Employment contracts: mutual trust and confidence

Shaw v State of New South Wales [2012] NSWCA 102

Issue: whether a term of mutual trust and confidence can be implied into employment contracts – given the decision in Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217; (2008) 72 NSWLR 559 (“Russell“), the appeal was heard by the 5 judges of the NSW Court of Appeal, each concurring with Barrett JA. The decision was limited to whether certain paragraphs in the pleadings should be struck out for want of a cause of action.

Its application is of growing interest in employment psychiatric claims for personal injuries.

Barrett JA

The implied term of mutual trust and confidence


The question whether a term compendiously described as one of “mutual trust and confidence” is, in the ordinary course, implied in every employment contract has received considerable attention in recent years. A positive answer for Australia may be indicated by the reference in Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312 at [51] to “implied duties of loyalty, honesty, confidentiality and mutual trust” as incidents of the “ordinary relationship of employer and employee at common law”; and by an observation in Koehler v Cerebos (Australia) Ltd [2005] HCA 15; (2005) 222 CLR 44 at [24] where, in a discussion of matters relevant to ascertainment of the content of an employer’s duty of care in negligence, McHugh, Gummow, Hayne and Heydon JJ referred to the need for a full exploration of “the contractual position between the parties (including the implied duty of trust and confidence between them)”.


It was not submitted that a term of this kind is to be implied from some presumed or imputed intention of the particular parties on the approach stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPCHCA 1; (1977) 180 CLR 266 at 283. Rather, it is said that the term is what Mason J, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 345, referred to as “a legal incident of a particular class of contract”. In Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 453, McHugh and Gummow JJ saw the basis for implication of this kind as being “lest the contract be deprived of its substance, seriously undermined or drastically devalued in an important respect”. Implication of the term must thus be necessary to the maintenance of the integrity of contracts of the class to which the particular contract belongs.


The existence of a term of mutual trust and confidence as a legal incident of employment contracts has been recognised in England. In Malik v Bank of Credit & Commerce International SA [1997] UKHL 23; [1998] AC 20 (“Malik“) at 45, Lord Steyn saw the implied term as requiring that an employer should not “without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee” (there has since been debate as to whether “calculated and likely” should properly be “calculated or likely”).


In Eastwood v Magnox Electric Plc [2004] UKHL 35; [2005] 1 AC 503 (“Eastwood“), the House of Lords supported the existence of an implied term that “the employer will not, without reasonable and proper cause, conduct himself in a manner likely to destroy or seriously damage the relationship of trust between employer and employee”; and held that although a statutory code governing unfair dismissal precluded application of the term to the dismissal of the employee, it did apply to the employer’s conduct before dismissal.


An article by Kelly Godfrey, “Contracts of employment: Renaissance of the implied term of trust and confidence” (2003) 74 ALJ 764 refers to a number of Australian cases which, at the time of writing in 2003, had indicated the existence of such an implied term as part of employment contracts. More recent conspectuses may be found in the judgment of Rothman J at first instance in Russell (Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198), in the judgment of Peter Lyons J in Wright v Groves [2011] QSC 66 and, in particular, in the analysis by the Full Court of the Supreme Court of South Australia in McDonald. In the last-mentioned case, Doyle CJ, White J and Kelly J said in their joint judgment (at [231] – [233], omitting citations):

“The development of the implied term can be seen as consistent with the contemporary view of the employment relationship as involving elements of common interest and partnership, rather than of conflict and subordination.

It is plain that the duties which may be required of an employer under the implied term of mutual trust and confidence, or perhaps the conduct from which an employer should refrain, are still being developed. This seems inevitable given the open-ended nature of the way in which the duty is expressed. In England, the implied term of mutual trust and confidence has evolved into a duty by employers to treat their employees fairly. Basten JA appeared to approve of this evolution in Russell. But other authorities have resisted the notion that the implied term connotes an obligation which is closely related to that of fairness, namely, an obligation by employers to treat employees reasonably.

It may be that the better view is that the implied term operates in a variety of circumstances within an employment relationship to restrain abuses of an employer’s power. This purpose of the term is suggested by the authors of Macken’s Law of Employment:

‘Whilst the duty may add little to the obligations of the employee, its importance lies in the extent of obligations it imposes on the employer. It provides a means by which “a balance [is] struck between an employer’s interest in managing his business as he sees fit and the employee’s interest in not being unfairly and improperly exploited”. In a climate of reduced collective bargaining, it protects the vulnerable employee by imposing limits on the managerial prerogative.'”


In Delooze v Healey [2007] WASCA 157,Wheeler JA (with whom Steytler P agreed) said (at [32]):

“So far as employers are concerned, there is implied in contracts of employment, a term that employers will not (without reasonable and proper cause), conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee (Easling v Mahoney Insurance Brokers [2001] SASC 22; (2001) 78 SASR 489 at 514 per Olsson J; Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) 116 IR 186 at [141] per Allsop J).”


Reservations and contrary views have been expressed in a number of cases. Reference may be made, in particular, to Aldersea v Public Transport Corporation [2001] VSC 169; (2001) 3 VR 499 (Ashley J) and, most recently, Dye v Commonwealth Securities Ltd [2012] FCA 242 (Buchanan J).


In neither Paige nor Russell was this Court required to come to any firm conclusion on the question of the implied term of trust and confidence. It was sufficient to assume its existence.


In Irving v Kleinman [2005] NSWCA 116, Hodgson JA held (with the concurrence of Ipp and Tobias JJA) that a pleading alleging an implied term that the employer would not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust between employer and employee should not be struck out or summarily dismissed. The particular pleading in that case omitted what Hodgson JA described as “the vital words” (that is, “without reasonable and proper cause”), with the result that re-pleading was necessary.


The conclusion in Irving v Kleinman, viewed in the light of the subsequent decisions of the Court of Appeal of Western Australia in Delooze v Healey and the Full Court of the Supreme Court of South Australia in McDonald, is sufficient for present purposes. It is not necessary to decide definitively that a term of the kind in question is a legal incident of employment contracts as a class of contracts. Irving v Kleinman was decided before the commencement of the Civil Procedure Act. The question there was accordingly the question I am now addressing, that is, whether a pleading founded on the implied term of trust and confidence should be regarded as disclosing an issue that is triable in the sense to which I have indicated by reference to the General Steel test. The answer must be that it does.

Whether excluded or inoperative in the particular circumstances


On the approach the appellants take, the term of mutual trust and confidence, as a term implied by law, is a legal incident of every employment contract, regardless of any presumption about the parties’ intention. The implied term will therefore fail to operate in a particular case only if it is overriden by the parties themselves or if exclusion is otherwise indicated by “the circumstances of the making of the contract”. These are words used by Jacobs J in Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd [1974] HCA 32; (1974) 132 CLR 1 at 17. And as Hope JA said in Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 492, the question of exclusion of a term implied by law is to be addressed by reference to the particular contract and the actual circumstances, not contracts of a class and general circumstances.


The party who seeks to rely on the term must show that the contract is of the relevant class so as to attract the concern that the implication by law is intended to allay, that is, that rights conferred by contracts of the class will otherwise be undermined: Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 229 CLR 577 at [59]. Any competing contention that the implication is excluded must come from the party against whom the implication is pleaded: it is “still open to the defendants to show such a state of facts as will exclude the implication” Delohery v Permanent Trustee Co of NSW [1904] HCA 10; (1904) 1 CLR 283 at 314.


In the present case, the respondent says that such a state of facts is found in the whole of the statutory context in which the appellants’ contracts were made. The proposition advanced by the respondent is that the legislation governing the appointment and tenure of officers of the Education Teaching Service of New South Wales is so detailed and comprehensive that there is no room for the operation of any term of mutual trust and confidence. The necessity that is the source of the implication is said, for that reason, to be absent. What I have termed the “triable quality” of the appellants’ case based on the implied term therefore depends on a finding that that proposition is incorrect.


This leads to further consideration of the decision in McDonald. After reaching the conclusion already noticed regarding the implied term, the Full Court of the Supreme Court of South Australia proceeded to consider whether the implication was excluded by the circumstances of the particular case. In doing so, it embarked upon a detailed analysis of the statutory provisions governing the employment of teachers in the State’s schools.


The court noted (at [269]) that such employment was “heavily regulated by statute, regulation and by binding industrial instruments”. Particular reference was made to extensive provisions for involvement by teachers in decision-making and policy development within schools and for appeal and review in relation to almost any matter about which a teacher may be aggrieved, including appeal against any decision involving termination of employment and against classification decisions, promotion decisions and any other decisions in respect of which they considered that they had just cause of complaint. There were also well-developed dispute resolution and grievance procedures.


The analysis of the statutory scheme led the court to a conclusion stated in this way (at [270]):

“In our opinion, the statutory and regulatory context in which Mr McDonald’s contract of employment operated made the implication of a term concerning mutual trust and confidence unnecessary.”


And then:

“The statutory and regulatory framework itself provided restraints on the exercise of power by the Minister and by those exercising supervisory or other powers under the Education Act which could affect Mr McDonald adversely. The existence of the means of redress can be taken to operate as a normative influence on the behaviour of the Minister and of others in positions of responsibility. Teachers are provided with means of redress in those cases in which powers are exercised unfairly, or are perceived to have been exercised unfairly. In this way, teachers such as Mr McDonald obtain the kind of protection to which, as we understand it, the implied term as to mutual trust and confidence is directed. The statutory and regulatory context in which Mr McDonald was employed provided, by a variety of means, for the achievement of a balance between the Minister’s interests in discharging the obligations imposed by the Education Act and the teacher’s interests in not being unfairly or improperly treated.”


Another basis for a like conclusion was then stated (at [271]):

“We appreciate that it could be said that the remedies which the Education Act, the Education Regulations, the industrial awards and the Certified Agreement provided to Mr McDonald do not preclude the implication of a term relating to mutual trust and confidence but instead simply provide part of the context to be considered in the event that recourse is had to those remedies. However, such an approach would mean that the necessity for the implication of the term would have to be found in other circumstances. It is not easy to identify such other circumstances. We do not consider that the relationship between implied term and the statutory award context of Mr McDonald’s employment should be rationalised in this way.”


In the result, it was held that, in the particular statutory context, the implied term did not operate. The necessity that is the foundation of the implication was absent.


The South Australian court proceeded on the same basis as the House of Lords in Johnson. The main claim of the employee in Johnson was for financial loss flowing from a psychiatric condition alleged to be a consequence of the unfair manner of his dismissal. He sued for damages for breach of the implied term of trust and confidence. The House of Lords examined statutory provisions under which an industrial tribunal could award “such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer”. It was held, by majority, that implication of a term of mutual trust and confidence would be contrary to the evident intention of Parliament that the plaintiff’s loss should be compensated, if at all, through the statutory process. That process applied to a particular class of persons, entailed a limit on sums recoverable and depended upon decision making by a specialist tribunal. Again, the necessity that is the foundation of the implication was absent.


A different conclusion was reached in Lennon v State of South Australia [2010] SASC 272. It was there held that the implied term of trust and confidence formed part of the employment contract of a senior civil servant. Layton J acknowledged (at [177]) that there was “ample authority to support that a term of mutual trust and confidence can be implied into employment contracts at law”. The point of distinction from McDonald was then explained (also at [177]):

“Having regard to the statutory context of the plaintiff’s employment, I consider that the PSM Act [Public Sector Management Act 1995 (SA)] is not a regulatory framework of the kind described in McDonald. Section 12 of the PSM Act sets out the situations in which the contract may come to an end, but it is silent on the manner in which the parties are to conduct themselves towards each other and it provides no avenue for appeal in the case of a disappointed employee. Whilst there may have been at one time, a technical possibility for the plaintiff to bring judicial review proceedings of a decision by the Government (or one of its agents), I do not consider this to be the sort of “means of redress” to which the Court was referring in McDonald. It must be remembered that even if judicial review was possible, it does not provide the same sort of protection and regulation as did the scheme in McDonald nor the same remedies as are sought in this case. I conclude that a term of mutual trust and confidence is implied in law in the plaintiff’s contract of employment.”


In the present case, the respondent pointed to very significant similarities between the South Australian legislation considered in McDonald and the New South Wales legislation in force when the appellants were officers of the Education Teaching Service of New South Wales. It is unnecessary to go into detail. It is sufficient to note that a table comparing the legislation of the two States provided to the court by the respondent (and agreed by the appellants) showed that every provision of any consequence in force in South Australia at the time relevant to the McDonald decision had a clear counterpart in New South Wales at the time relevant to these proceedings.


Assuming that McDonald is correct (a matter on which it is unnecessary to express any concluded view), it is distinguishable because of one notable difference between the circumstances under consideration there and those of this case. It comes from a feature of the New South Wales statutory provisions that had no counterpart in South Australia. The appellants held probationary appointments, a species of tenure not provided for in the South Australian legislation. They were therefore governed by s 48 of the Teaching Service Act which, as in force at the relevant time, was in these terms:

“(1) Unless the Director-General of Education, in a particular case or class of cases, otherwise determines, a person who is not an officer of the Education Teaching Service when the person is appointed by the Director-General to a permanent position in that service shall be appointed on probation, which shall be for a period of 12 months or such longer period as the Director-General may in any particular case or class of cases determine.

(2) The Director-General of Education may:

(a) after the expiration of the period of probation for which a person is so appointed, confirm or annul the appointment, or

(b) during the period of probation for which a person is so appointed, extend the period of probation or annul the appointment.

(3) Where the appointment of a person is so annulled, the person shall thereupon cease to be employed under this Division as an officer of the Education Teaching Service and shall, unless the Director-General of Education makes a determination under subsection (4), be deemed to be a temporary employee of the Education Teaching Service under this Act.

(4) Where the appointment of a person is so annulled, the Director-General of Education may determine that the person shall cease to be employed in the Education Teaching Service upon a day specified in the determination and the person shall cease to be so employed on that day.

(5) A person who, by reason of the annulment of an appointment, ceases to be a member of the Education Teaching Service under this section is not entitled to appeal to the Government and Related Employees Appeal Tribunal against the annulment or against any determination of the Director-General made under subsection (4).

(6) Nothing in section 85 prevents the Director-General of Education from exercising, at any time, the power to annul an appointment under subsection (2).

(7) This section does not apply to the appointment of a senior executive officer to a position in the Education Teaching Service.”


Annulment of the appointment of each appellant was made under s 48(2). The date specified pursuant s 48(4) was, in each case, 20 March 2000. Because of their probationary status and the deployment against them of the annulment process, the appellants ceased to be Crown employees (and members of the Education Teaching Service) on 20 March 2000 and were denied by s 48(5) access to appeal procedures in respect of both the annulment and every associated determination. In addition, the effect of s 48(6) was to make inapplicable provisions of s 85 under which involuntary separation might be achieved by enforced or negotiated resignation as an alternative to dismissal (or annulment).


Certain protective incidents favourable to employees that formed part of the regime applicable to other teachers thus did not apply to the appellants as probationary employees. The denial of the favourable incidents means one of two things: that effect must simply be given in an unqualified way to a statutory intention that their employer may treat persons of the relevant kind in a way that is, by comparison, disadvantageous; or that the absence of the protective incidents in relation to those persons leaves, in those respects, a gap in the statutory coverage that allows potential scope for the operation of the implied term of mutual trust and confidence.


The correctness of the latter approach rather than the former is, in my opinion, arguable with sufficient cogency to establish the triable quality of the proposition that the implied term forms part of the appellants’ contracts. There is a plausible basis for arguing that the gap in the statutory coverage in relation to probationary teachers is of the kind that caused Layton J to conclude in Lennon v South Australia that the implied term applied. All-embracing statutory substitutes of the kind on which the decision in Johnson turned are arguably absent.


In Paige, Spigelman CJ referred (at [150]) to the statutory arrangements concerning dismissal of New South Wales teachers, including the availability of unfair dismissal proceedings, and saw the existence of those arrangements as a reason for not recognising “a parallel remedy of unlimited scope ” at common law. The exceptions affecting probationary teachers are arguably sufficient to render that thinking inapplicable to this case.


Brisbane Barrister – David Cormack

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