Siblings but not twins: making sense of 'mutual trust' and 'good faith' in employment contracts.

• Jurisdiction: Australia
• Author: Riley, Joellen
• Date: 01 August 2012

[Since the 1970s English employment law has recognised a duty not to destroy mutual trust and confidence in the employment relationship and has developed more general duties of good faith and fair dealing at work. Australian employment contract law, on the other hand, has been slow to articulate clear principles around these concepts. This article proposes a framework for understanding both concepts--mutual trust and confidence on the one hand, and good faith performance of contracts on the other--in the hope that the articulation of clear and bounded principles may encourage general judicial acceptance and greater certainty in employment contract law.]

CONTENTS I Introduction II Mutual Trust and Confidence III Good Faith IV Bullying and Harassment Claims V Reputational Harm VI Conclusions I INTRODUCTION

It has become common for employees claiming contractual damages following termination of their employment to plead that the employer has breached 'an implied term of good faith, trust and confidence' in the employment relationship. (1) Sometimes two separate implied terms are pleaded: 'mutual trust and confidence' on the one hand, and 'good faith' on the other. (2) The circumstances in which these claim\s are made are as various as the causes of misery and grievance in human relationships at work. Sometimes they are pleaded hand in hand with allegations of bullying and harassment; (3) sometimes together with assertions of capricious denial of claimed entitlements (such as performance bonuses, (4) promotions, (5) or contract renewals). (6) Although 'mutual trust and confidence' and 'good faith' have become commonplace vocabulary in pleadings, there is still considerable confusion and disagreement about the content of these obligations. Some judicial decisions have been sceptical about whether they exist at all. (7)

The aim of this article is to propose a framework for understanding the role that mutual trust and confidence and good faith play in the resolution of employment contract disputes in Australia, in the hope that greater clarity around the concepts may convince the remaining sceptics that these are indeed legitimate employment obligations and they do not open floodgates to unpredictable damages awards. This framework may provide some guidance, and consequently alleviate some confusion, for the benefit not only of future litigants and their advisors, but also of the managers who determine workplace culture, and those who work within their influence.

This framework involves a number of propositions, each of which is expanded later in this article:

1 The two concepts--mutual trust and confidence on the one hand, and good faith on the other--describe closely related but nevertheless distinct obligations arising in an employment relationship, and perform different functions in resolving employment contract disputes. (8)

2 The notion that the employment relationship involves a duty on both employer and employee not to act in a manner calculated or likely to destroy the relationship of trust and confidence between employer and employee has been articulated clearly in the employment contract law of the United Kingdom, (9) and has been accepted or assumed in a sufficient number of cases in Australian jurisdictions to warrant its acceptance into the canon of Australian employment law. (10) This proposition, which I concede is not yet universally accepted by Australian employment law advocates or judges, is explained more fully in Part II. Breach of this obligation (by either employer or employee) constitutes a repudiation of an employment contract justifying an election by the innocent party to terminate the contract. In Australian law, breach of this obligation has not yet sounded in any damages claim independently of any damages flowing from the termination of the employment. (11)

3 Employment contracts, like other contracts which describe long-term (or at least, indefinite) relationships for the mutual benefit of the parties, are to be construed (12) according to the principle that parties to the relationship are committed to perform their obligations in good faith. (13) In this context, good faith is to be understood in the same way as good faith in the performance of other kinds of commercial contract. (14) This proposition--also considered dangerously novel by some judges--is explained in Part III.

4 Both obligations are contractual in nature, meaning that they depend upon an assumption that parties have willingly committed to these obligations in entering into the employment relationship. If the parties to the relationship have expressly limited their obligations to each other, the agreement between the parties prevails over any implied obligation.

These propositions are best explained first by tracing the development of each of these obligations in employment contract law, and then by practical illustrations from decided cases.

II MUTUAL TRUST AND CONFIDENCE

The subsistence of mutual trust and confidence is essential to an employment relationship. Central among the indicia that distinguish an employment relationship from other commercial relationships under which work is performed is the expectation that the employer may exercise the prerogative of control (15) (and should also bear the corresponding responsibilities of command), (16) and the employee must render loyal and obedient service. (17) These reciprocal obligations are at the heart of the employment relationship, and they depend upon a degree of trust and confidence between the parties. Just as an employer cannot be expected to continue to accept the service of a disloyal employee who has acted to undermine the employer's business interests, (18) so the employee should not be required to remain in employment with an employer who has engaged in conduct that has destroyed the employee's trust and confidence in the working relationship.

Destruction of the employee's trust may be evidenced by various kinds of conduct, depending on the circumstances of the employment. The following are examples of the kind of conduct which may be found to destroy trust and confidence: unwarranted carping criticism; (19) demotion; (20) capricious withdrawal of employment benefits; (21) pointed disregard of policy-based entitlements; (22) precipitate or unreasonable discipline without prudent and careful investigation of complaints. (23)

The development of the employer's obligation 'not without reasonable and proper cause [to] conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee' has been chronicled in many earlier books and articles. (24) It has also been traced in a number of Australian judicial decisions. (25) Here, it is sufficient to summarise the main steps in this development. The duty was articulated first in a series of cases in the United Kingdom, in which employees sought to cast the blame for the termination of their employment at the feet of employers, notwithstanding that the employers did not expressly dismiss these employees. (26) In each of these cases it was held that, if an employee was able to establish that the employer's conduct was so destructive of the mutual trust and confidence that properly binds parties to an employment relationship, the employee should be entitled to treat the employer's conduct as a constructive dismissal. In contract law terms, the employee will be permitted to treat the employer's conduct as a repudiation of the employment contract, and elect to terminate the contract and claim damages for wrongful dismissal. In many cases argued on this basis, the employee was seeking to claim statutory compensation for termination under the Employment Rights Act 1996 (UK) c 18. (27)

The duty was cemented into English employment law by the House of Lords decision in Malik v Bank of Credit and Commerce International SA (in liq) ('Malik'). (28) This was essentially a test case to determine whether a breach of the duty not to destroy mutual trust and confidence could sound in damages. It was held that a breach of mutual trust could sound in damages so long as loss could be shown to have arisen during employment as a consequence of the employer's breach. (29) Following this decision, the obligation not to destroy mutual trust has been engaged to address a wide variety of claims. For example, in Clark v Nomura International plc (30) and Clark v BET plc, (31) the obligation was relied upon to claim that an employer must exercise discretions relating to performance pay and salary increases in a reasonable manner. (32) In Gogay v Hertfordshire County Council, (33) it was relied on as the basis for an employer's obligation to act fairly and reasonably in conducting an investigation into alleged misconduct. It was engaged in Spring v Guardian Assurance pic ('Spring') (34) to articulate a duty to exercise care when giving references. In BG pic v O'Brien, it assisted an employee to obtain a redundancy payment that was not expressly provided in his contract of employment (although it had been paid to others), on the basis that the employer bore an obligation to 'treat employees in a fair and even-handed manner'. (35) Lord Steyn has described the duty more generally as a duty of 'fair dealing' in English employment law. (36)

The one hiccough in the development of this duty in English law came in the decision of a majority of the House of Lords in Johnson v Unisys Ltd, (37) affirmed in Eastwood v Magnox Electric plc (38) and more recently (by the Supreme Court) in Edwards v Chesterfield Royal Hospital NHS Foundation Trust ('Edwards'), (39) that breach of the common law duty of mutual trust, good faith and fair dealing would not sound in damages, if the damages flowed only from the fact of termination of the employment relationship. This is what has become colloquially known as the 'Johnson exclusion zone'. (40) The House of Lords held that...