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How the implied term of ‘good faith’ can apply in employment contracts

27 July 2022

#Workplace Relations & Safety

Published by:

Jamie Kim

How the implied term of ‘good faith’ can apply in employment contracts

In the decision of Harden v Willis Australia Group Services Pty Ltd [2021] NSWSC 939 (Harden), the NSW Supreme Court ruled that there was a breach of an implied term of ‘good faith’ in the employment contract.

The question as to whether there is an implied term of good faith in every employment contract was left open by the High Court in the case of Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 (Barker), where the High Court confirmed that there is no implied term of mutual trust and confidence in employment contracts but indicated that this decision “should not be taken as reflecting upon the question whether there is a general obligation to act in good faith in the performance of contracts”. The question of implied duty of good faith was subsequently considered by different courts and landed on different outcomes depending on the circumstances of each case.

This decision of Harden is an important development of the concept of the implied duty of good faith in the employment context.

Background

Mr Michael Harden was employed by Willis Australia Group Services Pty Ltd (Willis) to work for Willis Reinsurance Ltd’s business. Mr Harden was employed in various senior positions at Willis Reinsurance Ltd for about 30 years, with the latest position being the President of Willis Reinsurance Asia-Pacific.

After Mr Harden learned that Willis was merging with one of its competitors, Mr Harden decided to resign from Willis and handed in his notice of resignation. Subsequently, Mr Harden was directed to work from home and undertake separate duties as required that were other than his normal duties.  He received a letter from Willis which contained, amongst other things, directions on how Mr Harden should respond if approached by Willis’ clients, including that he must only say, “I’m sorry I cannot assist you because I am on leave. You should contact [name] on [mobile number]. There’s nothing further I can say at this time” (Direction). Further, Mr Harden was suspended from the IT and email system and other normal duties.  

Mr Harden argued that the Direction from Willis in effect amounted to a direction to “lie”, because he was directed to say that he was on leave when he was not. On this basis, he argued that Willis breached a duty to act in good faith which he asserted was a term of the employment contract implied by law. As a result, Mr Harden’s position was that Willis was in breach of an essential term or in serious breach of the employment contract, which resulted in a repudiation of the contract.

On the other hand, Willis asserted that Mr Harden was in fact on “gardening leave”. Although the term “garden leave” was not used in the contract, Willis asserted that there was a clause in the contract with respect to how the company could direct an employee during the notice period, which was in effect “garden leave”. Therefore, Willis argued that the Direction did not contain a “lie”.

Judgment

There were a number of issues that the Court was required to consider as part of the judgment. However, this article focuses on whether Willis directed Mr Harden to lie and thereby whether it breached the implied term of good faith.

Was Mr Harden directed to lie?

As foreshadowed earlier in this article, Mr Harden’s employment contract did not make a specific reference to “garden leave” although there was a reference to “other leave” which was defined to be a period of unspecified leave (paid or unpaid) for “compassionate, community service, parental leave etc”. The Court considered that, particularly in the absence of the specific terms providing for gardening leave, “gardening leave” would normally involve an employee staying away from work and performing no duties, which was not the case for Mr Harden.

In addition, Willis also never informed Mr Harden that he would be on leave, but rather notified him that he would be on full pay and performing limited duties according to its directions.

The Court found that when Willis issued the Direction, it was not placing Mr Harden on garden leave but was a form of suspension. Accordingly, the Direction involved untruth.

Did the Direction breach the implied duty of good faith?

The Court accepted that there was an implied term in the employment contract to act in good faith to each other. It held that the content of the term included an obligation to comply with honest standards of conduct and to comply with standards of conduct that are reasonable considering the interests of the parties. However, the implied term did not require one party to act in the interests of the other party or to subordinate their own legitimate interests to those of the other party.

In this context, the Court considered the Direction was not consistent with honest standards of conduct and having regard to Mr Harden’s interests and reputation, nor was it consistent with compliance with standards of conduct that are reasonable. Accordingly, the Court found that the Direction amounted to a breach of the implied term to act in good faith.

Was there a repudiation of contract?

The Court however found that the breach of the implied duty of good faith did not amount to a repudiation because the Court was not satisfied that Willis evinced an intention to no longer be bound by the contract or a fundamental obligation under it.

The Court considered the following facts:

  • Willis expressly stated that it was not terminating the contract and it was clear that Willis was concerned with managing the risk to the business of his departure
  • the Direction was only to have effect in particular circumstance if it arose (i.e. when a client contacted Mr Harden)
  • apart from placing Mr Harden on suspension, Willis only required his co-operation in the handover notes and in relation to any other matters that may arise
  • there was no complaint from Mr Harden.

After objectively considering the context, the Court found that the breach of the implied duty of good faith was insufficient to amount to a repudiation.

Key takeaways

This case demonstrates the continued trend of applying general contract law principles to the employment contract and new ways to apply these legal contractual principles in the employment context. 

In this instance, the implied term of good faith was used to expunge the effectiveness of Willis’ direction on what Mr Harden was required to inform clients. This arose in the particular context of where Willis was seeking to protect its business. There was also a dispute concerning the enforcement of restraints of trade and the protection of confidential information. 

Another area in which employers must consider the operation of any implied duty of good faith is in respect of the exercise of any discretions, the application of any policies or other practices to employees, as well as any determinations that the employer is required to make. These are all matters that should be considered as part of any ongoing review of standard template employment contracts. 

If you have any queries about this decision and how it may affect your business, please get in touch with us below or contact our team here.

Authors: Stephen Trew & Jamie Kim

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Jamie Kim

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