Co-authored by Dylan Anderson
What happens where an employer ‘botches’ an investigation and dismissal process? A recent High Court case has shed some light…and provides a useful reminder about the importance of following due process.
Background
In the High Court case of Elisha v Vision Australia Limited, Vision Australia was found liable for an employee’s psychiatric injury as a result of the employer’s breach of contract following an unsatisfactory investigation and dismissal process. Vision Australia was subsequently ordered to pay $1.44 million in damages to its former employee.
Mr Elisha, the employee, was dismissed on 29 May 2015 for ‘serious misconduct’ relating to an altercation with a hotel manager during a work trip in country Victoria. Following the investigation and the dismissal, Mr Elisha was diagnosed with a major depressive disorder, which formed the basis of his claim for psychiatric injury.
The High Court ultimately considered three key points in relation to the alleged breach of contract, namely:
- whether the particular contract of employment incorporated the employer’s disciplinary polices as terms of the contract;
- whether liability for psychiatric injury caused by a breach of employment contract is beyond the scope of the employer’s contractual duty concerned with the manner of dismissal; and
- whether liability for psychiatric injury was too remote in the circumstances of the particular contract.
Employment contract and breach of policies
The High Court considered the specific employment contract between Mr Elisha and Vision Australia and held that a 2015 Disciplinary Procedure Policy was incorporated into the employment contract. The procedure required that where a ‘concern is of a more serious nature’, a specific procedure will be followed, including the provision of a letter to the employee with an outline of the allegations and subsequently convening a ‘formal disciplinary meeting’ where the employee has the opportunity to respond to the allegations
Vision Australia breached this policy by failing to put a key allegation to Mr Elisha – that is, that it viewed the incident in the Hotel as an ‘example in a pattern of aggression’. In failing to put that allegation to the employee, Vision Australia did not provide him with the opportunity to respond to it, and therefore failed to uphold the procedurally fair standards set by its policy.
Scope of contractual liability
One of Vision Australia’s central arguments related to the scope of their contractual duties -specifically that damages for mental distress were not generally within that scope. Vision Australia relied on a principle from a 1909 House of Lords case, Addis v Gramophone Company Ltd, which found that mental distress was generally ‘unrecoverable as a head of damages’ in connection with contractual relationships.[1] The rationale for not allowing mental distress to be claimed in contractual relationships is that without express provision in the contract, the liability of one party for the other’s mental distress upon breach is ‘not…part of the business risk of the transaction’.[2]
The High Court considered Vision Australia’s reliance on Addis as misplaced, since the case didn’t state that damages can never be recovered for psychiatric injury arising out of a termination of employment contract.[3] Further, the High Court stated that the age of the case and the fact that it is no longer good law in England, impacted its applicability to the Australian context. Lastly, the High Court pointed to the previous case of Baltic Shipping Co v Dillon where a majority had held that ‘damages for psychiatric injury were available for breach of contract without any suggestion of an exception for employment contract[s]’. For these reasons, the court found that Vision Australia’s scope of liability for damages relating to a breach of contract included psychiatric injury.
Remoteness of the psychiatric injury
In considering remoteness, the High Court found that the ‘psychological impact of the breach that could reasonably be supposed to have been in the parties contemplation included not only the effect of Mr Elisha’s wrongful dismissal for alleged misconduct, but also the nature in which it occurred.’
The exact psychiatric injury that Mr Elisha suffered was not required to have been contemplated at the time the employment contract was entered into. The Court also concluded that it was reasonable for the employer to expect that Mr Elisha would have been so distressed by the manner in which the contract was breached and consequences of the breach, that there was a serious possibility that Elisha would suffer a serious psychiatric injury. Noting this, the court found that the damages for psychiatric injury were not too remote.
Key take aways for employers
Employers should review employment contracts and their policies to ensure that the policies are not inadvertently incorporated into the terms of employment or create mutually binding obligations. Disciplinary policies should allow for flexibility and discretion for the employer. Employers should regularly review workplace policies to ensure they are fit for purpose.
The case is also a timely reminder that an employer must ensure that during a disciplinary process, all allegations are put to the employee for his or her response prior to making a decision on the outcome.
Contact Coleman Greig’s experienced employment contract lawyers for a review of your contracts.
[1] Addis v Gramophone Company Ltd [1909] AC 488.
[2] Fidler v Sun Life Assurance Co of Canada [2006] 2 SCR
[3] Elisha v Vision Australia Limited [51].
