Implied Terms in Contracts of Employment – “Good Faith”, “Reasonableness”
Published on May 11, 2018 by Peter Punch
First published on June 23, 2015 by Peter Punch, then published in revised form on 11 May 2018
As is generally known amongst workplace law or relations practitioners, on 10 September 2014 the High Court decided in Commonwealth Bank of Australia v Barker  HCA 32 that there is no term of “trust and confidence” implied by law in employment contracts in Australia, but left open the possibility that there may be an implied term of “good faith and/or reasonableness” in all contracts, including employment contracts – see  per French CJ, Bell and Keane JJ, and  to , per Keiffel J.
That of course has led many of us to postulate whether such a “good faith” term may be recognised as implied by law in employment contracts at some time in the reasonably near future. Or perhaps, that the High Court will determine the matter, one way or the other, reasonably soon in an appropriate case, so that lawyers are able to confidently advise their clients on the issue.
Interestingly, there have been two decisions of the New South Wales Court of Appeal since the Barker decision that have addressed the point, and they form the subject of this article.
It is important to start with an appreciation of the development of case law on the implied term of “good faith and fair dealing” in commercial contracts since the early 1990s.
The starting point is the judgment of Priestley JA in Renard Constructions (ME) Pty limited v Minister for Public Works (1992) 26 NSWLR 234 at 268, where his Honour propounded a view that “people generally… have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance.”
That judgment was followed by a significant number of cases in both the NSW Supreme Court and the Federal Court where this notion of an implied term of “good faith and fair dealing” was analysed in the context of commercial (NOT employment) disputes. The case law authorities were helpfully reviewed and analysed by the NSW Court of Appeal in Burger King Corporation v Hungry Jack’s P/L  NSWCA 187. Suffice to say in this context that the vast preponderance of the authorities support the notion that a term of “good faith and fair dealing” can be implied into commercial contracts – at least in particular cases, if not as a term implied by law in the entire class of such contracts. Moreover, the authorities seem to demonstrate that the courts are not reluctant to imply such a term into a particular commercial contract, as a means of ensuring that rights under a contract are not unreasonably exercised or used by one party against the other to defeat the common commercial purpose of the parties (see for example Burger King itself, but also Hughes Aircraft Systems International v Airservices Australia  76 FCR 151, per Finn J).
At the intermediate court level, there are still some lingering unresolved questions in relation to the content and application of such an implied term – that is
(i) Does it apply to all contracts, or only to a particular class (ie commercial contracts);
(ii) Is it implied by law or depends on the terms of a particular contract;
(iii) How does it work with the acknowledged right of a party to pursue or protect its legitimate self interest in accordance with the contract’s terms; and
(iv) May the parties exclude such a term by express agreement.
Most importantly, the High Court has not ruled on the question of whether such a term may be implied, and if so, its contents – see Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436;  HCA 5, at , and Barker.
Against that background, it is interesting to examine two decision of the NSW Supreme Court dealing with employment contract matters after the High Court’s decision in Barker.
Adventure World Travel Pty Limited v Newsom  NSWCA 174
These are the basic facts of this matter.
1) The parties entered into an employment contract in December 2006 with a commencement date of 1 February 2007.
2) Clause 14.1 of the Agreement relevantly provided:
“(a) Either party may terminate this agreement and the Employment at any time by giving the other party not less than 12 months prior written notice during the 2 year period from the Commencement Date and thereafter by providing 3 months prior written notice.
(b) If paragraph (a) applies:
(i) the Executive must remain available for the balance of the applicable notice period to provide services to the Company at the request of the Company;
(ii) the Executive must adhere to his obligations including without limitation, under cl 12;
(iii) the Company may require the Executive to remain available but not to attend the offices of the Company for all or any part of the period of notice under paragraph (a) unless requested to do so by the Company; and
(iv) the Company may at any time pay the Executive an amount calculated by reference to the Remuneration in lieu of all or any unexpired portion of the applicable notice period referred to in paragraph (a), such that this agreement and the Employment shall terminate on the date the Company makes that payment.”
3) On 30 January 2009 Newsom wrote to Adventure World Travel (“AWT”) giving 12 months notice of termination of the employment.
4) On 9 June 2009 AWT advised Newsom that the employment would terminate on 30 June 2009, and that would be his last day.
5) On or about 30 June 2009 AWT terminated Newsom’s employment and paid him three month’s salary in lieu of notice.
6) Newsom sued AWT for damages for the balance of the twelve months notice of termination he did not receive, and was successful at first instance in the District Court.
On appeal the Court of Appeal (McColl, Meagher and Leeming JJA) upheld the judgment of the District Court.
The Court ruled that on its proper construction there could not be a second notice of termination after the first one, tendered by Newsom, was given. It was also held that that notice could be given at any time in the first two years of the employment, even if the notice period did not expire till after that time. It also held that the notice by AWT dated 9 June 2009 was not effective to terminate the contract in any event.
But importantly in the context of the “good faith” issue, AWT argued that the contract allowed more than one notice because of the use of the expression “”not less than 12 months notice” in Clause 14.1. AWT contended that if that phrase was given its natural meaning then a party could give 5, 10 or 20 years or more notice and the other party could not give a notice to bring it to an end earlier. The Court unanimously rejected that argument and in the leading judgment Meagher JA said this:
“The power to fix a period of “not less than” 12 months is conferred for the purpose of giving advance notice of the termination of the agreement. Where a contractual power is given to one party for a purpose but in terms wider than necessary for the protection of its legitimate interests, the exercise of the power may be constrained by implied obligations of reasonableness and good faith, as was held in relation to the exercise of the powers given in the agreement in Burger King Corporation v Hungry Jack’s Pty Ltd  NSWCA 187; 69 NSWLR 558 at , . A constraint in those terms would prevent the fixing of a period of notice for an extraneous purpose or one which could not on any view be justified as reasonable having regard to the purpose for which such a notice is given. That purpose, described generally, is to enable the parties to end their existing relationship and have a reasonable time to object either a substitute employee or other employment: see Birrell v Australian National Airlines Commission (1984) 5 FCR 447 at 458 (Gray J); and, in relation to a distributorship agreement, Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 448 (McHugh JA). In my view the power in cl 14.1(a) is to be read subject to such a constraint. The existence of that constraint substantially answers this argument of the appellant. It remains unnecessary, however, to address the language of the clause to see whether it is to be read as permitting the giving of a second or subsequent notice.”
Bartlett v ANZ Banking Group Limited  NSWCA 30
The essential facts for current purposes were these.
1) Bartlett was dismissed by ANZ on the ground of serious misconduct, ie that he had sent a doctored email to Mathew Cranston, a journalist at the Australian Financial review which was not true and was damaging to ANZ – the critical line (which was added to the actual email) being “No more lending. We are closed for business. Do not tell the markets or our clients.”
2) The relevant clause in the contract of employment (Clause 14) said this:
(a) Termination with Notice
ANZ may terminate your employment for any reason by giving you 4 months’ written notice. Alternatively, ANZ may elect to provide you with payment in lieu of notice or a combination of notice and payment in lieu of notice. Payment in lieu of notice made under this clause will be calculated on the basis of your Total Employment Cost (TEC) as described in Schedule A.
During the notice period or any part of it, ANZ may direct you not to perform all part of the duties of your position, to cease communication with customers, suppliers, employees and contractors of ANZ and not to attend your principal place of work.
(b) Immediate Termination Without Notice
ANZ may terminate our employment at any time, without notice, if, in the opinion of ANZ, you engage in serious misconduct, serious neglect of duty, or serious breach of any of the terms of this employment agreement. In such circumstances, you will be entitled to payment of your total Employment Cost (TEC) (as described in Schedule A) up to the date of termination only.
Judgment at first instance – Adamson J  NSWSC 1662
In dismissing Mr Bartlett’s claim for damages for breach of contract, Adamson J heldthat ANZ did not have to establish that Bartlett did in fact send the email – all it needed to establish was that it held the opinion, bona fide, that Bartlett had engaged in serious misconduct. (She went on to also rule that he did in fact send the email and thus had committed serious misconduct – a finding that was overruled by the Court of Appeal – see below.)
Adamson J rejected the contention for Bartlett that there was an implied term in the contract that the opinion of ANZ was required to be “reasonable, correct, formed in good faith, with proper regard for [his] interests and in compliance with the Performance Policy and neither capricious, arbitrary or unreasonable.”
Her Honour found that such an implied term did not satisfy the traditional tests for implying a term in a contract and thus rejected its importation into the contract between Mr Barrett and ANZ. She referred to the fact that the issue about whether notions of “good faith” or “reasonableness” could be implied into contracts was not settled and had not been addressed by the High Court in Barker’s case, and in particular observed that the question of “whether contractual powers and discretions may be limited by good faith and rationality requirements adopted and adapted from public law is not settled”.
Her Honour went on to hold that the relevant decision maker at ANZ in that case held the requisite opinion “in good faith”, and that was sufficient to dispose of the matter.
Court of Appeal decision
The Court of Appeal unanimously overruled the decision of Adamson J – it upheld Mr Barrett’s appeal, set aside the orders of Adamson J and awarded him damages of $110,000 with interest (from dismissal date on 15 August 2012 to date of judgment on 7 March 2016), plus costs.
The actual ruling of the Court of Appeal (as distinct from the various facets upon which opinions were expressed) had three limbs:
(i) On the proper construction of Clause 14 (b), read in the context of the entire contract, ANZ had to have a reasonable basis in fact to dismiss Mr Bartlett for serious misconduct – it was not sufficient for it to merely act “in good faith” in order to satisfy the requirements of the sub clause;
(ii) Because ANZ had dismissed Mr Barrett for serious misconduct, it had the onus of demonstrating that he was in fact guilty (ie that he was in fact the author of the offending email) but failed to discharge its onus because the handwriting evidence it relied on did not justify such a finding; and
(iii) Even if it was sufficient for ANZ to merely act on its opinion in good faith, nevertheless in forming its opinion it had to act reasonably in its process of investigating the matter, and this it had failed to do.
While the foregoing sufficed to deliver judgment in favour of Mr Bartlett, and some measure of justice after three and a half years, for the purposes of this article some of the other remarks in the judgments are instructive.
McFarlane JA (who delivered the leading judgment) reviewed the various authorities concerning the implying of “good faith” and “reasonableness” notions into contracts (including employment contracts) and, while acknowledging the authority of Barker’s case, nevertheless held that in an employment contract the exercise of a power or discretion by an employer had to “at least” respect the “public law” principle established by Associated Provincial Pictures Houses Ltd v Wednesbury Corporation  1 KB 223 – namely that no conclusion can stand when it is “so unreasonable that no reasonable decision maker would ever have come to it”. His Honour’s view on that point was concurred in by the other members of the Court of Appeal. It is noticeable also that his Honour prefaced this ruling by the words “at least” – meaning that he was not ruling out the possibility that the duty on the employer might be stronger than that adapted from the Wednesbury case – but that would be a matter for the High Court later to rule on in an appropriate case.
McFarlane JA also ruled that if ANZ had dismissed Mr Bartlett on notice (or payment in lieu of notice) there was no obligation on ANZ to act reasonably or in good faith in that regard, as the contract said that such a form of dismissal could be undertaken “for any reason”, and the case law did not support any contrary view. While Meagher JA agreed with his Honour, Simpson JA declined to join in that ruling. This may be significant, as it demonstrates that there remain differences of view among judges as to whether there ought be implied into contracts (including employment contracts) a requirement that any power or discretion conferred by a contract should be exercised “reasonably and in good faith” – precisely the point left open by the High Court in Barker.
Conclusion for now: High Court ruling needed…
From these cases, one can see that the notion of an implied contractual term of “good faith and fair dealing”limiting the rights of parties under an employment contract (insofar as contractual powers and discretions are concerned) is a “live issue” at the intermediate judicial level in Australia, although generally speaking the implication of such a term into commercial contracts now seem to be relatively routine (even if such terms are not yet held to be implied by law into all such contracts).
It is now over 12 years since the High Court noted in the Royal Botanic Gardens case that the existence and content of a “good faith and fair dealing” implied term in contracts had not been decided upon by it. In Barker, the observation was in effect repeated, in the context of an employment case. The issue does need to be addressed, but of course there has to be a suitable case presented to the Court, and that may be some time off yet. And an employment contract case would be needed to resolve the issue (although the result of such a case might not resolve the position in relation to commercial contracts).