Recent decisions from the New South Wales Court of Appeal and Victorian Supreme Court indicate that Courts will be hesitant to imply the term of ‘good faith’ contemplated by the High Court in the decision of Commonwealth Bank v Barker. In the Barker decision the High Court declined to imply a term of mutual trust and confidence into employment contracts but indicated that a general obligation to act in good faith in the performance of contracts may still exist, although this was not considered any further by the High Court.
In the recent case of State of New South Wales v Shaw the New South Wales Court of Appeal declined to imply a good faith term of the kind considered in Barker into the employment contracts of two teachers, whose employment was terminated. In finding that an implied term of good faith was not necessary to give efficacy to the teachers’ contracts, the Court particularly relied on the fact that the teachers’ contracts had been of a probationary nature. The Court went on to find that the State’s conduct would not have breached such a term, even if it were implied in the contract. It was alleged that the school principal had breached good faith obligations leading up to the termination of employment by providing one of the teachers with a petition from staff members expressing concern about incidents involving the teacher.
In February this year the Victorian Supreme Court also found that an obligation of good faith could not be implied into the employment contract of a mining warden because it would be inconsistent with the State’s broad powers of termination under the Mineral Resources (Sustainable Development) Act 1990 (Vic), which formed part of the contract.
It appeared that the High Court in Barker, whilst closing the door on the implied duty of mutual trust and confidence, had left another open in relation to an implied obligation to act in good faith. However, these cases demonstrate that so far, a decision to imply into a contract an obligation to act in good faith is not one that will be taken lightly by Courts. This is particularly so where the contract of employment provides comprehensive express rights relating to termination of employment, as in the case of a probationary contract or contracts incorporating statutory powers of termination.
Although it is only early days, employers should take heart from the general reluctance shown by these Courts to imply an obligation of good faith in the wake of the Barker decision. Comprehensive express contractual rights of termination, coupled with written policies that allow flexibility in performance management and disciplinary processes will assist employers seeking to avoid liability for a claim of this nature.