RUSSELL v THE TRUSTEES OF THE ROMAN CATHOLIC CHURCH FOR THE ARCHDIOCESE OF... [2008] NSWCA 217 | Case summary

(d) damages for humiliation and injury to feelings. 7 The one exception concerned a complaint with respect to his Honour's order that the appellant pay the respondents' costs of the trial. This order, it was contended, was made without giving the appellant an opportunity to submit that an alternative order would be appropriate. The proposed alternative was an order which would recognise that the appellant had been successful on a number of the issues agitated in the course of the trial. It is convenient to return to this point after considering whether the appellant is entitled to succeed on the substantive grounds noted above. 8 A claim for aggravated and exemplary damages was not pursued, in light of the abandonment of the claim in negligence. Nor was there any suggestion that, a breach of contract having been found, the appellant should have obtained a judgment, albeit for nominal damages. 9 There was also a challenge by the respondents, by way of notice of contention, to the findings of the trial judge in respect of breach of contract. In particular, the respondents challenged findings that there was an implied term of good faith in the contract of employment and that there was an implied term not to act in a manner likely to destroy or seriously damage a relationship of mutual trust and confidence. The respondents also contended that they had not breached any implied term in the manner particularised, to which further reference will be made below. Finally, they challenged the finding of the trial judge that a reasonable period of notice would have been 12 months, proposing in lieu thereof a period of six months. 10 The contract having been terminated without any notice, if summary dismissal were not justifiable, there had been a breach in failing to give notice and the period was largely academic, following his reinstatement by the Commission. No reliance was placed in the respondents' case on any possible right to terminate without notice. Background 11 The complaints of sexual misconduct involving the appellant were each said to have occurred in a period from 1981-1983. The primary complaints were made by a Mr Buckley, who had been a member of the choir. As a result of complaints made by him to police in 1998 and 1999, the appellant was charged with criminal offences. Those offences were listed for hearing on 13 March 2000, by way of committal proceedings in the Local Court. The complainant did not attend and all charges against the appellant were dismissed. 12 When first charged, the appellant had been stood down from his position as Director of Music, but had later resumed the position subject to conditions. When the charges were dismissed he was effectively reinstated unconditionally. At that stage the Church took no further steps to investigate the complaints. 13 Under Part 3A of the Ombudsman Act 1974 (NSW), the Ombudsman had responsibilities to monitor steps taken in relation to "reportable allegations", which included allegations of sexual misconduct in respect of children: see ss 25A and 25B. The scope of its statutory mandate extended to the Church and to scrutiny of systems employed by the Church for handling and responding to such allegations: s 25B. 14 The outcome of the criminal proceedings were reported to the Ombudsman's office in February 2002: see 69 NSWLR 198 at [21]. On 13 March, the Ombudsman responded, expressing the view that the Church was required to conduct its own internal investigation into the matter in order to satisfy itself as to the substance of the allegations: at [22]. On 13 August 2002, the Ombudsman in effect put the Church on notice that it would investigate the handling of the matter unless the Church undertook its own independent investigation. Following that advice, on 5 September 2002 the Church appointed a lawyer, Mr John Cooke, to assess the complaint which had been made against the appellant by Mr Buckley. Mr Cooke was asked to assess whether there were grounds for concluding, on the balance of probabilities, that the complaint was justified, either in whole or in part: at [30]. On 15 August 2002 Father Tony Doherty, the Dean of St Mary's Cathedral, spoke to the appellant advising that the investigation would be undertaken. Father Doherty advised, in response to his inquiry, that he was "at risk": at [27]. The appellant contacted the solicitor who had assisted him with the criminal proceedings and he had the benefit of legal advice with respect to the investigation and the subsequent termination of his employment. 15 Mr Buckley's complaints were not limited to misconduct on the part of the appellant. Indeed their primary focus was the conduct of a person understood to be a sacristan at the Cathedral at the relevant time, a Mr O'Grady, who had been a lodger in the appellant's house for a period in 1983. Mr Buckley alleged a number of incidents of sexual misconduct on the part of Mr O'Grady, which resulted in the laying of charges against him and his ultimate conviction. 16 Mr Cooke's investigation of the various complaints was thorough. Mr Buckley had named three members of the choir, as being subject to abuse, in addition to himself. It is sufficient for present purposes to note that Mr Buckley's own allegations involved inconsistencies and inaccuracies; statements obtained from the other boys said to have been involved supported his complaints only in part and Mr Buckley was, whether as a result of sexual abuse or otherwise, suffering from significant psychiatric problems by the time Mr Cooke conducted his investigation. Those problems were outlined in a report from a consulting psychiatrist, to which Mr Cooke had access. 17 So far as the complaints of sexual misconduct engaged in by the appellant against Mr Buckley were concerned, Mr Cooke concluded that they could not be sustained. However, he took a different view with respect to a specific incident in which Mr Buckley had alleged that Mr O'Grady had been engaged in sexual misconduct with himself and another boy, referred to as Mr X, in the appellant's home. It was alleged that the appellant had opened the door, entered the room and seen what was taking place and had said words to the effect: "Oh, I see that you're busy, I'll come back later."

He had then left the room and shut the door. As his Honour noted this became known as the "'walking in' incident": at [16]. 18 It is apparent that Mr X gave significant support to Mr Buckley's complaints in relation to Mr O'Grady, including in the course of criminal proceedings which resulted in his conviction. He also referred in his statement to the walking-in incident. His evidence, as summarised by Mr Cooke, based on a statement provided to police on 20 January 1999, included the following: "He stated that a group of choir members, including himself and Buckley, were given a free trip by steam train down the South Coast, as a reward for their singing performances. He said that the accused has suggested that he and Buckley, who lived at Helensburg and Minto, respectively, stay at his place overnight before catching the train next morning. The offer was accepted and the accused picked them up after school and took them to his house. He was able to give a description of the house, but not its location. [Mr X] stated that O'Grady was present and that the four of them had dinner, following which he, Buckley and O'Grady, went into the lounge room. He said that he could not recall where the accused was at this point. He said that they watched some TV, and later, at O'Grady's suggestion, the three of them removed their clothes and engaged in intimate sexual behaviour, leading to the masturbation of O'Grady. During the course of this behaviour, he said that the accused walked into the room, observed what was occurring, stated 'Oh, I see that you're busy, I'll come back later', and left the room, closing the door behind him. He stated that he could not recall subsequently discussing this matter with Buckley or O'Grady. He said that he informed his mother of what had taken place. He was not permitted to have any further contact with O'Grady. He did not go to the accused's house again." 19 After providing the report of 21 November 2002, Mr Cooke was asked to contact Mr X with a view to confirming or clarifying his version of the walking-in incident. He spoke to him by telephone on 27 November. He prepared a supplementary report setting out the contents of his conversation with Mr X. 20 Mr X's statement had a number of aspects which were clearly relevant to the investigation. First, according to Mr Cooke's notes, he said that he himself had "never experienced sexual abuse, either before or since this incident, and the circumstances are very clear in his memory". (The comment was clearly referring to occasions other than the incident being recounted.) Secondly, he had not stayed at the appellant's house on any other occasion and was not aware of any boys staying overnight at the appellant's house other than on that occasion. Thirdly, he was aware of rumour and innuendo with respect to Mr O'Grady, but "was not aware of any other suggestion of inappropriate behaviour by [the appellant]". 21 The appellant was provided with the "draft preliminary findings" of Mr Cooke as to the allegations which had not been sustained and as to the allegation concerning the walking-in incident. The appellant was given an opportunity to respond to Mr Cooke's report and did so by way of a letter to the Church dated 18 December 2002. That letter included a complaint in relation to what was identified as a breach of procedural fairness arising from a failure to make "reasonable inquiries". Commencing by reference to guidelines promulgated by the Ombudsman in relation to such investigations, the letter stated (par 5),: "As noted in Section 5.3 of the Guidelines: 'Procedural fairness requires the head of agency or the person conducting an agency investigation to: · … · make reasonable inquiries or investigations before making a decision, · …' It also appears, from the Final Report, that Mr Cooke did not actually speak to [Mr X] during the investigation, until the contact on 27 November 2002. … Accordingly, Mr Cooke was prepared to make an adverse finding in relation to a statement of [Mr X] without even speaking to him. When he did contact [Mr X], Mr Cooke appears to have spoken to him over the telephone. If this is correct, then Mr Cooke took no steps to gauge, by face-to-face interview, the veracity of [Mr X's] evidence." 22 Other complaints were made of the nature of Mr Cooke's inquiry, but the substantive complaint dealt with in these proceedings was that noted above. 23 On 31 January 2003, a further meeting was held between the appellant, his solicitor, Father Doherty and another Church officer. At the end of that meeting, Father Doherty, following a brief adjournment, advised the appellant that he had consulted with the Cardinal Archbishop and said that he in turn had "approved the decision to terminate your employment". He was handed a cheque which he understood to cover six months wages, after tax, together with outstanding entitlements. Breach of employment contract 24 Although the appeal relates to the assessment of damages, it is necessary to identify first the breaches of contract for which damages might have been awarded. In this context, it is convenient to address those aspects of the notice of contention which challenged the findings with respect to the implied terms of good faith and mutual trust and confidence, and the finding that the respondents breached those terms in their investigation of the conduct of the appellant and the termination of his employment. Questions of damage may then be examined in the context of the discussion of the contractual duties in issue. 25 Before considering those breaches of contract which were relied upon, two matters should be noted by way of background. The first is that there was no contention that the respondents were entitled to dismiss the appellant summarily if satisfied that the walking-in incident occurred. The context outlined above involved an allegation of misconduct in respect of children which, if the subject of a conviction, may have precluded the continued employment of the appellant in his role as choir-master: see Child Protection (Prohibited Employment) Act 1998 (NSW), ss 6 and 8 (repealed on 2 January 2007) and, now, Commission for Children and Young People Act 1998 (NSW), Part 7. As the trial judge noted, the allegations with respect to the walking-in incident were considered by the Industrial Relations Commission and were found not to have been substantiated, even on the probabilities. His Honour noted that the statutory test and the test for summary dismissal under the common law differed - at [159], [160] - and continued: "[161] In order for the Church to take the action it did, it was required only to satisfy itself that the continued employment of Mr Russell presented for it an unacceptable risk of injury or harm to the children in its care. Once Mr Cooke concluded, on behalf of the Church, that there were grounds for establishing that the allegations were correct, it was required only to determine that there was a real suspicion. At that point there were grounds for it to dismiss Mr Russell. See, by analogy, Waters v Police Board of New South Wales (1989) 34 IR 146; M v M (1988) 166 CLR 69. … [163] There was more than sufficient material upon which the Church could have come to the conclusion that it did, on the standards referred to in Briginshaw , namely that there was a real risk to children in its charge and which risk it was not prepared to take." 26 Because no reliance was placed upon a right to summarily terminate the appellant's employment, it is not necessary to consider what would have justified such termination in the present circumstances. The analogy drawn by reference to Waters was not a close one. Waters was concerned with an appeal on a question of law from the Government and Related Employees Appeal Tribunal. That Tribunal had held that the Police Board was entitled to take into account a "real suspicion" that the applicant had acted dishonestly in considering his promotion to the position of inspector. The conclusion that such a matter could be taken into account in the particular statutory context, without legal error, would provide only limited assistance in determining a question of summary termination under the general law. The other case referred to, M v M, involved the appropriate consideration of an allegation of sexual abuse in granting access or custody to a parent in circumstances which might expose the child to an unacceptable risk of such abuse. 27 The second matter which requires reference is the reliance placed by the appellant before the trial judge on an alleged denial of natural justice in the investigation of the complaint, dealt with by his Honour at [143]-[149]. In his submissions to the respondents, commenting on Mr Cooke's report, the appellant's complaint about the failure to interview Mr X face-to-face was sought to be based upon a requirement of procedural fairness, identified in the Ombudsman's Guidelines as requiring an investigator to "make reasonable inquiries or investigations before making a decision": NSW Ombudsman, Child Protection: Responding to Allegations of Child Abuse against Employees (March 2001), par 5.3. However, as his Honour noted at [143], there was no general law obligation on the respondents to accord procedural fairness in order to effect a valid dismissal: see Malloch v Aberdeen Corporation [1971] 1 WLR 1578 at 1581 (Lord Reid). To the extent that such an unfettered power is constrained by implied terms, they will be addressed below. There was, however, no argument in this Court that, in the context of allegations of child abuse, an employment contract was in some manner subject to requirements with respect to termination limited by the Guidelines promulgated by the Ombudsman for the investigation of such complaints. Nor do the Guidelines themselves purport to have any mandatory effect. The reference in par 5.3 to procedural fairness merely identifies what is envisaged by that term, in a section which states that heads of agency and persons conducting investigations "should be mindful of the principles of procedural fairness". 28 Although the trial judge did not suggest that there was an implied term to investigate an allegation in accordance with procedural fairness, having noted that the respondents did conduct an inquiry into the allegations made against the appellant, his Honour noted that they "purported to act under the provisions of the Ombudsman Act" and that the Act "requires natural justice". Further, his Honour noted, the respondents represented to the appellant that they would abide by the rules of procedural fairness: at [145]. These suggestions need not be considered further because his Honour found that there had been no "denial of natural justice": at [149]. It is thus not necessary to inquire as to which provisions of the Ombudsman Act were invoked or the possible effect of a representation made by the respondents. Implied terms of good faith and mutual trust and confidence 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 [8]. He arranged and led the choir on three international tours in 1982, 1985 and 1991: at [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 [10] and [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 [118]. His Honour continued: "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 [129], Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312 at [17] and [26] (Gleeson CJ, Gaudron and Gummow JJ) and [51(3)] (Kirby J) and Mahmud v Bank of Credit and Commerce International SA (in compulsory liq) [1998] AC 20: Russellat [99], [132] and [133]. 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, Lord Nicholls of Birkenhead stated at [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] SASC 22; 78 SASR 489 at [99] (Olsson J); Thomson v Orica Australia Pty Ltd [2002] FCA 939; (2002) EOC ¶93-227; 116 IR 186 at [141] (Allsop J); Martech International Pty Ltd v Energy World Corporation Ltd [2007] FCAFC 35 (Moore, Tamberlin and Gyles JJ); Hem, Re Coulco Trading Pty Ltd v Cant [2007] FCA 81; 159 IR 113 at [20]-[23] (Finkelstein J); Delooze v Healey [2007] WASCA 157 at [32] (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 (Wilcox CJ, von Doussa and Marshall JJ) in Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 at 151-154, 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] HCA 4; 176 CLR 344, discussed below. 35 Whether or not the appellant walked into the room in circumstances where he must have known of the improper conduct of Mr O'Grady taking place therein, was properly the subject of the inquiry instigated by the Church: the appellant did not suggest otherwise. Nor was it suggested that the Church acted improperly in obtaining the assistance of Mr Cooke, to carry out the investigation. The complaint, by the time of the appeal, was limited to the proposition that Mr Cooke had relied upon the statement of X to the police, and a telephone interview, without seeking to interview X face-to-face. Although the criticism appears to have been directed at Mr Cooke, for whose conduct the Church was held responsible, it was implicitly asserted that the Church was remiss in acting on Mr Cooke's report, knowing of the alleged flaw in the conduct of the investigation. 36 It was a matter for judgment whether Mr Cooke should have interviewed Mr X in person, or whether it was sufficient to interview him by telephone. The investigation was being undertaken in Sydney and a personal interview would have required either Mr X to travel from Perth where he lived, or for Mr Cooke to visit him in Perth. The trial judge held that as the Church had sufficient resources, it should, "as a matter of prudence, caution and diligence and, taking into account the significant prejudicial effect of any such investigation", have interviewed Mr X in person: at [164]. 37 Without seeking to diminish the significance of the considerations identified, it is difficult to understand how the respondents demonstrated any element of bad faith, or acted in such a way as to seriously damage mutual trust and confidence, in accepting a telephone interview of a principal witness. While a telephone interview may not be the best means of assessing credibility, the facts that Mr X lived on the other side of the country and was a police officer were material considerations in determining how to proceed. That more could, and even should, have been done falls short of demonstrating any want of good faith, or conduct destructive of mutual confidence, in a context where the employer was obliged to carry out an investigation with a view to terminating employment if a sufficient factual basis were established. This was not a case of constructive dismissal based on destructive behaviour of the employer, but of actual dismissal based upon the adverse findings in Mr Cooke's report. No breach of any implied term of good faith dealings with an employee was established. The respondents' contention in that respect should be upheld. Causation and loss 38 Even if the complaint as to the conduct of the investigation had been sound, it would have been necessary for the appellant to establish a causal connection between the breach of contract and the relevant loss suffered, which flowed from termination. The trial judge considered the transcript before the Industrial Relations Commission, which included what his Honour described as an "effective and thorough" cross-examination of Mr X: at [167]. The reasons continued: "However, there is nothing to suggest that absent cross-examination, a different outcome to the inquiry was possible, and certainly no different outcome was more probable than not. Even with such an effective and thorough cross-examination, the result in the Commission as to the allegations is a matter upon which reasonable minds might have differed." 39 Although the reasoning is not pellucid, I take this to mean that only full cross-examination was likely to have led Mr Cooke to a different conclusion, with the inference that an interview with Mr X face-to-face would not have been likely to have altered the outcome of Mr Cooke's investigation, or the Church's decision to terminate his employment. That would explain the finding which his Honour made immediately thereafter at [168]: "In those circumstances, the breach of this duty by the Church has occasioned no damage and none is awarded. Further, the basis of that finding means that there is no consequential damage that might otherwise flow if there had been a breach which may have affected the result of the inquiry." 40 Precisely what test was applied in determining whether damage flowed from the breach of implied term is unclear. The last sentence in [168] suggests that it would have been sufficient for the appellant to show that the breach "may have" affected the result of the inquiry, in which case it was presumably envisaged that damages would have been available for the loss of the chance of a different outcome, namely the retention of the appellant's appointment. However, the case was not run on that basis on appeal, or, it appears, at trial. (Whether damages for breach of contract could have been awarded if the causal connection with termination had been established will be addressed below.) 41 The appellant submitted that even accepting these findings, his Honour should have awarded damages for injury to reputation and injured feelings, in respect of the breach of the implied term. The trial judge addressed those issues only in the context of damages for wrongful dismissal. Thus he dismissed a claim for injury to reputation because the adverse publicity had been generated by the proceedings in the Industrial Relations Commission and not by the fact of the dismissal: at [178] and [179]. 42 In relation to injured feelings, his Honour did not make clear which breach of contract might justify such damages. He merely stated that the evidence before him did not "go far enough to allow general damages for the kind of 'injured feelings' to which the plaintiff refers": at [180]. 43 The emphasis in the appeal was focused, not unnaturally, on the larger items of loss, namely the costs incurred in the proceedings in the Industrial Relations Commission, which were stated to be in the order of $350,000, and the costs of the public relations consultant, which were said to be approximately $50,000. These costs were recoverable, it was contended, because they were incurred in mitigation of the loss and damage suffered by the appellant as a result of his wrongful dismissal. Recovery of loss: wrongful termination (a) Costs of unfair dismissal proceedings 44 The proceedings brought by the appellant in the Industrial Relations Commission invoked the powers of the Commission under Part 6 of the Industrial Relations Act to order reinstatement in circumstances where the Commission determines that a dismissal is harsh, unjust or unreasonable: ss 84(1) and 89. Under s 181, the Commission has a discretionary power to award costs. The power is limited in cases, such as the present, where the Commission is not sitting in Court Session, so that an order may be made in favour of an applicant only where the other party has "unreasonably failed to agree to a settlement of the claim": s 181(2)(c). Thus, in a practical sense, the appellant was not able to recover his costs of the proceedings in the Industrial Relations Commission by an award of costs in that jurisdiction. Understandably, he made no application for such an order. Rather, in his general law claim for damages for breach of contract, for dismissing him without notice, he included as part of his recoverable loss, the costs he had incurred in the Commission in obtaining reinstatement. These were said to be part of the costs and expenses of mitigating the loss resulting from his breach of contract. 45 In accordance with established principle, the damages to which the appellant was entitled on establishing a wrongful dismissal were assessed by reference to the period of notice to which he was entitled under his employment contract, less the payment received on termination in lieu of notice. The appellant's salary for his part-time appointment was $25,000 per annum gross. Given the payment received, any entitlement to damages under the general law, absent the order of the Commission, would have been a fraction of that figure. To claim, as the costs of mitigating his loss, an amount many times that figure would appear to require an unusual meaning for the term "mitigation". That is not to deny that, in an appropriate case, a party may recover loss constituted by reasonable attempts to mitigate his damage, even though the loss thus incurred exceeded what might otherwise have flowed from the breach of contract: see Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 356. Rather, it raises a question as to whether the conduct is to be understood as a reasonable attempt at mitigation or as a separate step, which would not have been taken but for the breach of contract, but which was not limited to mitigation of the loss thus incurred. 46 The proceedings in the Industrial Relations Commission obtained for him different benefits than those available under the general law, not merely because he obtained an order for reinstatement of his employment with continuity of benefits from the date of dismissal, but also because he was able in that manner to vindicate, at least in part, his reputation. The costs of the proceedings in the Commission were not directly related to the breach of contract relied on in this Court. They resulted from the invocation of a statutory remedy for a cause of action quite separate from the failure to provide a reasonable period of notice. 47 The appellant argued, correctly, that there are circumstances in which costs incurred in other proceedings may be recovered as part of the loss suffered, for example, as the result of tortious conduct. Thus, an injured person seeking damages for economic loss calculated by reference to net earnings, who has obtained workers' compensation payments and must repay the gross amount of the payments on receipt of damages, is entitled to an additional amount to cover the repayments of workers' compensation: Fox v Wood [1981] HCA 41; 148 CLR 438 at 446-447. 48 There is, however, a different basis upon which the claim was properly rejected. To permit a party to recover by way of damages an expense which the law requires that he or she bear personally, absent some contractual entitlement to the contrary, would be inappropriate. Thus, in Anderson v Bowles [1951] HCA 61; 84 CLR 310 the High Court considered whether a landlord suing to recover damages for the failure to deliver up the demised premises at the termination of the tenancy could claim the cost of ejectment proceedings brought to recover possession from the lessee. The relevant statutory provision precluded the Court in the ejectment proceedings awarding costs. The joint judgment in the High Court (Dixon, Williams, Fullagar and Kitto JJ) held at 323: "This is a legislative declaration that the parties to proceedings for the recovery of possession or proceedings arising thereout shall not be liable to one another for the costs of those proceedings. In the face of this legislative declaration can costs be properly included in the damages or mesne profits? It is a general rule that where it is sought to include costs incurred in other proceedings in the damages arising upon a cause of action, costs shall not be included, if as a matter of judicial determination or by a positive rule of law they are treated as costs which should be borne by the party suing. Accordingly it is not possible to recover as part of such damages the difference between party and party costs awarded to the plaintiff in the original litigation and the costs as between solicitor and client which he has incurred: Barnett v. Eccles Corporation [(1900) 2 QB 423 at p 428]. Further, if costs are expressly withheld by the court in the original proceeding none can be recovered in the action for damages brought by the plaintiff from whom they were so withheld…. The legislature having determined that costs shall not be recoverable in proceedings of the character now in question, it would be contrary to the principles which these cases exemplify if they were included in the damages and thus were made recoverable by a side wind." 49 In Avenhouse v Hornsby Shire Council (1998) 44 NSWLR 1 at 33-37 (Sheller JA, Mason P and Priestley JA agreeing), the claimants had sought damages from the Council in respect of an alleged breach of duty in processing a plan of subdivision. The Council had been found liable for economic loss, but the Court rejected an argument that the loss should include the costs incurred in earlier proceedings in the Land and Environment Court between the same parties which had ended with consent orders, including that there be no order as to costs. The claimants were unsuccessful on this head of damages, for reasons which were consistent with the reasoning in Anderson v Bowles. No assistance is obtained by a reconsideration of the cases discussed in Avenhouse relating to tortious liability, particularly for abuse of process or malicious prosecution. 50 The conclusion that the appellant was not entitled to recover the costs of the proceedings in the Industrial Relations Commission was correct: see 69 NSWLR 198 at [176]. (b) Loss of reputation; injury to feelings 51 The appellant also sought to recover as damages for wrongful termination the cost of hiring a public relations consultant. The trial judge dealt with this claim as an "ancillary matter" in the following terms at [178]: "The evidence discloses that the public relations consultant was engaged primarily to overcome the damage caused by bad publicity. I make it clear that I find that engaging the public relations consultant was a reasonable step. However, the publicity which was his main focus was publicity generated by the proceedings in the Commission. In those circumstances the expenses of the public relations consultant are not expenses in mitigation of the damage." 52 As the appellant pointed out, his Honour had expressly found that the commencement of the reinstatement proceedings was a "reasonable step" for the appellant to take. Indeed, he considered that would have been so even if the proceedings had been unsuccessful. The appellant then contended that to attribute the expense incurred in hiring a public relations consultant solely to mitigation of loss caused by way of bad publicity arising out of proceedings in the Commission was to make "an artificial distinction" between the two steps. He submitted that if one step were reasonably taken in response to a breach of contract, another concomitant step, which was reasonable and resulted from the first step, was causally related to the same breach of contract. 53 The preferable reason for supporting the conclusion of the trial judge is not that there was a break in causation between the commencement of the unfair dismissal proceedings and the attempt to mitigate the bad publicity; rather, the missing causal link is between the breach of contract, namely the failure to give reasonable notice, and the adverse publicity. To recover the costs of the public relations consultant, the appellant needed to establish that use of the consultant was a reasonable step in mitigating a recoverable loss flowing from the breach of contract. The relevant loss must be a loss of reputation, noted as an "underlying assumption" by the trial judge: at [179]. 54 What is meant by the concept of injury to reputation is not entirely clear in these circumstances. This was not a case in which the appellant sued for defamation based upon a statement published by the respondents. Rather, it seems to have fallen into one of two separate categories identifiable from the case-law relating to damages for breach of contract. Thus, on one view it could constitute part of the distress suffered by the appellant as the result of loss of esteem of friends, colleagues and acquaintances. However, damages on that account have been treated as generally unrecoverable for breach of contract: see Fink v Fink [1946] HCA 54; 74 CLR 127 at 144, where Dixon and McTiernan JJ stated: "Resentment, disappointment and the loss of esteem of friends are not proper elements [of loss, recoverable in an action on contract]." 55 Alternatively, loss of reputation may be invoked in a commercial sense to include difficulty in obtaining alternative employment, a head of damage which has been accepted as relevant in relation to artists and public performers: see, eg, Herbert Clayton and Jack Waller Ltd v Oliver [1930] AC 209 at 220 (Lord Buckmaster). As his Lordship explained, it was not so much a matter of "loss of reputation", but "the equivalent of loss of publicity". However, subject to exceptions, this head of damage is excluded by the principle stated by Lord Loreburn LC in Addis, that damages are not recoverable "for the injured feelings of the servant, or for the loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment": at 491. Nevertheless, damages of these kinds are recoverable, the appellant contended, on the basis of the exceptions accepted in Baltic Shipping and by Ashley J in Aldersea v Public Transport Corporation [2001] VSC 169; 3 VR 499 at [56]-[64]. 56 Baltic Shipping undoubtedly recognised exceptions to the general rule, in particular where a breach of contract gives rise to physical injury, psychiatric illness or even physical inconvenience, or where the subject matter of the contract is the provision of pleasure or enjoyment, the expectation of which is disappointed by the breach: at 362 (Mason CJ), 381 (Deane and Dawson JJ) and 394 (McHugh J). 57 The appellant did not seek to establish personal injury of the kind which might give rise to a claim for damages; nor can it be said that the contract was one which provided for pleasure or entertainment. Accordingly, as senior counsel for the appellant conceded, no such claim for damages was tenable, arising purely from the breach constituted by the termination without reasonable notice. Damages for breach of implied terms 58 There remains the question whether the appellant can claim damages for any of the three heads referred to above for breach of the implied terms, on the basis, contrary to the preferred reasoning set out above, that such terms should relevantly be implied in the contract and were breached. His argument in that respect depended on a two-step process. The first required that the principle in Addis be understood as limited to the holding that "the plaintiff could not recover in an action for damages for breach of contract in respect of his injured feelings and loss of employment prospects arising from the harsh and humiliating manner of his dismissal", as explained by Mason CJ in Baltic Shipping at 361. By contrast, such damages could be recovered if they flowed from a breach of a contractual term other than termination without proper notice. Thus, on the assumption that there was an implied term requiring the employer to act in good faith towards its employee and, in the circumstances, not to act so as to diminish the mutual trust and confidence in the relationship, and if it be assumed that the implied terms were breached by the manner in which the inquiry was conducted, then it could be said that the damage which flowed was the humiliation and injury to feelings resulting from the adverse finding of the inquiry, one (but not the only) consequence of which was the termination of employment. As explained by Lord Nicholls of Birkenhead in Eastwood at [27]: "An employee's remedy for unfair dismissal, whether actual or constructive, is the remedy provided by statute. If before his dismissal, whether actual or constructive, an employee has acquired a cause of action at law, for breach of contract or otherwise, that cause of action remains unimpaired by his subsequent unfair dismissal and the statutory rights flowing therefrom. By definition, in law such a cause of action exists independently of the dismissal." 59 As recognised in Eastwood, 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. 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". 61 As noted by McHugh J in Baltic Shipping (at 396), referring to a comment of Sir Guenter Treitel, it may seem curious that "anxiety is an almost inevitable concomitant of expectations based on promises", whilst rejecting the distress resulting from such disappointed expectations as a head of damage. In truth, the current justification for the principle is to be found in its own long-established existence. Such a justification may seem circular, but is nevertheless available because parties are assumed to contract on the basis of established legal principles. As Lord Hoffman explained in Transfield Shipping Inc v Mercator Shipping Inc [2008] 3 WLR 345 at [12]: "It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks … which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken." 62 Although this approach undoubtedly has greater justification in terms of commercial contracts, it reflects a well-understood point of difference between the principles upon which damages for breach of contract and for tort are to be assessed: see Baltic Shipping at 369 (Brennan J). Further, it reflects the more direct causal connection required between a particular loss and a breach of contract, as opposed to that linking a loss with a tort. Thus, where the contract itself is for the provision of pleasure or enjoyment, distress is the natural and direct consequence of disappointment of the expectation created by the promise. 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 and hence authorities (including Baltic Shipping) upholding the rule as the law in this country. Secondly, as recognised by the House of Lords in Eastwood, 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, 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 at [30]-[33]. 64 In this country, the continued adherence to Addis 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'. 66 As already noted, the costs of the proceedings in the Commission flowed from the allegation of unfair dismissal, and not from any prior breach of contract. In any event, those costs cannot be recoverable on a claim for breach of implied duties any more than in a claim for wrongful termination. Costs of trial 67 A separate and subsidiary issue arose in relation to the order that the appellant should pay the respondents' costs of the trial. The appellant contended that, having been successful in establishing the existence of certain implied terms in the contract and breach of those terms, but having failed on the question of loss, he should not have to pay all of the costs. Rather, an appropriate course would have been to assess costs on the basis of the issues on which each party was successful, as a result of which the appellant should have received 75% of his costs, or at worst there should have been no order as to costs. 68 In the course of the appeal, the Court inquired as to whether any particular application had been made to the trial judge or even the possibility flagged that costs might not necessarily follow the event: Tcpt, NSWCA, 05/05/08, pp 53-54. Counsel accepted that there had been no particular application to reserve costs or allow further argument in respect of costs: Tcpt, 06/05/08, p 1(45). 69 There is some difficulty for the appellant in seeking to raise on appeal an alleged error with respect to the costs order, in circumstances where nothing had been put to the trial judge as to whether an order other than the usual order should be made. In any event, for the reasons outlined above, the respondents are entitled to succeed on their argument that they were not in breach of the implied obligations relied upon by the appellant, with the result that significant issues on which the appellant succeeded below have now been determined against him. If there had been some order based on success with respect to particular issues, the respondents would have been entitled to have that order revisited in light of their success in this Court. As it may now be seen that the respondents were entitled to succeed on the major issues litigated at trial, the order that the appellant should pay their costs is not one with which this Court should interfere. Conclusion 70 Once it is accepted that the damages sought to be recovered by the appellant cannot flow from the termination of his contract of employment, the appeal is limited to questions of loss flowing from breach of the implied terms. 71 Whatever the scope of an implied duty of good faith, and assuming it arose under the contract, there was no breach of duty on the part of the respondents. Even assuming breach, the damages claimed were not recoverable. 72 Accordingly, the appeal should be dismissed with costs. 73 CAMPBELL JA: 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. 74 I agree with the reasons of Basten JA, in the respects identified by Giles JA, and with the orders proposed by Basten JA. **********

RUSSELL v THE TRUSTEES OF THE ROMAN CATHOLIC CHURCH FOR THE ARCHDIOCESE OF SYDNEY

At a glance

Court

Decision date

Before

Source

Judgment (47 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (25)

Cited By (23)