Mutual trust and confidence in employment contracts: has the door to damages been thrust open?

Key Points:

Employers face greater exposure to damages for breaches of mutual trust and confidence in employment contracts, following a recent judgment of the NSW Court of Appeal.

Whether a term of mutual trust and confidence is implied in every employment contract has received considerable attention in recent years. In Australia, it has now been accepted that it will generally be implied into employment contracts, but Australian courts have been reluctant to award damages for a breach of that term. The NSW Court of Appeal case of Shaw v State of New South Wales [2012] NSWCA 102 has suggested that courts may be more willing to order damages in the future.

What is the term of mutual trust and confidence and how is it applied?

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."

While the term has been recognised in Australian trial and appellate courts, the High Court is yet to make a definitive ruling on its existence, scope and operation. Lower courts have limited the application of mutual trust and confidence in two ways:

first, 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 (applied in Johnson v Unisys Ltd [2003] 1 AC 518 and...