The implied terms - the bonus
87Mr Foggo claimed that his contract contained a number of implied terms: that the defendant would perform its obligations and exercise its rights under the contract in good faith, reasonably and for the purpose of achieving the objects of the contract, and that it would not conduct itself in a manner likely to seriously destroy or damage the relationship of trust and confidence between it and Mr Foggo.
88The defendant accepted that there was an implied term that it would perform its obligations and exercise its rights under the contract for the purpose of achieving the objects of the contract, but otherwise disputed the existence of the other implied terms. In any event, it argued, even if the other claimed terms were implied in the contract, it had not breached them. Its exercise of its discretion in relation to the pool bonus had been for the purpose of achieving the objects of the contract, one of which was the retention of Mr Foggo in its employment. For reasons which I have already explained, I accept that view of the objects of this contract and that the conditions which the defendant imposed on the bonus payment it decided to make, were intended to advance that contractual purpose.
89As to the implied obligation of good faith and reasonableness, it certainly has some acceptance in Australia, at least in the case of certain commercial contracts. In United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) NSWLR 618 Allsop P recently observed at [61]:
"Whilst this necessarily incomplete review of authorities reveals that the law in Australia is not settled as to the place of good faith in the law of contracts, this Court should work from the position that it has said on at least three occasions (not including Renard) that good faith, in some degree or to some extent, is part of the law of performance of contracts. It is unnecessary to go beyond this proposition to gain assistance in the construction of this particular clause of this contract. Many issues arise in respect of any implication (whether as a matter of fact or by law) of any term requiring performance of a contract, or the exercise of contractual rights, in good faith. Those issues need not be explored here in a case dealing with an express clause as part of a dispute resolution clause."
90Earlier in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558, a case concerning wrongful termination of a franchise contract, the view taken was that in a commercial contract, there would ordinarily be implied as a matter of law, terms of good faith and reasonableness, in order to ensure that a party acting to promote its legitimate interests under the contract, does not do so in such a way as to render nugatory or worthless, the other parties' rights under the contract. This meant that a party was entitled to have regard to its own legitimate interests in exercising its discretion's but 'it must not do so for a purpose extraneous to the contract' (at 185]).
91The parties referred to a raft of authorities where the existence of the implied terms have been accepted, or assumed. In the case of employment contracts, it is convenient to refer to Russell v the Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2007] NSWSC 104; (2007) 69 NSWLR 198, where Rothman J reviewed various authorities which had dealt with the question of the existence of two implied duties, that of good faith and that of mutual trust and confidence; that is, a duty not without reasonable cause to act in a manner calculated to destroy or damage the relationship of confidence and trust which must exist between an employer and an employee. His Honour referred to Hoeben J's observation in Heptonstall v Gaskin (No 2) [2005] NSWSC 30:
"[17] It is submitted on behalf of the plaintiff that decisions in the United Kingdom make it clear that as a matter of law there is now to be implied into a contract of employment a term of mutual trust and confidence. Such an approach is the law of Australia, or alternatively is arguably the law of Australia.
[18] It seems beyond argument that the implication of such a term is now part of the law of the United Kingdom: Malik and Mahmud v BCCI (1998) AC 21, Johnson v Unisys Ltd (2001) 1 AC 518, Gogay v Hertfordshire County Council (2000) IRLR 703 and Eastwood & Anor v Magnox Electric plc, McCabe v Cornwall County Council & Anor (2004) 3 WLR 322.
[19] Because of the provisions of the Employment Rights Act 1996 (UK) with its remedies for unfair dismissal, a distinction has been drawn by the House of Lords between psychiatric injury brought about by an employer's actions during the actual course of employment and psychiatric injury brought about by dismissal from employment or by circumstances directly related to that dismissal. That is the essential distinction between Malik and Mahmud, Gogay and McCabe on the one hand and Johnson v Unisys on the other. As was explained by Lord Nicholls in McCabe (paras 4-6; 27-32) the particular statutory context which exists in the United Kingdom brought about the development of the 'trust and confidence' implied term in a contract of employment. Without such a term, deserving plaintiffs would have no legal right to claim against employers in respect of conduct which occurred before they were dismissed and which was not directly related to that dismissal.
[20] The background to the implication of such a term in the United Kingdom is important. It contrasts with the situation in Australia. In Australia the same result has been brought about by the tort of negligence. Such cases as State of NSW v Seedsman [2000] NSWCA 119, State of NSW v Jeffery & Anor [2000] NSWCA 171 and Mannall v State of NSW [2001] NSWCA 327 make that clear. A similar reliance upon the tort of negligence was not possible in the United Kingdom as a result of the decision of the House of Lords in White v Chief Constable of South Yorkshire Police (1999) 2 AC 455. There the House of Lords held that an employer's duty of care for the safety of employees and to take reasonable steps to protect them from physical harm did not extend to protecting them from psychiatric injury when there was no breach of the duty to protect from physical injury; and that the general rules restricting the recovery of damages for pure psychiatric harm applied to claims by employees.
[21] Accordingly there has been no need in Australia to rely upon a 'trust and confidence' implied term in the contract of employment to enable employees to succeed in claims against employers for purely psychiatric injury suffered in the course of employment. This difference in approach to that in the United Kingdom is apparent in Tame v NSW (2002) 211 CLR 317 and Gifford v Strang Patrick Stevedoring Pty Limited (2003) 214 CLR 269.
[22] What is not at all clear is whether a 'trust and confidence' implied term in the contract of employment forms part of the law of Australia. In Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 the full Federal Court left open the question of the existence of such an implied term (p 154). Similarly, Spigelman CJ in Paige (para 135) left that same question open. In a somewhat different context the full bench of the Industrial Relations Commission of NSW in Court Session implicitly approved the implication of such a term ( Hollingsworth v Commissioner of Police (1999) 47 NSWLR 151 at 190) as did Allsop J in Thomson v Orika Australia Pty Ltd [2002] FCA 939 para 141. The implication of such a term in employment contracts in Australia remains controversial and awaits clarification by an appellate court.
[23] Given the way in which the 'trust and confidence' implied term has evolved in the United Kingdom against a legislative background and an approach to tort law different to that in Australia I doubt whether such an implied term in a contract of employment does form part of the law of Australia. I cannot, however, say that such is not the case and I certainly cannot say that the existence of such an implied term is not arguable."
92Rothman J also referred to the observations of Allsop J (as he then was) in Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) 116 IR 186, where his Honour said:
"[141] However, if one is to approach the matter in straightforward contractual terms there is ample authority for the implication of a term in a contract of employment that the employer will not, without reasonable cause, conduct itself in a manner likely to damage or destroy the relationship of confidence and trust between the parties as employer and employee: Burazin v Blacktown City Guardian (1996) 142 ALR 144, 151 and the English cases there cited and Daw v Flinton Pty Ltd (1998) 85 IR 1, 3. Breach of that implied term will entitle the employee to treat himself or herself as wrongfully dismissed. Olson J (sitting at first instance) in Blaikie v South Australian Superannuation Board (1995) 65 SASR 85, 102-106 and (sitting on the Full Court, though in dissent) in Easling v Mahoney Insurance Brokers Pty Ltd [2001] SASC 22 at [99], if I may say so, expressed the principle with clarity. The principle expressed by Olson J in Easling at [99] was not the subject of any criticism from the majority (Doyle CJ and Bleby J). His Honour said:
'...Suffice to reiterate that the notion of constructive dismissal implies the existence of conduct on the part of an employer which is plainly inimical to a continuance of a contract of employment according to its express or implied terms. The authorities establish the concept that there is implied in a contract of employment a term that the employer will not, without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. An intention to repudiate need not be proved. Rather, it is a matter of objectively looking at the employer's conduct as a whole and determining whether its effect, judged reasonably and sensibly, is such that the employee cannot be expected to put up with it.'"
93On appeal, the conclusions which Rothman J reached on these questions were considered in Russell v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney [2008] NSWCA 217; (2008) 72 NSWLR 559. Basten JA there observed:
"29 The contract in the present case was oral and bereft of detail. The parties understood that the appellant was to take on the position of Director of Music at the Cathedral, which, as the trial judge found, meant that he was "responsible for the general management of the St Mary's Cathedral Choir; he taught and trained members of the Choir, conducted for the Choir at church services and other events, directed concerts and performances and conducted rehearsals" (at 202 [8]). He arranged and led the choir on three international tours in 1982, 1985 and 1991 (at 202 [9]). His Honour described the position as "permanent part-time" and noted that it was accompanied by a salary, which, by January 2003 was, in round terms, $25,000 per annum (at 202 [10] and 213 [66]).
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. In relation to the former, he noted that the express terms of the contract were basic in their extent and that the parties envisaged a continuing, indefinite period of employment, where the precise extent of the obligations of the employee were not fully known at the time the contract was entered into (at 227 [118]). His Honour continued (at 227 [118]):
"[118] ... 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."
31 In relation to the second implied term, his Honour noted that the characterisation of an employer/employee relationship as one importing duties of loyalty, honesty, confidentiality and mutual trust, was the subject of high authority, citing (at 230 [129]) Concut Pty Ltd v Worrell (2000) 103 IR 160 at 164 [17] and 167 [26] (Gleeson CJ, Gaudron J and Gummow J) and 172 [51.3] (Kirby J) and (at 222 [99], 231 [132]-[133]) Mahmud v Bank of Credit and Commerce International SA (In Liq) [1998] AC 20; Russell (at [99], [109] and [110]).
32 Although there were said to be two implied terms, it is probably sufficient to identify them as a single obligation. Thus, in Eastwood v Magnox Electric plc [2005] 1 AC 503 at 523 [11], Lord Nicholls of Birkenhead stated:
"[11] ... The trust and confidence implied term means, in short, that an employer must treat his employees fairly. In his conduct of his business, and in his treatment of his employees, an employer must act responsibly and in good faith. In principle, this obligation should apply as much when an employer exercises his right to dismiss as it does to his exercise of other powers of his which affect a subsisting employment relationship. It makes little sense, for instance, that the implied obligation to act fairly should apply when an employer is considering whether to suspend an employee but not when the employer is proposing to take the more drastic step of dismissing him."
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: see Easling v Mahoney Insurance Brokers (2001) 78 SASR 489 at 514 [99], per Olsson J; Thomson v Orica Australia Pty Ltd (2002) 116 IR 186 at 224 [141], per Allsop J; Martech International Pty Ltd (ACN 009 022 799) v Energy World Corporation Ltd (2007) 248 ALR 353 (Moore J, Tamberlin J and Gyles J); Hem v Cant (2007) 159 IR 113 at 118 [20]-[23], per Finkelstein J; Delooze v Healey [2007] WASCA 157 at [32], per Wheeler JA, Steytler P agreeing. In Hem , on facts not so distant from the present case, the employee was accused by his superior of being a thief, without justification. The Court accepted that such conduct could constitute constructive dismissal because it constituted conduct inconsistent with the mutual trust required for the employment relationship.
34 As explained by the Full Court of the former Industrial Relations Court of Australia in Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 at 151-154, per Wilcox CJ, von Doussa J and Marshall J, it is unclear to what extent the breach of such a term may permit relief by way of damages, consistently with 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) 176 CLR 344 discussed below."
94Gyles JA agreed with Basten JA's conclusions, assuming the existence of the implied terms and Hodgson JA observed:
"73 It is clear that there can be an implied term in a contract of employment requiring an employee to exercise good faith in certain circumstances (eg Del Casale & Ors v Artedomus (Aust) Pty Limited [2007] NSWCA 172; (2007) 73 IPR 326 at [32]-[34], [76]-[100] and cases there cited). Further, some Australian cases have accepted that there is (or, sometimes, that it is at least arguable that there is) an implied term in a contract of employment binding the employer to exercise good faith concerning the employment relationship: Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 607-8 (Waddell CJ in Eq); Hollingsworth v Commissioner of Police (1999) 47 NSWLR 151 at 190 (Wright and Hungerford JJ); Heptonstall v Gaskin (No 2) [2005] NSWSC 30; (2005) 138 IR 103 (Hoeben J); Irving & Ors v Kleinman [2005] NSWCA 116 (Hodgson, Ipp and Tobias JJA). I am content to decide the present case on the basis of assuming, without deciding, that the employer owed implied contractual obligations of the type that the appellant alleges."
95More recently the Full Court of the Federal Court in Yousif v Commonwealth Bank of Australia [2010] FCAFA 8; (2010) 193 IR 212 also found it unnecessary to resolve the question of the existence of such implied terms, given the conclusions reached on the facts in that case. It did observe, however, that the precise contours of the claimed duties appeared to be uncertain, suggesting that it was more useful to think of them as a single term, than as two distinct terms (see at [110]).
96In this case the defendant also submitted that it was unnecessary to determine the question of the existence of the claimed implied terms. It agreed that even if it were concluded that the implied terms existed, given the parties' common acceptance as to the operation of another implied term, namely that the defendant was obliged to exercise its rights and obligations under the contract for the purpose of achieving the objects of the contract, no different result would flow on the facts.
97I accept that submission, although it does seem to me that some further support for a conclusion as to the existence of an implied term of good faith is provided by the conclusions reached in Silverbrook Research Pty Ltd . While this point did not there arise for consideration, it is relevant to observe that Allsop P (with whom Beazley JA agreed) there took the view that the loss of a chance to earn a bonus under an employment contract involved the loss of a valuable commercial opportunity, compensable in damages for breach of contract. Further, in Byrne v Macquarie Group Services Australia Pty Ltd [2011] NSWCA 68, settled legal principles applying to the interpretation of business contracts, were applied to determine the proper construction of the provisions of a share retention policy applying to an employment contract.
98Employment contracts are, of course, particular kinds of contracts, but nevertheless contracts which may bring with them considerable commercial advantages, for both the employer and employees involved. That being so, it is difficult to see why a term of good faith and reasonableness would not be implied in such contracts, as it is in other contracts which bring parties commercial advantages. Such a conclusion may have to be tempered by considerations of the kind discussed in Russell , depending on the question which arises for determination in a particular case. Nevertheless, the approach adopted in the cases provides, in my view, a further basis for accepting the existence of the implied terms on which Mr Foggo seeks to rely in this case.
99In this case it is sufficient to assume the existence of the implied terms. In my view that does not advance Mr Foggo's case any further. Compliance with the implied terms does not require an employer to act contrary to its own interests. Rather, what is required is an approach which has regard to matters such as the honest and reasonable exercise of the employer's rights; with prudence, caution and diligence, and with care taken to avoid or minimise adverse consequences to the employee, that are inconsistent with the agreed common purpose and expectations of the parties to the contract. Essentially, employers must treat employees fairly in the conduct of their business, and must act responsibly and in good faith in the treatment of their employees.
100So understood, I cannot see that the defendant breached the obligations relied on in relation to the question of whether Mr Foggo should receive any pool bonus. It had a duty under the contract to conduct a performance assessment. There is no complaint as to what it undertook, or the conclusions which it reached about Mr Foggo's performance, or the basis of the pool bonus to be paid that year. The defendant then considered and discussed with Mr Foggo paying him a bonus on terms designed to induce him to remain in its employment, at a time when he was looking elsewhere for work with competitors. It later advised him of the conditions being considered and accepted some of his views, while not accepting that it should exercise a discretion in his favour, by the upfront payment of a very substantial cash bonus, without any conditions. It then proposed to pay him a bonus, on conditions designed to encourage him to remain in is employment.
101There is no complaint made about the decision to fix the bonus payment at $300,000 or to make that payment out of the pool determined. Even after it advised him of the conditions on which it had determined to pay him a bonus out of that pool greater than the contractual terms envisaged, it negotiated further with Mr Foggo. It did not accept his view of his contractual entitlements, or what he sought; an unconditional payment of the bonus proposed. In these proceedings it was accepted that much of what he understood had no foundation in the contract.
102The defendant was not prepared to do what Mr Foggo variously insisted on being entitled to, namely payment of $300,000 in cash up front, or at least $250,000 up front, without any requirement that he continue in the defendant's employment and repay any part of the bonus, if he left to work for a competitor.
103Mr Foggo had no contractual right to such a payment, nor could he have reasonably expected the defendant to exercise its discretion on that basis, given the conclusions reached as to his performance. The implied term did not require that he be given the generous treatment which he sought, nor did it require that the defendant ignore its own interests, in seeking to retain his services.
104In the context of this contract, I cannot see that the defendant's approach involved any breach of the implied terms relied on. It seems to me that in determining that it would pay him a bonus, the defendant was entitled to have regard to its assessment that Mr Foggo was a flight risk and to impose terms on the payment of the bonus, which sought to induce him to remain in its employment. What occurred in relation to the development and negotiation of the proposed new contract, can lead to no other conclusion, particularly given my conclusion that the defendant did not finally make entry into the new contract a condition of the payment of the bonus.