A decision handed down on Monday 19 February by Justice Rothman of the Supreme Court of New South Wales has confirmed that a duty of good faith and a duty of mutual trust and confidence will be implied into contracts of employment. Although this is a New South Wales decision it has implications for employers throughout Australia.

This is the first time that a superior court has found that there is an implied duty of good faith and an implied duty of mutual trust and confidence. While the decision is not binding, it could be followed by other courts, both in New South Wales and throughout Australia.

The decision is important because it highlights the possibility that acts done by an employer in the course of employment can be reviewed by a court on the basis that the conduct is inconsistent with the implied duties of good faith and mutual trust and confidence. It is difficult to predict precisely what obligations an employer will have in a given situation. However, if a court finds there has been a breach of the implied duties, it could result in an order for the payment of damages.

Employers accordingly need to carefully consider the likely impact of their actions and decisions on their employees, particularly where those decision and actions involve the investigation of employee conduct and possible disciplinary action.

The case involved an employee of the trustees of the Roman Catholic Church for the Archdiocese of Sydney (church), Mr David Russell, who sought damages for a breach of his employment contract; namely a breach of the implied terms of good faith and mutual trust and confidence and wrongful dismissal.

The court found that the contract of employment had implied into it:

  • a duty of good faith, and
  • a duty that the church would not, without proper and reasonable cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the parties.

However, the court held that to the extent either of these implied duties had been breached, Mr Russell sustained no damage. Further, although the church wrongfully dismissed Mr Russell (in that the manner of his dismissal was inconsistent with the implied term that reasonable notice of termination was required to be given), again no damage was sustained by Mr Russell as a result.

The Facts

Mr Russell, a talented musician, has been involved in music (including as the choir director), at St Mary’s Cathedral since 1954. In 1976 Mr Russell accepted employment as the director of Music at St Mary’s Cathedral. No written contract of employment ever existed between the parties.

In 1999, Mr Russell was arrested and voluntarily stood down as the director of Music following allegations of misconduct involving child protection. In March 2000, all charges against Mr Russell were dropped. On or immediately after this event, Mr Russell resumed full duties with the choir without any conditions or restrictions.

Subsequent to this there was an investigation conducted by the New South Wales Ombudsman’s Office and the church in relation to the child protection issues. As a result of the investigation process, a decision was made to terminate Mr Russell’s employment on 31 January 2003.

Mr Russell alleged that the process was a denial of natural justice and procedural fairness.

The Proceedings

On 17 February 2003, Mr Russell commenced proceedings under section 84 (the unfair dismissal provisions) of the Industrial Relations Act 1996 (NSW) for reinstatement. Deputy President Harrison found that Mr Russell’s termination was harsh, unreasonable and unjust and ordered reinstatement ‘with restitution of wages and continuity of service for all purposes’. Mr Russell was reinstated and was paid full back pay.

Considerable costs were expended by Mr Russell on the proceedings before the commission (approximately $350,000) and the decision notes that those proceedings caused him much ‘anxiety and stress’.

In the proceedings in the Supreme Court of New South Wales, Mr Russell alleged:

the existence of an implied term in the contract of employment that the church would act in good faith towards Mr Russell in and about the administration of his contract of employment, and

an implied term in the contract that the church would not conduct itself ‘in a manner likely to destroy or seriously damage the relationship of confidence and trust’ between it and Mr Russell or alternatively (if it be different that the church would not conduct itself in such a manner) ‘without reasonable and proper cause’.

Mr Russell sought damages for the wrongful termination and for breaches of the two implied terms comprising the cost of the proceedings before the commission, on an indemnity basis, the expenses of a media consultant, injury to reputation and damages for distress, embarrassment, humiliation and hurt to feelings. Further damages were claimed for negligence, aggravated damages and exemplary damages.

The Findings

Implied Duties

Justice Rothman held that although these issues awaited definitive clarification by an appellate court, he considered that there was an implied duty of good faith and mutual trust and confidence.

  1. An implied duty of good faith

    Mr Russell claimed that the contract of employment contained an implied term that the church would act in good faith in and about the performance of his contract of employment.

    Justice Rothman concluded that it was impossible to imagine that the contract of employment could operate without a duty of good faith. The duty imported a requirement that the parties exercise prudence, caution and diligence in the performance of the contract.
  2. An implied duty of mutual trust and confidence

    Similarly, Justice Rothman concluded that there was a duty not, without reasonable and proper cause, to act in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between an employer and employee.
  3. Justice Rothman also found that neither of these implied terms operate with respect to termination of employment or apply to affect the right of an employer to terminate an employee’s employment.

Wrongful Dismissal

The court held that Mr Russell was entitled to receive ‘reasonable notice’ in circumstances where there was no express term of the contract dealing with notice on termination. There was no implied right to make a payment in lieu of notice.

Accordingly, Mr Russell’s immediate termination of employment and payment purportedly in lieu of reasonable notice, was a breach of the contract for which, subject to the rules of mitigation, damages would be payable.

Breach of Duty

Mr Russell alleged breaches of the implied duties on the basis of the delay by the church in responding to the Ombudsman’s Office, the failure to inform him of the inquiries of the Ombudsman’s Office and the fact that the church did not respond to the Ombudsman’s Office in a timely manner. Justice Rothman found that unless it could be said that the result would have been different (or even may have been different) the alleged breaches could not have caused any damage. Further, Justice Rothman concluded that there was more than sufficient material upon which the church could have come to the decision that it did regarding his employment.

Mr Russell also complained that it was a breach of the duty of good faith not to interview a witness, Mr X, face-to-face (he was interviewed over the telephone). Justice Rothman held that given the church’s resources and infrastructure, it should have, as a matter of prudence and diligence, and taking into account the significant prejudicial effect of any such investigation, interviewed Mr X face-to-face. This was a breach of the church’s duty to act in good faith. Although Justice Rothman found that there had been a breach of the implied duty of good faith, he declined to award any damages on the basis that Mr Russell had not shown that the outcome would have been any different if the breach had not occurred.

Damages For Wrongful Dismissal

In relation to the wrongful dismissal, the court held that given Mr Russell’s seniority and length of service reasonable notice would have been no less than 12 months. But because he was reinstated and received back pay, no loss of income ensued.

Mr Russell argued that the cost of the reinstatement proceedings before the commission were reasonable costs of mitigating the damage. The court did not agree. Justice Rothman held that even though the commencement of the reinstatement proceedings was a reasonable step, it would be inconsistent with the purpose of the legislation and the operation of the legislative scheme to award the costs of the commission proceedings as a head of damage.

No damages were awarded for the expenses associated with hiring the media relations consultant or as a result of any injury to reputation. No aggravated or exemplary damages were awarded either.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.