Smith v Ventia Pty Ltd

Case •

[2023] NSWSC 517

•

17 May 2023

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Smith v Ventia Pty Ltd [2023] NSWSC 517
Hearing dates: 24 April 2023
Date of orders: 12 May 2023
Decision date: 17 May 2023
Jurisdiction:Common Law
Before: Fagan J
Decision:

1 Pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 the proceedings be dismissed.

2 Costs are reserved.

Catchwords:

EMPLOYMENT AND INDUSTRIAL LAW – contract – implied terms – whether contract contained implied term of good faith – whether employer’s independent discretion to terminate employment on notice without cause subject to implied term of reasonableness

CONTRACTS – remedies – damages – causation – whether employee’s loss of earnings following termination attributable to employer’s failure to act in good faith during subsistence of the employment – whether employer’s earlier breach of good faith term could be causative of employer’s own decision to terminate – employer’s exercise of independent discretion broke the chain of causation to loss of earnings damages

CIVIL PROCEDURE — summary disposal — dismissal of proceedings — no reasonable cause of action disclosed

Legislation Cited:

Uniform Civil Procedure Rules 2005 (NSW), r 13.4

Cases Cited:

Russell v The Trustees of the Roman Catholic Church [2007] NSWSC 104

Russell v The Trustees of The Roman Catholic Church [2008] NSWCA 217

Van Efferen v CMA Corporation Limited [2009] FCA 597

Addis v Gramophone Co Ltd [1909] AC 488

Johnson v Unisys Ltd [2003] 1 AC 518

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24

Bartlett v Australia & New Zealand Banking Group Ltd (2016) 92 NSWLR 30; [2016] NSWCA 30

Texts Cited:

JD Heydon, Heydon on Contract, 2019, Thomson Reuters

Category:Principal judgment
Parties: Erol Smith (plaintiff)
Ventia Pty Ltd (defendant)
Representation:

Counsel:
R Kumar (plaintiff)
M Watts (defendant)

Solicitors:
Dowson Turkon Lawyers (plaintiff)
Kingston Reid (defendant)
File Number(s): 2022/67117
Publication restriction: No

JUDGMENT

  1. On 24 April 2023 the Court heard a notice of motion filed by the defendant on 2 March 2023 claiming orders as follows:

1 An order pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 (UCPR) that the entire proceeding be dismissed.

2 In the alternative to order 1 above, an order pursuant to r 13.4 of the UCPR that those parts of the proceeding that fail to disclose a reasonable cause of action or that are otherwise an abuse of process be dismissed.

  1. The underlying proceeding is an action by the plaintiff for damages for wrongful termination of his contract of employment with the defendant. The notice of motion was listed when the trial of the action had already been fixed for a date three weeks later, namely, 15 May 2023. The argument concerning summary dismissal of the proceedings proved more complex than had been anticipated when the hearing of the notice of motion was appointed to a date so close to the trial. It was not possible to prepare reasons promptly after the hearing of the application on 24 April 2023, or reasonably in advance of the trial date.

  2. Upon the Court concluding that the defendant’s application for summary dismissal should succeed it became necessary to pronounce orders to that effect and to vacate the trial fixture, on 12 May 2023. The following orders were made:

1 Pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 the proceedings be dismissed.

2   Costs are reserved.

At the same time directions were given for submissions and evidence to be filed and served on the issue of costs. The Court’s reasons for summary dismissal of the proceedings were reserved and are now published.

Circumstances giving rise to the plaintiff’s claim

  1. The plaintiff was employed as the defendant’s operations manager from 16 April 2018 until 4 September 2020. Throughout that period the defendant had a long-term contract with the Royal North Shore Hospital under which it managed the maintenance of the hospital’s facilities.

  2. In about November 2018 Ms Courtney Epps commenced working for the defendant as a project coordinator at the hospital. On 1 July 2020 Ms Epps made a formal written complaint concerning the plaintiff to Ms Janene Browning, a human resources manager also employed by the defendant. In broad terms her complaint was that the plaintiff had interacted with her in disrespectful and discouraging terms and had refused her requests for various opportunities, such as working from home and a pay rise. The details are not presently material. By 13 July 2020 the defendant had referred the complaint to a private firm of solicitors for investigation. The solicitors interviewed Ms Epps, obtained a written response from the plaintiff and interviewed him, interviewed some other employees nominated by either Ms Epps or the plaintiff and reviewed the defendant’s documentary Code of Conduct and its workforce behaviour policies.

  3. In July or early August 2020 Ms Epps left the defendant’s employment of her own accord. On 17 August 2020 the investigating solicitors issued to the defendant a report in which they found some of Ms Epps’ allegations substantiated and others not. The solicitors concluded that the plaintiff had breached the defendant’s Code of Conduct and its policies. Their recommendations included the following:

As Ms Epps has left the workplace, there is no longer a risk that she will be exposed to workplace bullying by Mr Smith. […]

In order to protect the health and safety of its other employees, and to minimise the risk of potential litigation, we recommend that Ventia take swift action to address the workplace conduct of Mr Smith.

Mr Smith should be advised of the outcome of this investigation and Ventia must determine whether disciplinary action is required.

  1. On the basis of this report, by email of 3 September 2020 Ms Browning made the following recommendations, amongst others, to the defendant’s Executive General Manager:

Retention of an employee under these circumstances places Ventia at risk of claims for workers compensation and of negligence for failing to provide a safe working environment.

No mitigating circumstances exist to consider an alternative outcome to termination of Mr Smith.

The following recommendations are made:

1   John Smith’s employment be terminated for breach of: Ventia Code of Conduct, Ventia Bullying and Harassment Policy and Ventia Workplace Behaviour Policy.

[…]

  1. The Executive General Manager accepted Ms Browning’s advice, by return email, and on 4 September 2020 she communicated the decision to the plaintiff orally, in person. The plaintiff’s recollection of her words, as deposed to in his affidavit affirmed on 4 August 2022, is as follows:

John, we have decided that your employment will be terminated with Ventia as of today. This is because we have determined that you have breached Ventia’s code of ethics by engaging in bullying and harassment. You will receive four weeks’ pay in lieu of notice, plus an additional week because you are over 55.

  1. The plaintiff requested confirmation of this decision in writing and a copy of the solicitors’ investigation report. The defendant refused both. To obtain a copy of the report it became necessary for him to apply to the District Court for an order for preliminary discovery. That application was resisted by the defendant but the order was made by his Honour Judge Scotting on 8 June 2021.

  2. When the plaintiff commenced employment with the defendant he accepted a written offer dated 13 April 2018 that contained the following terms regarding termination:

8   Termination of employment

8.1   Either you or the Company may terminate your employment at any time by giving the period of notice set out in Item G of the Term Schedule or by the Company paying you in lieu of notice.

8.2   If however, you engage in misconduct or otherwise commit a serious or persistent breach of a term of this contract, or which, in the view of the Company, is a fundamental breach of this contract, the Company may terminate your employment immediately without notice.

  1. Item G of the Term Schedule prescribed a period of notice of five weeks, based upon the plaintiff’s age and period of service as at September 2020. It is common ground that in the conversation with Ms Browning referred to above she directed the plaintiff to collect his personal possessions and leave the defendant’s premises immediately. He was paid five weeks’ salary in lieu of notice. The termination of the plaintiff’s employment involved no breach of the express terms of the contract. It was authorised by cl 8.1. The plaintiff’s claim for damages depends upon the implication of one or both of two additional terms that the plaintiff has pleaded.

Implied “Good Faith Term”

The pleaded case on the Good Faith Term

  1. The first implied term that the plaintiff contends for is directed to conduct of the defendant prior to it exercising its right to terminate on payment in lieu of notice, pursuant to cl 8.1. This implied term is pleaded in par 8 of the Amended Statement of Claim as follows:

8   The […] Contract contained an implied term requiring the Defendant to:

a.   conduct itself towards the Plaintiff reasonably;

b.   conduct itself towards the Plaintiff honestly;

c.   conduct itself towards the Plaintiff in good faith;

d.   refrain from any conduct towards the Plaintiff which was capricious or arbitrary; and

e.   refrain from any conduct towards the Plaintiff which was unconscionable.

(the Good Faith Term).

Particulars

i.   The Good Faith Term was implied by law and/or in fact.

ii.   It was necessary to imply the Good Faith Term into the Second Contract because:

(a) the Plaintiff was not an employee protected from unfair dismissal within the meaning of section 382 of the Fair Work Act 2009 (Cth);

(b)   the Plaintiff was not covered by any modern award;

(c)   the Plaintiff was not covered by any enterprise agreement;

(d)   it would be absurd and contrary to community values if an asymmetrical duty- i.e. a good faith obligation owed by employees and not employers is held to exist;

(e)   in the premises of the preceding particulars (a) to (d), the rights of the Plaintiff would be rendered nugatory, worthless or be seriously undermined absent the implication.

  1. It is made clear by the plaintiff’s pleading of alleged breach of this implied term, in par 19 of the Amended Statement of Claim, set out below, that the term is not alleged to have applied to or conditioned the defendant’s exercise of its right to terminate on notice under cl 8.1. The exercise of the express right to terminate is alleged to have been qualified by the second implied term, the Reasonable Exercise of Discretion Term, pleaded at par 9 of the Amended Statement of Claim. The plaintiff’s submissions on the hearing of the notice of motion confirmed that the implied Good Faith Term in par 8 is only said to have bound the defendant and to have been breached by it during the subsistence of the employment contract.

  2. Breach of the Good Faith Term is pleaded as follows:

19   The Defendant breached the Good Faith Term by reason of the following conduct:

a   the Defendant failed to inform the Plaintiff which of the Allegations had been substantiated in the Investigation Report;

b   the Defendant failed to identify to the Plaintiff the basis on which any of the Allegations had been substantiated in the Investigation Report;

c   the Defendant failed to provide the Plaintiff with an opportunity to respond to the proposed termination of his employment prior to determining to effect, and effecting, the Termination;

d   the Defendant did not carry out, or engage any external firm to carry out, an investigation of those allegations in Ms Epps' Complaint relating to the conduct of Mr Lynch;

e   the Defendant did not carry out, or engage any external firm to carry out, an investigation of those allegations in Ms Epps' Complaint relating to the conduct of Mr Krause;

f   the Defendant did not dismiss, or otherwise impose disciplinary action on, Mr Lynch, notwithstanding that the Investigation Report found that at least some of the conduct about which Ms Epps complained could be attributed to Mr Lynch;

g   the Defendant did not dismiss, or otherwise impose disciplinary action on, Mr Krause, notwithstanding that the Investigation Report found that at least some of the conduct about which Ms Epps complained could be attributed to Mr Krause;

h   the Defendant purported to find that the Plaintiff had breached the Defendant's Code of Conduct and engaged in bullying or harassment of Ms Epps where the Investigation Report did not provide a sound, well-founded and defensible basis to consider that the Plaintiff had breached the Defendant's Code of Conduct or engaged in bullying or harassment of Ms Epps.

Particulars

As to paragraph (h):

i   The Investigation Report established that at least one of Ms Epps' allegations against the Plaintiff had been false.

ii   Many allegations made by Ms Epps against the Plaintiff could not be substantiated.

iii   Many allegations made by Ms Epps against the Plaintiff were not supported by the witnesses interviewed, including those witnesses whom Ms Epps had identified.

iv   The above matters should have caused an adverse inference to be drawn about Ms Epps' credibility and/or recollection.

v   The Plaintiff exercised some supervisory responsibility over Ms Epps, and either all or some of the allegations made by Ms Epps against the Plaintiff related to conduct that would amount to reasonable management action.

vi   Allegation 2 was substantiated without a proper or reasonable basis, as the conduct was denied by the Plaintiff and uncorroborated by any witness.

vii   The allegations substantiated in the Investigation Report did not amount to a breach of the Code of Conduct, or bullying or harassment of Ms Epps.

viii   The Investigation Report revealed that other employees of the Defendant had engaged in, or were continuing to engage in, conduct of the kind that purportedly justified the dismissal of the Plaintiff from his employment.

  1. As it is only alleged that the Good Faith Term created obligations to be fulfilled by the defendant during the subsistence of the employment contract, it might be thought that breach of the Term, if it should be implied, could not be causative of the damage claimed by the plaintiff. The only head of damage claimed is loss of salary following termination, pleaded in pars 20-22 of the Amended Statement of Claim as follows:

20   Prior to the termination, the plaintiff intended to remain in his employment with the defendant until at least 7 September 2025.

21   But for any or all of the breaches of the […] Contract set out in paragraphs 19 and 19A, the plaintiff would have remained in his employment with the defendant until at least 7 September 2025.

22   In the premises of paragraphs 20-21, the plaintiff has suffered loss and damage.

Causation of post-termination loss of earnings

  1. In order to establish a causative nexus between the defendant’s alleged breach of the Good Faith Term during the subsistence of the contract and the plaintiff’s loss of earnings after termination, the plaintiff submits that the defendant’s failure to fulfil the Good Faith Term caused it to exercise the cl 8.1 right, which otherwise it would not have exercised. That is a novel concept of causation of damage. It involves, as the first link, that one party’s failure to perform a contractual obligation may be regarded in law as having caused that same party to exercise, regularly, a contractual right to bring the contract to an end. The second link is that the first party’s exercise of the right of termination occasions economic loss to the party who was innocent in relation to the earlier breach. The plaintiff’s argument purports to join the two links as a chain of causation, from the employer’s earlier failure to perform a substantive contractual obligation through to the loss occasioned by its exercise of the right of termination.

  2. The plaintiff submits that this analysis satisfies the “but for” test of causation of damages for breach of contract. It is said that but for the defendant’s earlier breach of the implied Good Faith Term the defendant would not have exercised its cl 8.1 right of termination and the plaintiff would not have suffered his subsequent loss of earnings.

  3. In JD Heydon, Heydon on Contract, 2019, Thomson Reuters the learned author summarised the law on this subject as follows (some citations omitted):

[26.510] Causation tests

The leading decision of the High Court on causation is March v E & MH Stramare Pty Ltd (1991) 171 CLR 506. It is a negligence case, but its reasoning requires that the ideas about causation employed in that case be applied to contract [Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 174–175]. That case and others establish the following propositions.

It is a precondition to the recovery of non-nominal damages for breach of contract that there be a causal connection between the breach and the plaintiff's loss. That is, or can be, a question of fact. It is a question of fact on which the plaintiff bears the burden of proof. But it is an unusual question of fact. It has to be determined “by a value judgment involving ordinary notions of language and common sense”. Lord Reid said that causation “must be determined by applying common sense to the facts of each particular case” [Stapley v Gypsum Mines Ltd [1953] AC 663 at 681, approved in March v E & MH Stramare Pty Ltd at 515]. […]

The “but for” test is a common but not sufficient test for causation.208 Where a possible cause of loss is the defendant's breach, but other possible causes lie in the conduct of the plaintiff or a third party, “the ‘but for’ test, while retaining an important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive positive test” [Medlin v State Government Insurance Office (1995) 182 CLR 1 at 6 per Deane, Dawson, Toohey and Gaudron JJ, citing March v E & MH Stramare Pty Ltd at 515–519 and 522–524]. Mason CJ (Gaudron J concurring) said that “the lesson of experience [is] that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of value judgments and the infusion of policy considerations” [March v E & MH Stramare Pty Ltd at 516] As McHugh JA said, “in the case of damage caused by the simultaneous operation of two separate and independent events each of which alone was sufficient to cause the damage, the single ‘but for’ test is plainly inadequate” [Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 at 351].

[…]

[26.540] Extraneous events or novus actus interveniens

The court may conclude that there is no causal link between a breach of contract and a head of damage because some extraneous event breaks or interrupts the chain of causation. The authorities in contract are much less numerous than those in tort.

  1. In further discussion of extraneous events the learned author considers cases of intervening conduct by the innocent party or by a third party. The author does not identify any case in which it has been held that, following a non-repudiatory breach, if the at-fault party brings the contract to an end by exercising an unconstrained right to do so on notice or on payment in lieu, the court may nevertheless find an unbroken chain of causation between the original breach and any loss that the innocent party suffers as a result of the lawful termination. I am unaware of any decision that would permit the court not to recognise the exercise of that right as a novus actus inteveniens.

  2. The plaintiff submits that Ms Browning’s words at the point of termination, quoted at [8] above, prove a causal link from breach of the alleged Good Faith Term to the employer’s exercise of its rights under cl 8.1 and from that event to the loss of income that followed. However, Ms Browning’s nomination of a ground or reason for termination under cl 8.1, where none was required by the contract, cannot establish legal causation of loss of income damages.

  1. The plaintiff’s contention that his income loss due to termination was caused by breach of the implied Good Faith Term is not maintainable in law. Assuming that such a term is to be implied and that it was breached as alleged in par 19 of the Amended Statement of Claim, the first link in the causative chain propounded by the plaintiff is insupportable. It is not legally recognisable that the defendant’s failure to fulfil an affirmative obligation under the contract may be treated as a cause of it exercising its distinct contractual right in cl 8.1. Perhaps as another way of expressing the same point, the defendant’s exercise of its cl 8.1 right of termination must in law be regarded as having intervened to break any causal connection between the original breach of the Good Faith Term and the plaintiff’s loss of income following termination.

Van Efferen v CMA Corporation Limited

  1. The plaintiff cited Van Efferen v CMA Corporation Limited [2009] FCA 597. In that case the employer (“CMA”), based in Geelong, was performing a demolition contract at Port Hedland. The work there was underway in 2006 and was expected to continue until April 2008. The employee was assigned to work on the contract as marine supervisor. His workplace agreement contained termination provisions that were summarised by Tracey J as follows:

[29]   Clause 2.1(b) provided that the agreement could be terminated by either party on the giving of prescribed periods of notice. CMA could terminate the contract by paying wages in lieu of the prescribed notice period. Provision was also made for summary dismissal for serious misconduct. Separate provision was made, in clause 2.7, for CMA to contribute to a redundancy trust fund from which payment was to be made in the event of an employee becoming redundant. There was, however, no specific provision in the [agreement] that it could be terminated in the event that the employee had become redundant.

  1. Clause 2.10 of the agreement prescribed a grievance procedure that was expressed to be “designed to deal with CMA’s concerns about the behaviour of its employees”. The procedure comprised four steps, the first of which was that the employee and CMA’s manager would “discuss the issue”. If the employer’s concern continued there were further, graduated steps to be taken, with formal counselling and warnings to be given in writing. Ultimately, a written warning could be given by a more senior manager and if CMA was still concerned the employment could be terminated.

  2. In mid-October 2006 CMA’s site manager in Port Hedland expressed to the employee strong dissatisfaction with him and then arranged for him to be recalled to Geelong. The company knew that it had no gainful work to offer him at its base. He was engaged upon maintenance tasks at Geelong for about two weeks until his employment was terminated, with payment of wages in lieu of notice and a redundancy payment and other entitlements in accordance with the contract. The employee’s position at Port Hedland had not become redundant but was filled by another person.

  3. Tracey J held that CMA had breached cl 2.10 by failing to carry out any of the steps that the clause prescribed for resolving the Port Hedland site manager’s concerns. The employee claimed his lost income after termination as damages for the breach of cl 2.10. The Court was satisfied that if his employment had not been terminated the employee would have continued on the demolition contract until it was completed in April 2008. His Honour noted that the issue of whether his loss of income following termination was caused by CMA’s breach of its obligation to adhere to the grievance procedure in cl 2.10 arose in the following way:

[51] Mr Van Efferen’s first cause of action is founded on s 721 of the [Workplace Relations Act 1996 (Cth)]. Section 721(1) provided that:

“A party to an AWA who suffers loss or damage as a result of a breach of the AWA by the other party may recover the amount of the loss or damage in an eligible court.”

It is, therefore, necessary for Mr Van Efferen to show that CMA’s breach of clause 2.10 was the proximate cause of the loss and damage which he seeks to recover: cf S & Y Investments (No 2) Pty Ltd (In Liq) v Commercial Union Assurance Company of Australia Ltd (1986) 85 FLR 285 at 291-294. Whether the breach was a proximate cause of Mr Van Efferen’s loss and damage is a question of fact.

  1. His Honour rejected CMA’s factual contentions that if its breach of cl 2.10 had not occurred the employee would in any event have been removed from the Port Hedland project before April 2008. CMA propounded a range of other circumstances that would have caused it to recall him and submitted that it would then have had no reason to continue his employment and would, instead, have terminated it. His Honour determined the issue of causation of damage as follows:

[62]   […] The contract was terminable for serious misconduct which warranted summary dismissal and otherwise by the giving of prescribed periods of notice. Had CMA not breached clause 2.10 the contract would not have been terminated and Mr Van Efferen would have continued working at Port Hedland until the completion of the [demolition] project in April 2008. The breach of clause 2.10 was a proximate cause of Mr Van Efferen’s loss of the salary and other benefits to which he was entitled as the marine supervisor for CMA on the [demolition project].

  1. The employer’s arguments about causation in Van Efferen v CMA Corporation Limited were limited to the factual issue of whether its failure to implement the grievance procedure was a proximate cause of the employee having been recalled to Geelong. That was resolved in favour of the employee. CMA appears not to have challenged the proposition that, upon the employer then exercising its right to terminate on payment in lieu of notice, loss of earnings that followed from the termination should be regarded as having been caused by the earlier breach of cl 2.10 that had resulted in his recall. No submissions were made that the exercise of the right to terminate was an intervening event between the failure to observe the grievance procedure and the loss of income. There was no submission that the breach of cl 2.10 could not in law be regarded as having caused the employer to exercise the independent right of termination, or that the exercise of that right disrupted and negated any legally recognisable causal connection between the original breach of cl 2.10 and the loss of earnings. Tracey J did not have to decide any such questions and his decision is therefore not authority against the conclusion that I have reached in the present case, where issues of that nature were raised by the defendant (at pp 9, 10, 26-28 and 65-68 in the transcript of oral argument) and were responded to by the plaintiff’s counsel (at pp 37-41, 57).

  2. The plaintiff’s claim based upon the implied Good Faith Term is doomed to failure on the issue of causation of damage. I will consider the further authorities cited by the parties, relative to the cause of action pleaded in pars 8 and 19-22.

Russell v The Trustees of the Roman Catholic Church

  1. In Russell v The Trustees of the Roman Catholic Church [2007] NSWSC 104 the contract of employment between the plaintiff and the Church was made orally and informally, with no express terms concerning duration or termination. The Church caused an investigation to be made of allegations that the plaintiff had engaged in sexual misconduct towards children. The Church concluded “that there was a real risk to children in its charge and which risk it was not prepared to take”: [163]. It then immediately terminated the plaintiff’s employment, without notice but with payment of six months’ salary in lieu.

  2. Rothman J held:

[144]   If […] the Church had chosen, for no reason, to terminate the employment of Mr Russell, it could have done so lawfully by the giving reasonable notice of termination. It could have done so, at common law, without giving a reason and without proving fault. However, this is not how the Church acted.

After referring to the Church’s inquiry into the allegations against the plaintiff, his Honour continued:

[150]   [There] were no express provisions of the contract of employment dealing with the termination of the contract. In those circumstances there is implied in a contract of employment the right of either party to terminate the contract on reasonable notice. The common law does not give a right to terminate a contract of employment on payment in lieu of reasonable notice. In those circumstances, the immediate termination of employment by the Church, and payment purportedly in lieu of reasonable notice, was a breach of the contract for which, subject to the rules of mitigation, damages are payable.

  1. Rothman J said that in ordinary circumstances damages would be payment of salary for the period of reasonable notice that ought to have been given, which his Honour thought would have been no less than 12 months: at [169]-[170]. The plaintiff obtained an order for reinstatement from the Industrial Relations Commission, consequent upon which the Church paid the plaintiff the income he had not received. Accordingly, no damages had been suffered as a result of the wrongful termination.

  2. His Honour held that a duty of the employer to act in good faith was implied by law in the contract of employment. First, as to the content and scope of the implied term his Honour said this:

[117]   In the context of an employment relationship, if there exists a duty to act in good faith it “imports a requirement that the person doing the act exercise prudence, caution and diligence,” which would mean due care to avoid or minimise adverse consequences to the other party.

  1. Then at [118], after referring to the absence of any express terms regarding how the parties were to regulate their relationship and to the fact that their exercise of rights and performance of duties would necessarily impact upon each other, his Honour held as follows:

[118]   […] In those circumstances, it is impossible to imagine that the contract of employment could operate without a duty of good faith. And in those circumstances, 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.

  1. Rothman J also held that there is implied by law in an employment contract a separate duty of trust and confidence, which his Honour expanded in the following terms:

[120]   … a duty not, without reasonable and proper cause, to act in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

[126]   […] Trust and confidence, reposed by each of the employer and employee in the other, is a necessary concomitant of the right to control. It is essential to the contract of employment.

[127]   […] Without trust and confidence there is no submission and subordination and no right of control. Without trust and confidence there is no contract of employment.

[128]   Such an analysis renders the duty not to act in a manner calculated or likely to destroy the relationship of trust and confidence in a fundamentally different position. Unlike most other implied duties, it cannot be excluded unless one does not want to have a contract of employment. […]

  1. At [134] Rothman J acknowledged that issues concerning the content of implied terms of good faith and of mutual trust and confidence “await clarification by an appellate court”. His Honour’s reasons continued as follows:

[134]   […] In the meantime, the plaintiff claims the existence of both implied terms and part at least of their claim depends on that existence. It is, therefore, necessary for me to determine whether, under the common law of Australia, such implications arise. I determine that they do.

Effect of Implied Terms on Termination

[135]   The employer or employee may terminate a contract of employment by the giving reasonable notice of termination, except to the extent that there is an express provision to the contrary in the contract. The foregoing discussion and conclusion on the existence of the implied terms of good faith and of 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 employer and employee, does not deal with the question of whether, and if so how, such duties impact upon the capacity of the employer (or employee) to terminate on reasonable notice.

[136]   The English cases establish that the implied duties do not touch upon termination: Johnson v Unisys Ltd [2003] 1 AC 518. Although Lord Hoffmann (with whom Lord Bingham of Cornhill, Lord Nicholls of Birkenhead and Lord Millet agreed) took the view that the courts could imply an obligation to exercise the power of dismissal in good faith. This, he said, “did not mean that the employer could not dismiss without cause. The contract entitled him to do so. But in so doing, he should be honest with the employee and refrain from untruthful, unfair or insensitive conduct. He should recognise that an employee losing his or her job was exceptionally vulnerable and behave accordingly.”

[137]   In Johnson, there was an express provision in the contract relating to termination of employment. But the existence of an express provision, apart from setting the period of notice, does not alter the rights of either party to terminate on notice.

[138]   There is no authority, in Australia or in England, for the proposition that the implied terms to which I have referred apply to affect the right to terminate. The plaintiff accepts that limitation and submits that it is possible for the Court to separate out the dismissal from the conduct leading up to the dismissal, namely, the conduct of the investigation and events surrounding it.

  1. The plaintiff in that case claimed damages for psychological injury flowing from the way in which the employer had investigated his conduct, before terminating the contract. At [139]-[140] his Honour noted that the plaintiff did not claim that any duty to avert psychological damage “arose in relation to the termination of employment”. Rothman J added the following:

[140]   [The] rationale for the implication of the implied terms is a necessity to cooperate in the fulfilment of the contract of employment and/or the necessity to have such implied duties in order to make the contract of employment efficacious.

[141]   By its nature, an act terminating the contract of employment is inconsistent with the fulfilment of the contract of employment, its continuation, and the necessity to make it efficacious. Almost 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. It may be that the implied duty of good faith can operate at the point of termination, but it cannot operate in circumstances where the termination is, as a matter of fact and as a matter of law, without cause.

  1. His Honour found that the employer had breached its implied contractual duties by the manner in which it had investigated the allegations against the employee. However, he found that this breach “occasioned no damage and none is awarded”: [168]. The principal significance of this decision for present purposes lies in what his Honour said at [141]. Rothman J proceeded on the basis that there was to be implied in the employment contract a term substantially to the effect of that propounded in par 8 of the Amended Statement of Claim that is now under consideration. His Honour’s conclusion that such a term “will not interfere with the right of a party to a contract of employment to terminate the contract” and will not “operate in circumstances where the termination is, as a matter of fact and as a matter of law, without cause” supports my view that consequences to the employee from termination without cause, such as loss of income, cannot be treated as damages for breach of the implied duty of good faith. To recognise such damages as recoverable for breach of the implied term would allow it to “interfere with” the employer’s right of termination.

  2. On appeal, in Russell v The Trustees of The Roman Catholic Church [2008] NSWCA 217, Giles JA assumed that there were implied terms in the contract of employment “that the Church would act in good faith or would not without reasonable cause conduct itself so as to damage or destroy the relationship of trust and confidence”. It was not necessary for his Honour to decide the issue: at [1]. Campbell JA proceeded on the same basis: at [73].

  3. Basten JA noted the uncertain scope of the terms that Rothman J said were implied in the contract, particularly having regard to the fact that their field of operation must be constrained by the employer’s contractual right to terminate at any time on notice. His Honour held as follows (citations omitted):

[30]   Rothman J considered separately whether there were implied terms of good faith and of not acting, without reasonable and proper cause, in a manner calculated to destroy or seriously damage the relationship of confidence and trust between employer and employee. […]

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

[33]   Recognising that an employer may act with reasonable and proper cause to pursue its own interests, whether or not they are adverse to those of the employee, and may terminate the employment at any time without cause on giving notice, casts some uncertainty on the scope and extent of the implied duties. In Australia, they have enjoyed more limited recognition than in the UK and have usually been called in aid to identify the kind of conduct of an employer sufficient to constitute “constructive dismissal”, which the employee can treat as a repudiation of the contract of employment. […]

  1. At [34] Basten JA referred to:

the principle in Addis v Gramophone Co Ltd [1909] AC 488, precluding damages for the manner of a wrongful dismissal and the distress thereby occasioned to the employee, except in the limited circumstances identified in Baltic Shipping Company v Dillon [1993] HCA 4; 176 CLR 344 […].

In Addis v Gramophone Co Ltd [1909] AC 488 it was held that where an employee was wrongfully dismissed, without being permitted to work out six months’ notice to which he was entitled, he could recover as damages the wages that would have been paid and the profits or commission that would probably have been earned during the six months. He could not recover damages in respect of what Lord Atkinson described as “the harsh and humiliating way in which he was dismissed, including, presumably, the pain which he experienced, as is alleged, by reason of the imputation upon him conveyed by the manner of his dismissal”.

  1. In Russell v The Trustees of The Roman Catholic Church Basten JA did not consider that any breach of the implied terms identified by Rothman J had been established. However, his Honour addressed the question of whether any damages could have been awarded, for a breach constituted by the manner in which the employer had investigated allegations against the employee, if there had been established a causal connection between any such breach and the termination. On that subject his Honour concluded as follows:

[59]   As recognised in Eastwood v Magnox Electric plc [2005] 1 AC 503, there is an area, referred to as the “Johnson exclusion area”, by reference to the decision of the House of Lords in Johnson v Unisys Ltd [2003] 1 AC 518, which precludes the recovery of damages for breach of the implied conditions, where the loss has flowed from an unfair dismissal. Once it is accepted that the appellant’s claim falls within that exclusion area, even in accordance with English law, no damages are recoverable which would not be recoverable under the principle in Addis v Gramophone Co Ltd.

[60]   One question raised by this argument is whether the law in Australia conforms to that in the UK. The starting point for that analysis is the limitation on recovery of damages for breach of contract traditionally ascribed to the rules in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 at 151 (Alderson B). In the words of Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 at 91-92, those rules provide that “the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach”. Their Honours noted that the statement is now seen as a single principle, expressed by Lord Reid in Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 385 as “whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation”.

[63]   To uphold a claim to damages because of steps taken by an employer leading up to a dismissal, has three consequences which require consideration. The first is that, because the loss will almost inevitably flow from the termination of employment, rather than the manner in which the decision to terminate was made, the effect will be to sidestep the rule in [Addis v Gramophone Co Ltd] and hence authorities (including [Baltic Shipping Company v Dillon]) upholding the rule as the law in this country. Secondly, as recognised by the House of Lords in [Eastwood v Magnox Electric plc], such a course is likely to be inconsistent with the statutory remedies for unfair dismissal, a principle applied by this Court in State of New South Wales v Paige [2002] NSWCA 235; 60 NSWLR 371 at [133]-[154], albeit in the context of a proposed duty of care in tort. Thirdly, as also noted in [Eastwood v Magnox Electric plc], the provision of damages for breach of such an implied term otherwise than in relation to termination of employment, creates significant anomalies, for example, by creating a right to recover in the less serious case of suspension of employment, but not in the case of dismissal: see [Eastwood v Magnox Electric plc] at [30]-[33].

[64]   In this country, the continued adherence to [Addis v Gramophone Co Ltd] supports the avoidance of any variation in principle which would have anomalous consequences. Indeed, the creation of such a consequence suggests that any development of the common law having that effect is itself inconsistent with the statutory scheme with respect to unfair dismissals. Just as the legislature has limited the quantum of relief which may be obtained in a case of unfair dismissal, so it may equally be said that the legislature has limited the basis of relief to unfair dismissal, rather than providing a more general remedy for the unfair administration of an employment contract.

[65]   It follows that, even assuming success in relation to the existence of the implied term and breach thereof, there was no basis for an award in the present case of general damages for distress, humiliation, injury to feelings or loss of “reputation”.

  1. The critical points of Basten JA’s reasoning may be summarised as follows:

1   Addis v Gramophone Co Ltd is good law in Australia and holds that, for wrongful termination, an employee may only recover damages measured by loss of the income that he would have earned during the period of notice to which he was entitled.

2   Johnson v Unisys Ltd holds that, in the United Kingdom, if the employer under an implied obligation to act in good faith breaches that obligation and if the employee incurs loss from wrongful termination that follows upon the breach, then damages for the breach are limited to those that could have been awarded for the wrongful termination – namely, loss of income for the notice period in accordance with Addis v Gramophone Co Ltd.

3   In Australian law, if an obligation of the employer to act in good faith is to be implied, then it would be accompanied by the limitation on recoverable damages referred to in point 2.

  1. I do not see how the position can be any more favourable for an employee who is lawfully dismissed, on notice or on payment in lieu, rather than wrongfully, following an employer’s breach of an implied obligation of good faith. To adapt Basten JA’s words in [63], where “steps taken by an employer leading up to a dismissal” are in breach of the implied term, “the loss will almost inevitably flow from the termination of employment, rather than the manner in which the decision to terminate was made”. Basten JA concluded that damages for breach of the implied term would be limited to whatever would be recoverable for the wrongful termination. It should follow that if the termination was lawful, damages would be limited to nil.

  2. Every aspect of the reasoning in Russell v The Trustees of the Roman Catholic Church reinforces my conclusion, on grounds additional to the analysis of causation undertaken earlier in these reasons, that the cause of action pleaded in pars 8 and 19-22 of the Amended Statement of Claim cannot succeed according to law. That is so irrespective of whether the putative Good Faith Term is implied by law or should be implied in fact. It is not necessary for me to determine whether the Term is implied, on either basis.

Implied “Reasonable Exercise of Discretion Term”

  1. The plaintiff has pleaded the Good Faith Term and propounded the extended causal connection to his post termination loss of income, as considered above, in order to overcome the defendant’s apparently unconstrained express right to terminate on notice pursuant to cl 8.1. The plaintiff’s alternative means of overcoming that obstacle to his damages claim is the implication of a term that would condition and restrict the defendant’s exercise of its right to terminate under cl 8.1. This term is pleaded in par 9 of the Amended Statement of Claim as follows:

9   Further or in the alternative to the preceding paragraph, the Second Contract contained an implied term requiring the Defendant to exercise any contractual discretions, including the Termination Discretion:

a   reasonably;

b   honestly;

c   conformably with the purposes of the contract;

d   not in a capricious or arbitrary manner; and

e   not for an extraneous purpose

(the Reasonable Exercise of Discretion Term).

Particulars

i   The Reasonable Exercise of Discretion Term was implied by law and/or in fact.

ii   It was necessary to imply the Reasonable Exercise of Discretion Term into the Second Contract because:

(a) the Plaintiff was not an employee protected from unfair dismissal within the meaning of section 382 of the Fair Work Act 2009 (Cth);

(b)   the Plaintiff was not covered by any modern award;

(c)   the Plaintiff was not covered by any enterprise agreement; and

(d) in the premises of the preceding particulars (a) to (c), the rights of the Plaintiff would be rendered nugatory, worthless or be seriously undermined absent the implication.

  1. Breach of the Reasonable Exercise of Discretion Term is pleaded in par 19A, which merely invokes the same conduct as alleged in par 19 – as follows:

19A   In exercising the Termination Discretion despite the matters described in paragraph 19 a to h above the Defendant also breached the Reasonable Exercise of Discretion Term.

  1. In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347; [1982] HCA 24 Mason J (as his Honour then was) affirmed that criteria for implication of a contractual term upon the basis of facts and circumstances are as follows:

The conditions necessary to ground the implication of a term were summarized by the majority in BP Refinery (Westernport) Pty Ltd v. Hastings Shire Council [1977] HCA 40; (1977) 52 ALJR 20, at p 26: "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.

  1. The plaintiff’s Reasonable Exercise of Discretion Term could not possibly satisfy criteria (2)-(5), upon any assumption about what circumstances surrounding formation and performance of the contract might be established at a trial. It is sufficient to refer to item (2). There is no reason of business necessity why the employer should not be free to terminate the employment pursuant to cl 8.1 without any restraint additional to what is expressed in that clause. A workable contract of employment depends upon harmonious personal relations. The mutual right to end such a contract on notice is a safety valve that enables people who are not getting along to get away. That includes enabling the employer to end the employment of a worker who appears to be in personal conflict with another. To that end, either party needs to be at liberty to end the relationship upon subjective considerations, even idiosyncratic or capricious ones. No term should be implied that, by intruding an objective reasonableness test, would lock the parties into continuance of an employment relationship that one of them regards as unacceptable at a personal, subjective level. No doubt that consideration informs the common law’s implication, in a contract that is silent on the subject of termination, of an unqualified provision for termination by either party on reasonable notice: Russell v The Trustees of the Roman Catholic Church at [150] (Rothman J).

  2. Nor is there implied by law any qualification to the express right of termination on notice: Russell v The Trustees of the Roman Catholic Church at [150] (Rothman J), quoted at [35] above; Bartlett v Australia & New Zealand Banking Group Ltd (2016) 92 NSWLR 30; [2016] NSWCA 30 at [87] (Macfarlan JA, Meagher JA agreeing at [107]). In the latter case the relevant part of the provision for termination with notice was in the following terms:

14.3 Termination by ANZ

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. […]

  1. I see no material difference between that clause and cl 8.1 of the contract in the present case (quoted at [10] above), such as would warrant any different conclusion from that of Macfarlan and Meagher JJA in Bartlett v Australia & New Zealand Banking Group Ltd. At [87] Macfarlan JA said this:

[87]   … [None] of the authorities to which I have referred at [40]-[48], nor any other to which [the appellant referred], warrants the implication of any restriction on the bank’s power under cl 14.3(a) to terminate on notice “for any reason”. Such a restriction would be inconsistent with those quoted words. Unlike cl 14.3(b) [which provided for termination without notice if in the opinion of the bank the employee had engaged in serious misconduct etc], that subclause does not require the bank to form a specified opinion as a precondition to the exercise of the power.

  1. As the Reasonable Exercise of Discretion Term cannot be implied either in fact or in law, the plaintiff’s cause of action on pars 8A and 19A-22 is also doomed to failure. That leaves the plaintiff with no pleaded claim capable of being sustained in law. Hence the dismissal of the proceedings by the orders of 12 May 2023, referred to at [3].

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Decision last updated: 17 May 2023

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