Essay: Implied term of mutual trust and confidence prior to Malik v BCCI

Examine the development of the common law implied term of mutual trust and confidence prior to the House of Lords’ decision in Malik v BCCI. What is the significance of this development for the law of employment generally?
Introduction The doctrine of constructive dismissal provides that an employee is entitled in response to the employer’s unreasonable conduct which results in a fundamental breach going to the root of a contract. In this connection, the requirement for a fundamental breach may be constituted by the conduct on the part of the employer amounting to a repudiatory breach of a term of the contract or a breach of the implied term of mutual trust and confidence or both. In Malaysia, the relevant provision is section 20(1) of the Industrial Relations Act 1967 (‘IRA 1967’) which provides as follows:- ‘Where a workman, irrespective of whether he is a member of a trade union of workmen or otherwise, considers that he has been dismissed without just cause or excuse by his employer, he may make representations in writing to the Director General to be reinstated in his former employment; the representations may be filed at the office of the Director General nearest to the place of employment from which the workman was dismissed.’ The key phrase is that of ‘dismissed without just cause or excuse’. As the implied term of mutual trust and confidence originated from the doctrine of constructive dismissal, the Malaysian courts, in their endeavour to bring into play the implied term of mutual trust and confidence in the context of the concept of dismissal without just cause under section 20(1), have incorporated through this provision the doctrine of constructive dismissal. In addition, section 14(1) of the Employment Act 1955 (‘EA 1955’) provides as follows:- ‘An employer may, on the grounds of misconduct inconsistent with the fulfilment of the express or implied conditions of his service, after due inquiry:- (a) dismiss without notice the employee; (b) downgrade the employee; or (c) impose any other lesser punishment as he deems just and fit, and where a punishment of suspension without wages is imposed, it shall not exceed a period of two weeks.’ In the context of constructive dismissal, two tests have been developed by the courts with regard to the determination as to whether employer’s conduct amount to a breach of the implied term of mutual trust and confidence. As will be further discussed below, the courts General Principles In Western Excavating (ECC) Ltd v Sharp, the Court of Appeal held that an employee is only entitled to terminate a contract of employment where the employer’s conduct evinced an intention to no longer be bound by the contract i.e. it amounted to a fundamental breach which went to the root of the contract. This is commonly referred to as the contract test. In Bliss v South East Thames Regional Health Authority, the Court of Appeal held that ‘the employer shall 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’. This gave rise to the reasonableness test. In short, the difference between the contract test and reasonable conduct by the employer which was so unreasonable that it renders the employer to be in breach of the implied term of mutual trust and confidence may entitle the employee to claim for constructive dismissal notwithstanding the fact that such conduct does not amount to a fundamental breach under the ‘contract test’. In the context of the doctrine of implied term of mutual trust and confidence, this doctrine is not compatible with the contract test. This is because the contract test, as it is understood under the common law, does not provide for any element of good faith or fair dealing. In other words, parties to a contract are not obliged to look out for each other’s interest or to help each other fulfil their contractual obligations. Since the right to claim damages for any breach by the counterpart party is available, there is no reason why any party in a commercial relationship such as employment would wish to help each other. Accordingly, there is no room for any implication of the term of mutual trust and confidence under the contract test. As a result, the term can only be presumably implied under the reasonableness test. As will be discussed however, the Industrial Courts in Malaysia seemed to have found a way around this conundrum by mitigating the harshness of the contract test by imposing a requirement of reasonableness upon the exercise by a employer of its contractual powers. In Malaysia, the contract test was referred to with approval by the Malaysian Supreme Court in Wong Chee Hong v. Cathay Organisation (M) Sdn Bhd in which the court held that the reasonableness test could be ‘dangerous and can lead to abuse and unsettled industrial relation’. The Supreme Court in Wong Chee Hong seemed to have erroneously related the concept of dismissal without just cause or excuse in Malaysia with the common law doctrine of constructive dismissal. This error may be due to the court’s omission to properly consider the phrase ‘dismissal without just cause and excuse in section 20(1) of the Industrial relation Act 1967 (IRA 1967). Taking into account the fact that the remedy of reinstatement is available for any dismissal found to be without just cause, it can be said that the purpose and effect of the section is to ensure security of tenure. Accordingly, the doctrine of just cause in section 20(1) ‘ought not be confined to the point of dismissal, but that justice and equity should pervade and form the basis of the entire employment relationship’. In effect this means that the employer should not be allowed to treat their employees unfairly during employment while escaping liability by only treating the employees during the point of dismissal. Irrespective of the applicable test, it is submitted that this approach would allow the implication of the term of mutual trust and confidence. The remark by the Supreme Court in Wong Chee Hong relating to the dangers of the reasonableness test was not followed by the Industrial Courts in later cases. For example in Kuala Lumpur Glass Manufacturers Co. Sdn.Bhd. v. Lee Poh Kheng, the Industrial Court after paying lip service in stating that the contract test is applicable to claims of constructive dismissal nevertheless went on to hold that an employer is not allowed to unreasonably exercise its contractual powers to the detriment of the relationship of trust and confidence between the parties. Additionally in Rimex Sdn. Bhd. v. Mering Ak Madang, the Industrial Court held that the employer ‘ought to have accorded dignity, respect and consideration’ to the employee. Perhaps this bold departure on the part of the Industrial Courts is justified by section 30(5) of the IRA 1967 which provides that Industrial Courts ‘shall act according to equity, good conscience and the substantial merits of the case without regard to technicalities and legal form.’ In the United Kingdom, the development of the reasonableness test reached its climax in the case of Malik and Mahmud v Bank of Credit and Commerce International SA [1997] wherein the House of Lords extended the implied obligation of mutual trust and confidence on the part of the employer to any conduct by the employer so as to include conduct which is not directed at any particular employee. It is submitted that the reasonable test should be given preference over the contract test. This is because if the contract test is applicable, employers may engage in unreasonable conduct without giving rise any entitlement on the part of the employee to resign and claim damages so long as the conduct does not amount to a fundamental breach. Illustrative Example of Breaches In the course of this assignment, case laws of the United Kingdom jurisdiction which were decided prior to the landmark case of Malik and Mahmud v Bank of Credit and Commerce International SA will be discussed. The case laws serves as an illustration of the circumstances in which employers have been found to be in breach of the implied term of mutual trust and confidence will be discussed. The choice of referring to United Kingdom case laws was made on the basis that the legal jurisprudence as well as employment protection in the United Kingdom is much more devel
oped than other common law jurisdiction. Among the examples of conduct by employers in the United Kingdom which have been found to amount to breaches of the implied term of mutual trust and confidence are as follows:- (i) Inappropriate Criticisms (UK) In Courtaulds Northern Textiles Ltd. v Andrew, the employee who had worked for the employer for 18 years was involved in an argument with one of the assistant manager of the employer. At the end of the argument, the assistant manager said to the employee, ‘you can’t do the bloody job anyway’ whereupon the employee reacted by resigning and claiming for constructive dismissal against the employer. The Industrial Tribunal held that any expression of criticism by the employer, however trenchant it may be, will not automatically lead to the result that the criticism amounts to a repudiatory breach resulting in a finding of constructive dismissal. An evaluation has to be done based on the facts of each case to ascertain as to whether the criticism is appropriate under the circumstances of the case. Only if the criticism is inappropriate would it lead to a possible finding of repudiation. On the facts, as the criticism was not a true reflection of the actual situation, it amounted to a breach of the implied term of mutual trust and confidence giving rise to a finding of constructive dismissal. (ii) Unreasonable Treatment (UK) In Post Office v Roberts, the employee was a clerical assistant whose annual appraisals initially indicated that her working performance was of an acceptable level. According to the employer’s appraisal policy, all assessments have to be countersigned by a senior office. Unfortunately for the employee, her senior officer was not satisfied with her performance and the officer, without proper considerations, unjustifiably appraised the employee as being unsuited to qualify for promotion though the employee was not notified of this. Later on, the employee’s application for transfer was rejected purportedly on the grounds that there is no vacancy at the office the employee applied to go to. In actual fact, the rejection was due to the senior officer’s negative assessment of the employee’s work performance. When the employee found out about the real reason for the rejection, she resigned and initiated a constructive dismissal claim against the company. The Industrial Tribunal found that the unjustifiable negative appraisal coupled with the employer’s failure to tell the employee the real reason for the refusal of her transfer amounts to a breach of the implied term in the employment contract that ‘an employer will treat an employee in a reasonable manner’ in addition to the implied term of mutual trust and confidence. (iii) Imposition of Requirement Without Proper Basis (UK) In Bliss v South East Thames Regional Health Authority, the employee was a consultant orthopaedic surgeon at a hospital who was involved in a dispute with a colleague. The dispute escalated to such an extent that the colleague and his wife wrote to the Regional Medical Officer (RMO) to express their concern about the employee’s state of mind. The RMO referred the matter to a committee which found no pathological behaviour on the part of the employee. Nonetheless, the RMO wanted to have a meeting with the employee. However the employee refused to attend the meeting whereupon the RMO requested the employee to undergo a medical examination which the employee also refused. This resulted in a temporary suspension of the employee from his duties while disciplinary proceedings were brought against him. The proceeding ended with the committee of inquiry acquitting the employee of all charges. The employee alleged that the employer has wrongfully repudiated their contract of employment and that he had elected to accept this repudiation in relation to which he is claiming damages. The Court of Appeal held that the imposition by the employer of the requirement of psychiatric examination without reasonable cause amounted to a breach of the implied term of mutual trust and confidence of the employment contract between the parties thereby rendering the employer to have wrongfully repudiated the contract giving rise to a valid claim for damages on the part of the employee. (iv) Inadequate Protection (UK) In Smyth v Croft Inns Ltd, the employee was a Roman Catholic working as a barman at a pub with Protestant customer in Belfast which was religiously sensitive area. Another employee at the pub received a message which advised the employee not to be present in the bar during a particular time period. The employee was worried that his life was at risk and harboured the expectation that the employer will take protective action for his benefit. However the employer did not address the threat against the employee but instead merely told the employee that he is free to stay on working or resign from his job. The employee claimed that the lack of sympathy, concern and protection afforded by his employer amounted to unfair discrimination on the grounds of religious belief against him resulting in his constructive dismissal. The Northern Ireland Court of Appeal held that the employer was in breach of the implied term of mutual trust and confidence which justified the employee’s decision to leave his employment and to claim damages thereafter. (v) Omission to Notify (UK) In Scally v Southern Health and Social Services Board, the employees were medical practitioners who were suing the employer for their losses due to the employer’s failure to notify them of their rights to purchase additional years of pension entitlement before such rights had lapsed. The employees contended that the employer owed contractual, tortious as well as statutory duties to duly notify them of their rights under the pension scheme and that this failure on the part of the employer has caused them financial loss in relation to which they are claiming damages. The House of Lords held that the employer was contractually obliged to take reasonable steps to bring to the notice of the employees their right to enhance their pension entitlement through the purchase added years. There was a contractual obligation on the employers to take reasonable steps to bring the existence of the right to enhance their pension entitlement by the purchase of added years to the notice of the plaintiff employees. Accordingly, the court implied an obligation into the employment contract to such effect. The court reasoned that because the terms of the contract were not negotiated with the individual employee but instead resulted from negotiation with representative body, the employee cannot be reasonably expected to know the existence of a valuable right which is contingent upon action being taken by the employee. Under such circumstances, the implication of the term to impose an obligation on the part of the employer to bring to the employee notice the existence of the valuable right is necessary. On the facts, the employer was in breach of this implied term which is essentially rooted in the implied term of mutual trust and confidence. (vi) Unhealthy Work Environment (UK) In Waltons & Morse v Dorrington, the employee who was a non-smoker was a secretary at solicitors firm. After a change of sitting arrangement, the employee was affected by cigarette smoke which caused her discomfort whereupon she complained to the employer. The employer established a smoking policy which restricted smoking activities to particular areas of the office. However, this failed to solve the employee’s discomfort as a result of which she complained again to the employer who told responded by saying that there was nothing more they can do. As a result, the employee left her employment and claimed for constructive dismissal. The Employment Appeal Tribunal held that the employer could have taken the reasonably practicable step of prohibiting smoking within the office area. The failure on the part of the employer to do so resulting in continuous discomfort to the employee which eventually resulted in her leaving the employment amounts to a breach of the implied term of mutual trust and confidence on the part
of the employer. Discussions Judges in different common law jurisdictions have come up with different approaches with regard to the operation of the implied term of mutual trust and confidence. In the United Kingdom, Court of Appeal in Lewis v Motorworld Garages Ltd. held that the proper approach in considering as to whether the employer’s conduct amounts to a breach of the implied term of mutual trust and confidence is to look at it from an objective perspective taking into account the relevant actions and behaviour of the employer in a cumulative manner. In Quah Swee Koon v Sime Darby Bhd, the Malaysian Court of Appeal seemed to equate constructive dismissal with breach of the implied term of mutual trust and confidence. The court opined that the issue which should be considered in determining whether an employee has been constructively dismissed is simply ‘whether the appellant was driven out of employment or left it voluntarily’. In the Malaysian context, the courts would consider whether the employer’s conduct was so unreasonable that it resulted in the employee having practically no viable option but to leave the employment. In contrast, the United Kingdom courts would consider whether a reasonable person evaluating the employer’s conduct would adjudged it as amounting to a breach of the implied term of mutual trust and confidence. Accordingly, the approach of the Malaysian courts can be said to be more subjective in nature as compared to that of the United Kingdom courts. It is submitted that the Malaysian courts departure from the approach taken by the United Kingdom courts is proper. It should be kept in mind that the doctrine of constructive trust was incorporated into the local domain via section 20(1) of the IRA 197 which lays down the concept of dismissal without just cause whereas the doctrine of constructive trust was developed in an original manner in the United Kingdom. In this connection, section 20(1) focuses on the employee’s conduct whereas the doctrine of constructive dismissal focuses on the employer’s conduct. From this approach, it can be noted that section 20(1) consider matters from an employee’s perspective whereas the doctrine of constructive dismissal consider matter from an employer’s perspective. Hence it is proper that Malaysian courts consider the effect of the employer’s conduct on the employee from the employee’s perspective. Although the doctrine of constructive dismissal in the United Kingdom consider matters from the employer’s perspective, as it is not possible to consider the effect of the employer’s conduct on itself, hence the United Kingdom takes an objective perspective in this regard. In Australia however, the High Court in Commonwealth Bank of Australia v Barker rejected in no uncertain terms the doctrine of implied term of mutual trust and confidence. The court reasoned that the case of Malik was decided in the societal matrix and considerations prevalent in the United Kingdom. Accordingly, Malik was based on the social policy in the United Kingdom which requires a transformation of legal effects brought about by the operations of the contract of employment. Given the different political and constitutional structure in Australia and the United Kingdom, the court opined that such matters of policy ought to be decided upon by the legislature. For purposes of comparison with the common law, it should be noted that the European Convention on Human Rights (ECHR) has afforded protection to employees. This was noted by Heple who wrote that ‘since the court must act compatibly with convention rights, the duty of trust and confidence also embodies a duty to respect the convention rights of an employee’.. In this manner, the doctrine of implied term of mutual trust and confidence has been brought into play in the context of European employment governance framework through the role of the courts as the bastion protectors of rights afforded under the ECHR. Significance to Employment Law Based on the examples discussed above, it is clear that the impled term of mutual trust and confidence requires employers to behave in a reasonable manner in dealing with their employees. In addition, the courts in the United Kingdom have also held that in circumstances employers have a positive duty to act whereby omission to take the necessary actions may amount to a breach of the implied term. In this connection, as the case of Scally shows, an omission on the part of the employer to notify the employees of any benefit to which they are entitled may amount to a breach of the implied term. In general, the duties and obligations imposed on the employers through the doctrine of implied term of mutual trust and confidence have heralded a new era of possibilities for the law of employment to develop into. Some notable possible aspects of improvements are as follows:- (i) Employment as Relational Contract A relational contract is one in which the relationship of the parties are based on trust. The introduction of the doctrine of implied term of mutual trust and confidence into employment law has play a big part in moving this branch from of law from the traditional contract theory to that of a relational contract. Given the evolution of the employment sector from being labour-based to one one knowledge-based, it is submitted that this development towards relational contract is a positive one. This is because as the supervision and governance of employees by employers become less, the degree of trust and confidence required to exist between the parties in order for the relationship to function effectively plays an increasingly critical role. In this connection, McNeil has described relational contracts as being concerned with ‘role integrity, preservation of the relation, harmonisation of relational conflict, propriety of means and external or supracontract norms’. In the context of employment contracts, the doctrine of implied term of mutual trust and confidence plays an important role in bringing about and giving effect to the recognition that the employment relationship is one which goes far beyond the four corners of the employment agreement. At this juncture it is pertinent to note the comments by McLachlin J in Wallace v United Grain Growers that the employment contract ‘is not a simple commercial exchange in the marketplace of goods or services’ as it is ‘typically of a longer term and more personal in nature than most contracts, and involves greater mutual dependence and trust, with a correspondingly greater opportunity for harm or abuse’. The significance of the doctrine of implied term of mutual trust and confidence was that by promoting the element of trust in employment relationships and mitigating the risk of harm or abuse, which is a distinct possibility given the authority which employers hold over their employees especially so in the context of the labour based economy, the doctrine has edged employment contracts closer to the domain of relational contract (as per McNeil’s identified relationship contract features) by increasing the integrity of employees and rebalancing the bargaining powers so as to promote a healthier relationship in which conflicts can be solved in a harmonious manner. (ii) Greater respect of employees by employers Following on from the discussions in point (i) above, the doctrine of implied term of mutual trust and confidence would have brought about an employment culture in which employers understands that they should show greater respect towards their employees. This cultural development is more important than the development of the law itself. As our Constitutional Law Professor, Prof Shad said ‘life will always be greater than the law’. The courts through the application of the doctrine would hopefully have planted the seeds which would eventually result in the development of an employment culture in which the employee can have equal standing with the employer. ‘Culture’ can be defined as ‘the way of life, especially the general customs and beliefs, of a particular group of people at a particular time’. In the context of employment, it is hoped that culture respect for employees
engendered by the doctrine would eventually lead to respect for employees as a way of life, not because it is required by the law. (iii) Conformity With Constitutional Right to Livelihood In Tan Tek Seng v Suruhanjaya Perkhidmatan Pendidikan & Another, the Court of Appeal recognised that the right to livelihood constituted a facet of the right to life. The court emphasized on the importance of work to be an individual and interpreted Article 5 of the Federal Constitution as providing the ‘right to seek and be engaged in lawful and gainful employment and to receive those benefits that our society has to offer to its members’. Although the case was decided in the context of public employment, it is submitted that on the basis of Article 8 of the Federal Constitution which provides for the right to equality, the right to livelihood can be applied in the context of private employment as well. Accordingly, any dismissal proceedings would have to fulfil the requirements of due process in order for the dismissal to be valid. In this connection, the doctrine of implied term of mutual trust and confidence plays an important role in ensuring that employers would not be able to circumvent the requirement of due process in dismissal proceedings by treating the employee badly in order to force him to resign. Prior to the introduction of doctrine of implied term of mutual trust and confidence, the only test applicable was the contract test. If only the contract test is applicable, an unscrupulous employer who does not want to comply with the due process requirement of dismissal procedure may circumvent the requirement of due process in dismissal proceedings by treating the employee badly in order to force him to resign. So long as the employer’s conduct does not amount to a fundamental breach of the contract, the employee would not be able to claim for constructive dismissal. In this sense, there is arguably a lacuna in the law. The doctrine of implied term of mutual trust and confidence has plugged this lacuna as the introduction of the reasonableness test thereunder which prohibits the unscrupulous employer from acting unreasonably such as by treating the employee badly in order to force him to resign as this would amount to constructive dismissal under the reasonableness test though it may not so amount the contract test. (iv) Towards the Status Approach The status approach is one which takes into account the practical realities relating to employment contracts. In contrast the contract approach merely limits employment contracts to the four corners of the document. The development of the doctrine of implied term of mutual trust and confidence which have widened the scope in which the courts can imply terms into employment contracts is an illustration of the status approach of the courts based on human rights considerations. Under traditional contract law principles, terms can only be implied into contracts on the basis of the officious bystander test and on the ground that it is necessary to give business efficacy to the contract. However in the case of Scally, the Court of Appeal of the United Kingdom held that the court would imply a term as a necessary incident of a definable category of contractual relationship’ whereby the implication is made based on ‘wider considerations’. As this case involved employment issues, it is submitted that it represents a shift towards the status approach. On the facts, the courts recognized the inequality of information between the parties and thereby implied a term into the contract to impose an obligation on the part of the employer to give notice to the employees of a right to which the employees is entitled. Hence as can be seen from the case of Scally, the doctrine have resulted in the courts moving towards embracing the status approach in dealing with employment contracts. It is submitted that this is a positive development as the status approach affords more recognition of the incapacities of the employees in bargaining with employers wherefore employment contracts ought not be dealt as an ordinary business or commercial contract. (v) Economic Efficiency It is common knowledge that the balance of bargaining position and powers is titled in favour of the employer. It is also common acceptance that in a capitalistic market the law of employment tends to be inclined towards the interests of the employer. As Riley notes, the employment relationship is generally an unhealthy one as employers have an unilateral discretion to determine important aspects of the relationship. He writes that from the perspective of economic efficiency, employees can only maximize their benefits under an employment contract if the law can protect the reasonable expectations of the employees from being defeated by the employers. Based on our discussions above, it can be noted that the doctrine of implied term of mutual trust and confidence by realigning the balance of bargaining position and powers between employers and employees so as to render it more evenly balanced, though nonetheless still remains in favour of the employer, the doctrine would have increased the economic efficiency of the employment sector. This is because by affording greater protection to employees, the law would have reduced the likelihood of the employer defeating the reasonable expectations of the employees thereby allowing the latter to maximize their benefits under the employment contracts resulting in increased economic efficiency in accordance with Riley’s theory discussed above. Empirical studies have found that where parties enter into long term relational contracts on equal bargaining powers, there is more evidence of good faith as well as greater cooperation in pursuing joint goals. Hence by realigning the balance of bargaining position and powers between employers and employees, the doctrine of implied term of mutual trust and confidence can be said to have indirectly resulted in the fostering of healthier employment relationships. Conclusion Work is a central and essential part of the earthly existence of a human being. This is because to be engaged in purposeful and constructive work gives one a sense of worth and satisfaction in that one is able to contribute to the society to which one belongs. In this regard, the central role that work plays in the life of a citizen has been explicitly recognised by the Malaysian courts which have granted constitutional status to the right to earn a living. Given the importance of work coupled with the unequal bargaining position which is titled in favour of the employer as well as the pro-employer stance of statutory provisions enacted by the legislature, the courts have resorted to the mechanism of implied trust and confidence to protect employees from being subjected to exploitation or harsh treatment by the employer. This is a welcome departure from the traditional approach of English contract law which does not have any element of Roman ‘good faith’ but instead adopts the motto of ‘each man for himself’. In this regard, the trend towards respect and protection of employee is consistent with the path of contractual law inclining in the direction of good faith values which are expected to play a bigger role in the contractual arena of the United Kingdom in time to come. It is hoped that Malaysian courts will follow the footsteps charted by their United Kingdom counterparts in this context. This would render Malaysia to be in the beginning phase of the transition process into a welfarist system of judicial governance. In this connection, it can be noted that it is to the author’s personal knowledge that they are at least two leading legal firms in Malaysia which adopt the practice of annual contract renewals for their junior lawyers. It is submitted that such practices should be disallowed as it does not provide job security to such lawyers.This is but one example of possible abuse by employers of their superior bargaining position. The courts in the course of developing the common law ought to be acutely aware and constantly keep in mind such abusive leverage by employers of their superior bargaining p
osition as it hinders the development of mutual trust and confidence between the parties without which the employment relationship may lack any ‘intrinsic significance’.