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Mutual Trust in Employment Contracts

Paper Type: Free Essay Subject: Law
Wordcount: 4372 words Published: 19th Sep 2017

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In all the employment contracts a term mutual trust and confidence which is also known as the duty to act reasonably and fairly is implied or not is the question for over the past years. As per the labor regulations in Australia, different range of sources provides different rights and responsibilities of employers and employees, which also creates a huge different level of complications while going through these sources. These terms will generally be implied in an employment contract in Australia that has been widely acknowledged, but at the same time the debate on awarding the damages for a breach of these terms in some of the Australian courts will be challenging as well.


Contract is a legal document that states and explains a formal agreement between two different people or groups, or the agreement itself.[1]

There are two kinds of contract and they are Express and Implied contract. Express contract is a type of contract which parties state the terms either orally or in writing at the time of its formation. On the other hand implied contract is a contract where terms and condition are not expressly defined at the time of its formation.[2]

Employment Contract

Employment contract is a category of contract, which used in employment. It is a relation between both parties on the one and stands an employee who is employed by an employer. It contains all terms and condition regarding employment.[3]

Mutual Trust and Confidence in Good Faith

Analyzing the concepts is very much necessary when it comes to “breach of mutual trust and confidence” and “the duty of mutual trust and confidence”. There is a lot of difference between the duty of good faith and the mutual trust and confidence. One talks about the implied duty that will relate to the terms of the contract and the relationship and whereas other talks about the incident of the employment relationship (right to Control). [4]

When it comes to incident of the employment relationship, there comes a question whether the relationship of trust and confidence exists or not. Which totally depends on the nature of the employment. So there is a doubt that it has existed and continues to exist, a necessary relationship of trust and confidence between employer and employee.

In an employment relationship the subsistence of mutual trust and confidence is very much essential to it. Because the employer cannot accept disloyalty of an employee who has undermine the employer’s business interest.[5] So the employee should not remain with the employer in employment because the employee has destroyed the trust and confidence in the working relationship.

Employee’s destruction of trust can be evidenced by different types of conduct and which also depends on the circumstances of the employment. Some of the examples of different types of conduct, which may destroy the trust and confidence, are: demotion;[6] unwarranted carping criticism;[7] withdrawal of employment benefits.[8]

It was first originated from the series of cases in the United Kingdom, in which employees totally blame employers for termination of their employment; despite this employers did not expressly dismiss these employees.[9] If any employee can make out that the employer’s conduct was so destructive of mutual trust and confidence, which properly ties up the parties to an employment relationship, than the employee treats employer’s conduct as constructive dismissal. In terms of contract law, employer’s conduct is treated as a repudiation of the employment contract by the employee as they are permitted to do so and elects to terminate the contract and claim damages for wrongful dismissal. On this basis in many of the cases, employee was seeking to claim statutory compensation for termination under the Employment Rights Act 1996 (UK) c 18.[10]

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Into the English employment law, duty was cemented by the decisions of House of Lords for example in Malik v Bank of credit and Commerce International SA (‘Malik’).[11] This was actually the test case for determining whether the breach of the duty is not to destroy mutual trust and confidence that could sound in damages. So it was held that mutual trust could sound in damages during employment as a consequence of the employer’s breach, that is why following this decision, not to destroy the mutual trust has been engaged to address a wide variety of claims. For example, in Clark v Nomura International Plc[12] and Clark v BET plc[13]

So in the development of this duty in English law, which actually came from the decisions of a majority of the House of Lords that breach the common law duty of mutual trust, good faith and fair dealing would not sound damages until the damages flow from only the termination of the employment relationship. So to overreach the limitations already determined by statute,[14] the House of Lords held the common law not to be developed. Since in the United Kingdom the legislation has already imposed a cap on damages for termination of the employment, and also exercising the common law jurisdiction should not award damages that exceed the statutory limits for termination. To compensate for any losses incurred by the employee, damages might be awarded as a consequence of breach of employment contract during employment, but also not for any loss surffered as a consequence of loosing the job.[15]

English scientific study of law has allowed damages for breach of the obligation that is not to destroy the trust and confidence, but even not when the damage flowed from the fact or manner of dismissal. Most importantly, in the English Law ‘the giving of the lawful notice cannot itself constitute a breach of the implied term.’[16]

When it comes to Australian case law it has generally assumed that duty has been existed not to act in a manner or likely to destroy the mutual trust and confidence when it comes to employment relationship,[17] though no appellate court decision has depended upon such a findings.[18]

Both parties to an employment relationship bear the duty not to destroy the mutual trust and confidence has assumed by the Australian courts in more recent times. When it comes to the English law, destruction of mutual trust signifies to the situation in which employees refuses to do something that are legally required to do as per employment contract and than identifies who is to be blamed if termination of the contract ensues. But whereas in Australian law, destruction of mutual trust and confidence has not been found to sound any damages on its own. In Australian case law it distinguishes between the employment relationship and employment contract.[19] The employment relationship is nothing but the actual dealing between employer and employee regulated by different types of law that includes common law of contract and also statutes that impose the mandatory obligations on the parties.[20] Whereas in terms of employment contract it is not automatically terminated when there is destruction of relationship of trust, but by electing innocent party.[21] In such circumstances the employees who gets terminated are entitled to be paid any remuneration or some other benefits according to his or her loss of account of premature termination of the employment contract.[22] This also means the payment of remuneration and other benefits that would have been received during a proper notice period. More importantly, the obligation not to destroy the mutual trust does not constrain an employer to take the decision to terminate the employment. So as long as the employer brings together the terms of the contract, and without prior notice and explaining how it should be done the employer is not at all liable for breaching the employment contract simply by deciding to terminate the employee.[23]

Australian law has not gone so far unlike the English law, where the obligation is not to destroy mutual trust and confidence with a general duty of good faith and fair dealing in the employment contracts, in which breach might sound in damages. In some of the Australian cases there are few suggestions that on one hand there is two obligations of mutual trust and confidence, and on other hand the good faith, are having nearly the same meaning and these statements tend to be made by the courts who have found to decide upon the matter without any obligations.[24]

According to Russell (Appeal) in 2008

“Although there were said to be two implied terms, it is probably sufficient to identify them as a single obligation.” [25]

They derive from the same source, as siblings, that show the existence of a relationship of employment but again to understand it in the better way make it the separate concepts of each of them and with different functions. It is just a matter of choosing a vocabulary to assist in the clear articulation of separate concepts. The terminology of ‘mutual trust and confidence’ is very useful to describe in a particular characteristic of an employment contract that distinguishes it from a contract of sale or other contractual arrangement. Also ‘good faith’ is described as governing principle that is best engaged in interpretation and construction of relational contracts such as employment.

Commonwealth v Barker

It was in the year 2009 where the Commonwealth Bank of Australia took a step forward to change its Corporate and Financial Services business unit, due to which Mr. Barker’s position in the Bank was removed. As per the policy of the company, if they don’t require any position of the employee they will need to place that concern employee to the other part of the department or other position in the company. But in the case of Mr. Barker the Commonwealth Bank did not imply this policy.

On 2 March 2009 Mr. Barker was send a letter to inform him about the redundant of his position but the Bank would like to send him to other area of the Bank. Later there was a meeting where Mr. Barker was told to clear out his desk, give away the keys and mobile phone and not to come to work. The Bank also stops Mr. Barker’s email and intranet facilities. On 9th April 2009, Mr. Barker was sent a letter of termination due to his redundancy and there was no sign of redeploy for Mr. Barker by the Bank.

Mr. Barker had given his 23 years in the Bank and his contract of employment showed that he would be terminated only if the Bank is unable to give him a different position but there was no proper word in the contract apart from potential operation of an implied term of mutual trust and confidence.

Mr. Barker’s file the case to the trial judge against the Commonwealth Bank and that included the failure of the Commonwealth Bank to give him the employment in some other department of the Bank.[26]

What the Bank did to Mr. Barker was not according to the term of the contract of employment.

As per the contract there should be mutual trust and confidence between employer and employee but that didn’t work at his time his employment.

The policy of the company for redeployment was not utilized at his case of redundant of his position.

Mr. Barker was entitled $300,000 from the bank for not following the company’s policy of redeployment.

The case was then requested to the Federal Court as the Bank felt the Trial judge has made mistake in giving justice without any proper evidence. The courts refused to accept the appeal as Mr. Barker was more favorable and for this reason Jacobson and Lander JJ were appointed to go through the case in detail under Australian Law. [27] They came to the conclusion on the following grounds:

  • In the court of England the policy support the implied term with the contemporary employment relationship.[28]
  • The employment relationship should take part necessary of common interest and partnership fairly than a serious disagreement or argument.[29]
  • These typical parts called for the result of an action or a decision by law of an obligation, for which employment relationship need to be in its original state.[30]
  • According to the majority, the implied term only work in a particular way in respect of conduct and form a unit by it from the manner of termination of the contract of employment that is, it does not apply at the point of dismissing someone from their job or to steps inextricably linked with dismissal.[31]

It was easy to see or understand from their reasons for decision that Jacobson and Lander JJ held that the implication of the implied term by law was necessary

For Jacobson and Lander JJ, the Bank’s failure to give redeployment policy was not the important factor. As they found the Bank has not implied term or made something happen:

  • Mr. Barker was a senior employee and worked for more than 23 years.
  • The Common wealth bank was a large corporate organization and
  • The contract (clause 8) contains that the employment may be terminated if the Bank were unable to place the employee in other position.[32]

In these conditions of the facts, Jacobson and Lander JJ held that the implied term required the Bank to take positive steps from 2nd March 2009 to advice Mr. Barker about the possibility of redeployment and to give him the option to apply for alternative position within the Bank. [33]

Jacobson and Lander JJ confirmed that Mr. Barker has been gone through hurt and distress and even loss of reputations that can never be recovered.[34]

As an alternative reason for holding the Bank was liable, Jacobson and Lander JJ found that the same circumstances triggered the operation of the implied tasks of the organization in the contract of employment.[35]

This implied the state of being forced upon the need for one party to take positive steps without which the other party is unable to enjoy a right or to be in a better position because of the contract.[36]

By comparing the case where an employee despite to be knowing for the benefit unless it is brought to his attention by the employer. [37]

After paying great attention to details and had judgment in which he completely study the gradual development of English and Australian case law in relation with the implied term of mutual trust and confidence, Jessup J concluded that: “…the question whether the implied term is part of the law of contracts of employment in Australia has never been answered in the affirmative by an Australian appellate court in the sense of being of the ratio decided.”[38]

His Honor went onto hold that the implied term of mutual trust and confidence was not needed for the pleasure of the rights conferred by the contract of employment.[39]

Jessup J described the implied term as having “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.”[40]

His honor makes a decision that the implied term, if accepted, “would enable defined limits in the existing fabric of common law and equitable remedies to be side-stepped”; and that the implied term would “overlap a number of legislated prohibition and requirements, thus tending to compromise the democratically-drawn architecture” by closely connected with the employment obligations.[41]

Jessup J further held that the fact of being express reservation in the Bank’s redeployment policy “did not …leave any scope for the conclusion that by merely failing to comply with the policy, the Bank breached the implied term.”[42]

The largest part of the case was in favor of Mr. Barker and at least for now, that in the period of time when express terms to the contrary is away, there is an implied term of mutual trust and confidence in every Australian employment contract.

The decision moved to a higher level for consideration if the employers should clearly deliberate the implied term from employment contract. To whatever degree, it won’t be too complicated as given:

  • As far as possible giving particular attention to the implied term, and
  • The way of dealing by the majority judges, that particular circumstance triggered the operation of the implied term.

The majority decision is turned upside down by the High Court of Australia on appeal; employers now need to put the implied term of mutual trust and confidence and the implied duty of cooperation to their list for them to remember all the time. In addition to the matters such as rise in the adverse action claims in dealing with their employees.

When it comes to advantages and disadvantages for employers and employees of having such an implied term in the employment contract, employees should always remain faithful and sincere to the employer’s interest. Any confidential document or information of the company should not be shared outside the workplace to its competitors and it should remain internal within the workplace.[43]

Whereas employers make decisions from the policies so they have to pay extra attention to its policies and regulations. In Barkers case federal court advised the employers to conduct themselves in a way that it wont destroy their relationship of trust and confidence with employee. When it comes to common law employers have to make sure that workplace is a safe place for employees to work.

Employees have a huge advantage in having the implied term mutual trust and confidence because if there is a severe breach in the employment policies which is found than through the award of damages by the court, it will not only be considered a breach of an implied term.


In my view the term mutual trust and confidence is very much important to be implied in the employment contract. Because having the term mutual trust and confidence in the contract will create a comfortable working environment and also conditions can be achieved between both employer and employee. Incase if such implied term is not reflecting in the employment contract than either the employer or the employee would be permitted to act in a way that is not necessarily in accordance with the will of the contract. And also the practice of obeying rules between employer and employee are included in the viewpoint of an implied term.

[1] Cambridge Advance Learner Dictionary (3rd Editioin)

[2] ibid

[3] Mark Freedland, the personal employment contract 2003 Oxford University press.

[4] Gillies v Downer EDI Limited [2011] NSWSC 1055

[5] Concut Pty Ltd v Worrell (2000) 176 ALR 693.

[6] Russian v Woolworths (SA) Pty Ltd (1995) 64 IR 169.

[7] Lewis v Motorworld Garages Ltd [1986] ICR 157.

[8] Clark v Nomura International plc [2000] IRLR 766.

[9] Courtaulds Northern Textiles Ltd v Andrew [1979] IRLR 84.

[10] Lewis v Motorworld Garages Ltd [1986] ICR 157.

[11] [1998] AC 20.

[12] [2000] IRLR 766.

[13] [1997] IRLR 348.

[14] Johnson v Unisys Ltd [2003] 1 AC 518, 544 [56]–[58] (Lord Hoffmann).

[15] Gogay v Hertfordshire County Council [2000] IRLR 703.

[16] Kerry Foods Ltd v Lynch [2005] IRLR 680, 682 [16] (Clark J).

[17] Sappideen et al, above n 10, 162 [5.230] and the cases cited there.

[18] Aldersea v Public Transport Corporation (2001) 3 VR 499.

[19] Visscher v Giudice (2009) 239 CLR 361.

[20]Byrne v Australian Airlines Ltd (1995) 185 CLR 410.

[21] Visscher v Giudice (2009) 239 CLR 361.

[22] Thomson v Orica Australia Pty Ltd (2002) 116 IR 186.

[23] Russell (Trial) (2007) 69 NSWLR 198; Rogan-Gardiner [2010] WASC 290 (22 October 2010).

[24] Russell (Appeal) (2008) 72 NSWLR 559, 567 [32],

[25] ibid

[26]Barker v Commonwealth Bank of Australia[2012] FCA 942 (3 September 2012).

[27] 2013] FCAFC 83 at para [79],

[28] 2013] FCAFC 83 at paras [94]-[95],

[29] [2013] FCAFC 83 at para [81], referring to the Full Court of the SA Supreme Court decision inSouth Australia v McDonald(2009) 104 SASR 344

[30] [2013] FCAFC 83 at paras [72], [107].

[31] [2013] FCAFC 83 at paras [72], [97].

[32] [2013] FCAFC 83 at paras [110]-[111].

[33] [2013] FCAFC 83 at paras [112], [117], [130]-[132].

[34] 2013] FCAFC 83 at paras [152]-[158].

[35] 2013] FCAFC 83 at paras [118]-[128].

[36] 2013] FCAFC 83 at para [122].

[37]As in the House of Lords decision inScally v Southern Health and Social Services Board[1992] 1 AC 294, discussed by the majority inBarker[2013] FCAFC 83 at paras [114]-[115], [123], [128].

[38] 2013] FCAFC 83 at para [280

[39] 2013] FCAFC 83 at paras [288]- [295], especially paras [289]-[290].

[40] 2013] FCAFC 83 at para [340].

[41] 2013] FCAFC 83 at para [340].

[42] [2013] FCAFC 83 at para [351].

[43] Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd (1967) VR 37.


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