Background

The employee, Mr Elisha, commenced employment with Vision Australia in 2006. His employment was terminated in May 2015, following a finding by Vision Australia that he engaged in ‘aggressive and intimidating’ behaviour towards a proprietor of a hotel he was staying at during a work trip in March 2015.

The employer became aware of the alleged incident in May 2015 and conducted an internal investigation. The investigation commenced while the employee was on leave but included several meetings with him once he returned. The employee also provided a written response. The employee ‘vigorously’ denied having engaged in any of the alleged misconduct.

However, the investigation found the conduct had occurred and the employee was summarily dismissed for engaging in serious misconduct.

The employee’s alleged history of aggression and excuse-making formed part of the reason for the termination of his employment, despite that specific issue not being put to him during the investigation.

Following his dismissal, the employee was diagnosed with major depressive disorder and was found to have no capacity for work in the foreseeable future.

Initial Procedural History

The employee initially pursued an unfair dismissal claim in the Fair Work Commission, which settled for a payment of 26 weeks’ pay (which is the maximum amount of compensation payable in that jurisdiction).

The employee then also separately sued for damages in the Supreme Court of Victoria, claiming that he suffered loss and damage as a result of the processes implemented by the employer as part of its investigation into the alleged misconduct and his eventual dismissal, which resulted in his psychiatric injuries. Specifically, the employee pursued claims in:

• Contract, alleging that the employer breached due process provisions of the relevant enterprise agreement and its disciplinary procedures which were said to have binding, contractual effect (including by failing to provide the employee with a letter before meeting with him which advised him of all allegations made against him, and therefore denying him an opportunity to respond to all allegations) and
• Negligence, in the alternative, alleging that the employer’s duty of care extended to disciplinary and termination processes.

At first instance, the primary judge found that the process which led to the employee’s dismissal was ‘unfair, unjust and wholly unreasonable’ and ultimately breached the relevant enterprise agreement and the disciplinary procedures, both of which were also found to have been incorporated into the relevant employment contract. The primary judge concluded that, had the appropriate process been followed and the contract not been breached, the employee would not have been dismissed and he would not have developed his serious psychiatric injury.

On this basis, it was found at first instance that the breach of contract resulted in the development of a psychiatric injury and the employer was ordered to pay the employee $1,442,404.50 in damages. However, the claim in negligence was rejected at first instance, on the basis that the scope of the duty of care alleged by the employee is not presently recognised by the common law. The employer appealed to the Court of Appeal of the Supreme Court of Victoria, which ultimately found that while the enterprise agreement had not been incorporated into the contract, the disciplinary procedures had been.

As a consequence, it was also found that the employer breached the incorporated terms during the disciplinary process. Importantly however, the Court of Appeal found that damages were not available for reasons which included the employee’s psychiatric injury being ‘too remote’; that is, the injury was not reasonably in contemplation of the parties when they first entered into their contractual relationship in 2006.

The claim in negligence was again rejected on appeal for the same reasons as at first instance.

High Court of Australia appeal

The employee then appealed to the High Court of Australia, on the basis that the Court of Appeal erred in concluding that:

• Damages for psychiatric injury suffered by the employee were not recoverable for breach of contract; and
• The employer did not owe a duty to take reasonable care to avoid injury to the employee in its implementation of the processes leading to and resulting in the termination of his employment.

The majority judgment of Gageler CJ and Gordon, Edelman, Gleeson and Beech-Jones JJ found for the employee in relation to the claim concerning damages for breach of contract and restored the orders made by the primary judge. The claim in negligence was not considered by the High Court of Australia given this finding.

In making this finding, the majority concluded that:

• The disciplinary procedure must have been intended by the parties to have separate contractual effect
• The type of damage that was required to have been reasonably contemplated at the time of the contract as a serious possibility arising from such a breach of duty is psychiatric injury
• The employer breached the contract by failing to follow the appropriate disciplinary procedure, and the employee would not have been dismissed for alleged misconduct without this breach
• Psychiatric injury is part of a class of physical or personal injury for which damages are recoverable for breach of contract and
• It was reasonable to expect that the employee would have been so distressed by the manner in which the employer breached the contract, and by the consequences of the breach for him (being his dismissal), that there was a serious possibility that the employee would suffer a serious psychiatric injury.

Under separate reasons, Jagot J agreed with the orders made. Steward J dissented.

Key Takeaways

The case serves as an important and timely reminder for employers regarding the implementation of investigation and termination processes, including the potential legal risks arising out of any failure to ensure that: 

• Contracts of employment are drafted carefully in order to avoid the unintended incorporation of policies, procedures and other extrinsic materials
• All relevant policies and procedures are followed closely
• All allegations are put to an employee as part of any investigation, and they receive a genuine opportunity to respond to all allegations
• Reasons for termination are limited to matters that have been put to the employee and
• No findings are made as to alleged misconduct before these processes are completed.

Further information / assistance regarding the issues raised in this article is available from the authors, Richelle Farrar and Victoria Jamieson or your usual contact at Moray & Agnew.