015) 251 IR 248 at [160]-[172].

[17] Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 at [6].

[18] Rankin v Marine Power International Pty Ltd [2001] VSC 150; (2001) 107 IR 117 at [411]; Silverbrook at [5]; Foggo v O’Sullivan Partners (Advisory) Pty Ltd [2011] NSWSC 501; (2011) 206 IR 87 at [62]- [63].

[19] UGL Rail Services Pty Ltd v Janik (2014) 246 IR 320 at [189]-[190].

[20] See Eastwood v Magnox Electric plc [2004] UKHL 35; [2005] 1 AC 503 at [27]- [33].

[21] Downe v Sydney West Area Health Service (No 2) [2008] NSWSC 159; (2008) 71 NSWLR 633 at [414].

[22] Bartlett, see note 14 above, at [49].


AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.austlii.edu.au/au/journals/PrecedentAULA/2016/46.html