Breaches of mutual trust and confidence may result in damages

by Stephanie Zillman05 Jul 2012

A landmark finding in a case which has dragged on for 12 years means employers may face greater exposure to damages for breaches of mutual trust and confidence in employment contracts.

Whether a term of mutual trust and confidence is inherent in every employment contract has been hotly debated in recent years, yet it has now been accepted that it is generally implied in every employment contract. So far Australian courts have been reluctant to award damages for a breach of that term, employment law experts at Clayton Utz have said.

Following the recent judgment in Shaw v State of New South Wales [2012] NSWCA 102, a five-strong panel of judges in the NSW Court of Appeal has indicated that courts may be more willing to order the payment of damages in the future.

According to Clayton Utz, the term of mutual trust and confidence is a term that “an employer must not, without reasonable or proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the employer and the employee”. The term has been recognised in Australia’s lower courts, but critically the High Court is yet to make a definitive ruling on its existence, scope and operation. Clayton Utz noted that thus far, lower courts have limited the application of mutual trust and confidence in two ways:

  • Firstly, mutual trust and confidence will not be implied if an employee has access to statutory unfair dismissal laws or statutory mechanisms to pursue their grievances
  • Secondly, where it is implied and a breach occurs, damages cannot be awarded because of distress or financial loss resulting from the manner of the dismissal itself

If the term is able to result in damages, what are the implications?

Legal experts have said that the finding in the case of Shaw has confirmed the view that mutual trust and confidence can be implied into Australian employment contracts, particularly where there is no access to unfair dismissal legislation or similar legal avenues, for example in executive, probationary and casual contracts.

Critically, when dealing with treatment, management, counselling and termination of senior staff and executives, the manner in which this occurs could potentially lead to claims of breach of the implied term and expose the employer to damages for breach of contract.

In the UK, the following types of breaches of trust and confidence have resulted in damages being awarded to employees:

  • sexually harassing, bullying, publicly vilifying or verbally abusing the employee;
  • failing to provide a safe working environment, or safety training; 
  • failing to properly investigate complaints and follow grievance procedures; 
  • failing to adopt and follow the employer’s own policies;
  • acting arbitrarily or singling one employee out for discrimination; 
  • deliberately providing excessive workloads; 
  • accusing the employee of dishonesty without cause; and
  • exercising a contractual right to relocate employees in a capricious manner.

HR takeaways

Following this case, best practice may be to assume the duty of mutual trust and confidence will apply and can result in damages.

In turn, employers need to ensure that fair and proper procedures are followed in managing and dealing with senior executives, particularly in relation to investigations, counselling and events leading to termination of executive employment.


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