Express law No. 52

7 March 2007

New grounds for employees to sue employers for breach
of contract

In an Australian first, a superior court has held that
there are implied conditions in a contract of employment
that the employer owes the employee a duty of good faith
and a duty of trust and confidence.

Russell v Trustees of the Roman Catholic Church for the
Archdiocese of Sydney

NSW Supreme Court, 19 February 2007, Rothman J
[2007] NSWSC 104

Background

The plaintiff, David Russell, was dismissed on 31 January
2003 from his duties as Director of Music at St Mary's
Cathedral, following dismissal of criminal charges in 2000
and an internal investigation by the Roman Catholic Church
(the Church) into alleged sexual misconduct.

In February 2003 Mr Russell commenced proceedings in the
NSW Industrial Relations Commission under the Industrial
Relations Act 1996 (NSW). On 1 June 2004, Deputy President
Harrison found that the termination was harsh, unreasonable
and unjust, and ordered reinstatement with restitution
of wages and continuity of service for all purposes. Mr
Russell continued his employment from 1 June 2004.

Mr Russell
incurred substantial legal costs in the Commission proceedings.
He was not awarded those costs.

Mr Russell commenced his Supreme Court proceedings in
March 2006. He sought damages for breach of contract, in
particular for breach of allegedly implied terms of good
faith and/or mutual trust and confidence. Alternatively
he sought damages for wrongful dismissal. Among other damages,
he claimed the legal costs which he had incurred in the
Commission proceedings, being $350,000.00 (including interest).

Summary of decision

In conclusion, Rothman J found that:

  • the contract of employment between the Church and
    Mr Russell had an implied duty of good faith
  • the contract also had an implied duty that the Church
    would not, without proper and reasonable cause, conduct
    itself in a manner calculated or likely to destroy or
    seriously damage the relationship of confidence and trust
    between the parties
  • the Church had breached the implied duties and had
    wrongfully dismissed Mr Russell but that no damage was
    sustained as a result of the breaches.

Rothman J therefore ordered a verdict for the defendants
and ordered that the plaintiff pay the defendants' costs
in the Supreme Court (not the Commission).

Implied duties found to exist

Rothman J ruled that there was an implied duty of good
faith and an implied duty of trust and confidence in the
employment contract between the Church and Mr Russell.

The implied duty of good faith and the implied duty of
trust and confidence are well accepted in England (Mahmud
v Bank of Credit and Commerce International (BCCI) [1998]
AC 20).

Rothman J considered that previous Australian case law
had not ruled that the implied duty of good faith exists
and had not ruled at an appellate level that the implied
duty of trust and confidence exists, although there was
some existing judicial support at lower levels.

Implied duty of good faith

The duty was described by Rothman J as follows:

… the rights and/or duties reposed in either the
employer or the employee would need to be exercised honestly
and reasonably; with prudence, caution and diligence,
and with "due care to avoid or minimise adverse
consequences" to the other party that are inconsistent
with the agreed common purpose and expectations of the
parties to the contract. But all the while, the parties
have the capacity to exercise their rights in their own
interests. [118]

His Honour held at [112] that the duty of good faith is
not a duty of utmost good faith and that it is something
less than a fiduciary duty.

On this analysis, the duty of good faith is a mutual duty
owed both by employer and employee. However, for the purposes
of this decision, it was only necessary for the court to
rule that the employer owed the duty to the employee.

Implied duty of trust and confidence

Rothman J held that the duty was a duty, without reasonable
and proper cause, not to conduct oneself in a manner calculated
or likely to destroy or seriously damage the relationship
of confidence and trust between the employer and employee.

His Honour held that the duty is mutual and is an aspect
of the trust and confidence which is essential for the
employment relationship. He held that the duty of trust
and confidence is an implied duty which cannot be excluded
from a contract of employment.

Assessing whether duties breached

Rothman J applied a balancing exercise in assessing whether
the duties had been discharged. For example, his Honour
said at [160] that the implied duties require a balance,
in good faith, of the interests of the employer against
adverse effects it may have on the employee.

The court had regard, for example, to the interest of
the Church in protecting the children in its care and to
the entitlement of the Church to terminate Mr Russell's
employment if satisfied that the continued employment of
Mr Russell presented for it an unacceptable risk of injury
or harm to the children in its care.

Effect of implied duties on termination on reasonable
notice

If the Church had exercised its common law right to terminate
the contract on reasonable notice, this would not have
involved any breach of the implied duties. Rothman J said
at [141] that:

[a]lmost by definition, the implied duty, not to act
to destroy the relationship of trust and confidence,
will not interfere with the right of a party to a contract
of employment to terminate the contract.

Effect of implied duties on investigation of misconduct

The implied duties extended to the manner in which the
investigation of Mr Russell was conducted. Rothman J held
at [164] that the Church had a duty to ensure that the
investigation was carried out with 'prudence, caution
and diligence'.

One of the key deficiencies identified by Mr Russell was
that the key evidence upon which this decision was made
was the evidence of 'Mr X' who was only interviewed
on the telephone and not face-to-face. On this matter Rothman
J held at [164]:

Given the Church's resources and infrastructure,
it should have, as a matter of prudence, caution and
diligence, and taking into account the significant prejudicial
effect of any such investigation, interviewed Mr X face-to-face.
It was a breach of the Church's duties to do otherwise.

Having regard to the cross-examination of Mr X in the
Commission proceedings, Rothman J was satisfied that breach
of this duty would have made no difference to the outcome
and therefore no damages were payable in respect of this
breach.

Wrongful dismissal

The court held that it was open to the Church to be satisfied
that Mr Russell was a real and unacceptable risk to the
children in its care and that the Church was entitled to
terminate the employment of Mr Russell on that basis.

The court held that Mr Russell had been wrongfully dismissed
because the Church had purported to pay compensation in
lieu of notice. Under the implied terms of the employment
contract the Church was only entitled to give reasonable
notice of termination and could not pay an amount in lieu
of notice. The Court found that no damage was suffered
as a result of the breach.

The court ruled that Mr Russell had no entitlement to
compensation for the $350,000 in legal expenses incurred
in the Commission proceedings, in part because any award
of such damages would be inconsistent with the legislation
relating to the Commission proceedings.

Further, the court found that damage to reputation had
followed the media coverage and not the dismissal itself.
The court also stated that there was not sufficient evidence
on which to base damages claims for the 'injured
feelings' that Mr Russell complained of.

Implications for agencies

It has been well established for a long time in Australian
law that employees, including APS employees, have a duty
of good faith and fidelity (or loyalty and fidelity) to
the employer, although the content of the duty is not clear
(Bennett v President, Human Rights and Equal Opportunity
Commission [2003] FCA 1433; see AGS Litigation Notes No.
11, 22 October 2004).

Australian Government agencies have a long history and
practice of acting as a model employer. However, the decision
in Russell reinforces the need for agencies to act honestly
and reasonably, and with prudence, diligence, caution and
due care, when exercising employer powers and entitlements,
or otherwise dealing with employees. It is now clear that
a failure to do so can have legal consequences.

Text of the decision is available at:
http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2007/104.html

For further information please contact:

Paul Vermeesch
Special Counsel Litigation
T 02 6253 7428 F 02 6253 7381
paul.vermeesch@ags.gov.au

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