The High Court of Australia finds that a failure to follow contractually agreed disciplinary processes can give rise to a right in an employee to recover damages for psychiatric injury.
In issue
- The High Court considered whether an employee was entitled to compensation for a psychiatric injury that arose as a result of a failed disciplinary process.
The background
From 2006, Mr Elisha was employed as an adaptive technology consultant by Vision Australia (VA), pursuant to a written contract (Contract). In the performance of his duties to set up or assist with computer systems for the vision impaired, Mr Elisha would visit clients in various locations, which would sometimes require him to be accommodated away from home.
In March 2015, Mr Elisha was travelling for work and staying at a hotel managed by Ms Trch. There was an incident during that stay in which Mr Elisha was moved to a different room as he complained of loud noise emanating from another room. While disputed, it was alleged that Mr Elisha acted aggressively towards Ms Trch.
The incident was brought to the attention of Mr Elisha’s manager, Ms Hauser (noting that the relationship between them had been strained for some time). Ms Hauser held concerns that Mr Elisha’s conduct was escalating, having previously been aware of reports of Mr Elisha’s aggressive behaviours in the past.
Ms Hauser subsequently wrote to Ms Trch and apologised for Mr Elisha’s behaviour.
Shortly thereafter, Mr Elisha (who had just returned from annual leave) was handed a 'stand down letter' advising him that he was being stood down pending an investigation into serious misconduct and requiring him to attend a meeting to respond to the allegations. Relevantly, the letter referenced only the hotel incident.
Mr Elisha vigorously denied the allegations against him in writing. At that meeting, Mr Elisha read out his written response to the allegations. Ms Hauser made notes of the meeting which stated, in effect, that Mr Elisha conducted himself arrogantly and without any remorse. Another staff member made a note of that meeting in effect concurring with Ms Hauser’s observations.
Internally, a decision was then made by VA to terminate Mr Elisha’s employment on the basis of both the hotel incident, and Ms Hauser’s alleged experience of Mr Elisha’s aggression. However, Ms Hauser’s account of Mr Elisha’s behaviour was never put to him and the termination letter referenced only the hotel incident.
Mr Elisha was subsequently diagnosed with major depressive disorder as well as an adjustment disorder with depressed mood.
In June 2015, Mr Elisha commenced proceedings against VA in the Fair Work Commission for unfair dismissal. That proceeding was settled on the basis that VA pay Mr Elisha $27,248.68, the maximum available in that jurisdcition. Mr Elisha then commenced proceedings in the Supreme Court of Victoria in August 2020, seeking damages for psychological injury caused by the manner in which his employment with VA was terminated.
The decision at trial
The Supreme Court of Victoria found that the process which led to Mr Elisha's termination was 'unfair, unjust and wholly unreasonable' and that 'from the point at which Ms Hauser became involved to the sending of the termination letter, the process adopted by Vision Australia was nothing short of a sham and a disgrace'. The disciplinary process conducted by Vision Australia was found to breach cl 47.5 of the Vision EA and the 2015 Disciplinary Procedure, both of which were held to have been incorporated into the 2006 Contract. The primary judge concluded that the possibility that termination could result in distress or even psychiatric injury was acknowledged and even anticipated as shown by VA providing access to counselling and support.
The decision on appeal
The Court held that cl 47.5 of the Vision EA had not been incorporated into the Contract but the relevant terms of the 2015 Disciplinary Procedure had been incorporated, and that Vision Australia had breached an incorporated term by failing to give Mr Elisha notice of, and afford Mr Elisha the opportunity to respond to, the allegations of patterns of aggressive behaviour. However, the Court of Appeal held that damages for psychiatric injury were not available for the breach of contract. This was because damages for psychiatric injury were only available in circumstances where the psychiatric injury was consequent upon physical injury caused by the breach of contract, or where the very object of the contract was to provide enjoyment or relaxation; and the psychiatric injury was too remote from the breach of contract by VA.
The issues on appeal
Mr Elisha appealed on the basis that the Court of Appeal erred in concluding that damages for the psychiatric injury suffered by Mr Elisha were not recoverable in a claim for breach of contract.
He also argued that the Court of Appeal erred in concluding that VA did not owe a duty to take reasonable care to avoid injury to Mr Elisha in the implementation by Vision Australia of the processes leading to and resulting in the termination of his employment.
The High Court decision
The High Court began by considering whether the 2015 Disciplinary Procedure was incorporated as a term of the Contract. In essence, the issue was whether the Court of Appeal was correct to conclude that the 'Other Conditions' clause of the Contract had incorporated the 2015 Disciplinary Procedure. The issue concerned only the interpretation of the terms of the Contract and whether those terms gave contractual effect to the 2015 Disciplinary Procedure. This required consideration of the common intention of the parties by reference to the object and text of the provision as well as the surrounding circumstances. The High Court had no hesitation in concluding that the common intention of the parties was that VA’s policies and procedures would be contractually binding on both employer and employee and specifically stated that: 'It would defy both logic and common sense to suggest that an employer who was subjecting an employee to disciplinary action according to contractual policies would not similarly be bound by those policies'.
The High Court rejected VA’s argument that even though the 2015 Disciplinary Procedure was incorporated into the terms of the employment contract, it was not contractually binding, including because it could not be reasonably understood as merely designed to ensure compliance with the Vision EA.
In relation to whether an employee is 'precluded' from recovering damages for breach of a contractual duty concerning the manner of their dismissal, the High Court noted that the scope of a defendant's contractual duty does not depend upon the damage that might reasonably have been contemplated by the parties but rather upon the nature of liability that, in light of the parties' agreement, the parties might fairly be regarded as having contemplated and been 'willing to accept'.
VA’s submission was effectively that, like damages for mental distress, there was a rule that damages for psychiatric injury were generally beyond the scope of any contractual term concerning the manner of termination of an employment contract. The House of Lords decision relied on in support of this argument was misplaced, however for several reasons including that it was decided over a century ago in very different social times. This meant that the scope of the contractual duty fell to be considered by reference to the usual considerations of the nature of the liability that, in light of the parties' agreement, the parties might fairly be regarded as having been willing to accept.
After noting that remoteness of damage in contract is separate from the scope of a contractual duty, the High Court considered whether the test for remoteness of damage had been satisfied. The general type of damage and general manner of occurrence must have been within the reasonable contemplation of the parties, at the time of contract, as a serious possibility. 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 was psychiatric injury.
Although the precise manner in which the breach by VA caused Mr Elisha's psychiatric injury need not have been contemplated by the parties, an important element in the causal sequence by which Mr Elisha's psychiatric injury occurred was that without Vision Australia's breach, Mr Elisha would not have been dismissed for alleged misconduct. This causal element was entirely predictable in light of the nature of VA’s breach. That causal element was significant.
In the High Court’s view:
The psychological impact of the breach that could reasonably be supposed to have been in the parties' contemplation included not only the grave effect of Mr Elisha's wrongful dismissal for alleged misconduct, but also the "unfathomable nature" of what occurred. The precise psychiatric injury suffered by Mr Elisha need not have been contemplated at the time of the 2006 Contract, but it was reasonable to expect that Mr Elisha would have been so distressed by the manner in which Vision Australia breached the 2006 Contract and by the consequences of the breach for him, including his dismissal for alleged misconduct from the employment that he had held for nearly a decade, that there was a serious possibility that Mr Elisha would suffer a serious psychiatric injury.
It was strictly unnecessary to consider the appeal ground relating to negligence, however the High Court indicated it raised very different issues, including that such a duty must be coherent with relevant legislation, such as employment law legislation and administrative law. In the absence of comprehensive submissions on the issue of coherence, and in circumstances in which it was unnecessary to consider the scope of an employer's duty to provide a safe system of work, the majority of the High Court declined to determine that appeal ground.
Implications for you
This decision marks a significant shift in the approach to psychiatric injuries in the workplace, particularly in relation to an employer's breach of contract and disciplinary processes that are found to have formed part of an employment contract.
Employees can now seek damages for psychiatric injuries caused by such breaches if the court finds that the employer’s written policies and procedures form part of the employment contract (at the time the contract was established). In these circumstances, the courts will scrutinise whether employers have followed their own written policies and procedures.
As such, employers should review their employment contracts to ensure that disciplinary processes (and indeed, other policies) are expressly excluded as a term of the employment contract. Alternatively, where they incorporated, employers must take particular care to ensure that processes are carefully followed, alongside offering adequate support to employees during investigations and dismissals.
Consideration should also be given as to whether a particular policy, including overly prescriptive disciplinary processes are actually required.
