High Court sets precedent with $1.44 million damages for psychiatric injury

Here, our experts break down this case in detail, covering everything from the key facts and court decisions to essential lessons for employers and the lasting precedent it establishes for similar cases in the future.

The facts

Mr Elisha began working with Vision Australia in September 2006. During a work trip in March 2015, an incident occurred where he was accused of acting aggressively and intimidating hotel staff. The allegation was later reported by two other Vision Australia employees who stayed at the hotel afterwards. These employees reported the matter to Mr Elisha’s manager, who expressed little surprise at the claims and requested that the matter be investigated.

On 19 May 2015, Mr Elisha met with his manager, who informed him of a serious complaint against him and gave him a stand-down letter. The letter required his attendance at a meeting two days later, which was to be conducted in accordance with the Vision Australia’s enterprise agreement.

During the meeting, Mr Elisha denied the allegations in the stand down letter, however, the following day, Vision Australia determined that it accepted the hotel proprietor’s account of the incident over Mr Elisha’s account due to previous allegations of aggressive behaviour. Notably, this past behaviour, which was passed on to the investigator, was not but not put to Mr Elisha during the meeting. On 29 May 2015, Vision Australia for serious misconduct.

Mr Elisha commenced unfair dismissal proceedings where the matter settled with Mr Elisha being awarded the maximum compensation, six months’ pay, totalling $27,428.68.

In August 2020, Mr Elisha commenced proceedings in the Supreme Court of Victoria, seeking damages for psychiatric injuries, including a major depressive disorder and an adjustment disorder with depressed mood.

Primary Judge’s Decision

The Primary Judge ruled in favour of Mr Elisha, noting  significant inconsistencies in the hotel manager’s accounts of the incident and found that “Mr Elisha had not yelled or shouted; he was not aggressive or threatening during the incident; and when leaving the hotel Mr Elisha did not throw the room key towards the desk in an aggressive or threatening manner.”

In respect of the investigation, the Primary Judge found that Vision Australia had already accepted the hotel’s version of events before meeting with Mr Elisha and that the true reason for termination was deemed to be an alleged history of aggression and excuse-making; the judge criticised as lacking proper evidence and substance.

Due to the fact that Mr Elisha wasnot given the opportunity to respond to these allegations, the Primary Judge determined that the process adopted by Vision Australia was nothing short of a sham and a disgrace. The primary judge determined that damages could be awarded for the psychological injury sustained due to the unlawful breach of contract and awarded damages in the sum of approximately $1.44million. The Victorian Court of Appeal upheld Vision Australia’s appeal and determined that the damages were not recoverable.

Legal issues to be determined by the Hight Court

The Court was required to consider the following:

1. Did Vision Australia’s employment policies form part of Mr Elisha’s employment contract?
2. Were damages for psychiatric injury recoverable for a breach of contract claim?
3. Did Vision Australia owe a duty of care to avoid injury to Mr Elisha?

The Decision

The majority judgment of Gageler CJ, Gordon J, Edelman J, Gleeson J and Beech-Jones JJ first considered whether Vision Australia’s policies were incorporated in Mr Elisha’s employment contract. The term of the contract is set out below.

“Conditions of Employment

Your engagement will be governed by the terms of this letter and the [1999 Award].

…

Other Conditions

In addition, Employment Conditions will be in accordance with regulatory requirements and Vision Australia Policies and Procedures. Breach of the Policies and Procedures may result in disciplinary action.”

The acceptance on the last page of the letter was as follows:

“ACCEPTANCE:

This contract may be amended from time to time by mutual agreement between the parties.

I have read and fully understand the terms and conditions of employment detailed in this contract. I agree to comply with these terms and conditions of employment and all other Company Policies and Procedures.

I certify that the details in my application/curriculum vitae are true and correct; and that I have no knowledge of any fact or circumstance, which may prevent fulfilment of the terms of this contract.”

The High Court considered that the references to the Employment Conditions would be understood by a reasonable person in the position of the parties as creating contractually binding obligations, particularly since the clause provided that a breach by Mr Elisha of the additional policies and procedures may result in disciplinary action. Vision Australia argued that the insertion of the policies in the contract would create an uncertain term as the policies and procedures may be amended at any time at the discretion of the employer, but the High Court found that the lack of certainty wasn’t a reason to deny the clearly expressed intention of the parties that those things that answer the description of a policy or a procedure, from time to time, will have contractual effect.

Vision Australia argued that an employee is precluded from recovering damages for mental distress through a breach of a contractual duty concerning the manner of their dismissal as it couldn’t have reasonably contemplated by the parties at the time the contract was entered as well as the pre-existing decisions of the Courts that mental distress as generally unrecoverable as a head of damages. The basis for this submission was based substantially on the UK decision of Addis v Gramophone Company Ltd [1909] AC 488 (Addis). The High Court reflected that the decision of Addis was over a century ago and had been substantially overtaken in the United Kingdom and didn’t place much weight on this submission.

The High Court looked at the decision in Hadley v Baxendale (1854) 9 Ex 341 at [354] which contains the test as to where a loss will be too remote to recover damages. The two limbs are:

1. whether, assessed at the date of contract, it could be said that the damage from that breach arose “according to the usual course of things”; or
2. whether the damage could “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 of it”

Applying these principles, the High Court determined that given the disciplinary meeting was considered to be a sham due to the evidence of the hotel being accepted prior to Mr Elisha’s disciplinary meeting and, therefore, while the precise manner of the breach wasn’t required to be contemplated by Vision Australia, the causal sequence by which Mr Elisha’s psychiatric injury occurred was that without Vision Australia’s breach, Mr Elisha wouldn’t have been dismissed for alleged misconduct and this was entirely predictable in light of the nature of the breach. The High Court noted that “it has been described as a “social reality” that a person’s employment “is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem.”[1] An unfair process of termination for alleged misconduct could affect all three of those interests, i.e., a person’s livelihood, identity, and self-esteem.”

The High Court noted that the precise psychiatric injury suffered by Mr Elisha didn’t need to be considered at the time of the execution of the contract in 2006, 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.

Given the High Court concluded that damages may be recoverable from the breach of contract, the High Court didn’t delve into the appeal ground concerning the tort of negligence in significant detail. The High Court did note the authority of New South Wales v Paige (2002) 60 NSWLR 371 the New South Wales Court of Appeal held that an employer was not under a general common law duty of care “to provide a safe system of work encompass[ing] the provision of a safe system of investigation and decision making” in respect of employees who are in breach of their terms of employment. The High Court didn’t delve into this position and whether a breach of the Fair Work Act would provide an employee the opportunity to seek damages for psychological injury, including in proceedings for adverse action.

We do note that in the dissenting Judgment, Steward J did reflect that on the question of remoteness, he “would classify the type of harm which needed to be in the contemplation of the parties in 2006, when the employment contract was entered into, as being ‘serious psychiatric injury’ as distinct from merely ‘psychiatric injury” and the fact that Vision Australia didn’t have any knowledge of Me Elisha’s mental health, it couldn’t have contemplated at the time of the execution of the contract.

What are the key lessons for employers?

The longstanding authority of Addis v Gramophone Company Ltd [1909] AC 488  has been abandoned because of Elisha; psychiatric injury caused by a breach of an employment contract is directly compensable. Additionally, Elisha confirms that the parties to an employment contract understand that a serious possibility of a breach of contract is that psychiatric damage could occur.

The key lessons for employers are:

1. Carefully review employment contracts and ensure that other documents, including policies and procedures, enterprise agreements and other documents, aren’t incorporated.
2. Develop a thorough understanding of any referenced documents and ensure compliance with their provisions.
3. Diligently follow contractual obligations when conducting workplace investigations.

The Court accepted that Vision Australia’s policies formed part of Mr Elisha’s employment contract. Vision Australia’s failure to comply with the policies and its decision to proceed with the termination without sufficient investigation was pivotal in the High Court deeming the decision termination unfair. The investigators were also found to lack credibility on major issues in the dispute.

This case highlights an important takeaway for employers. The Court’s willingness to consider organisational policies as part of an employment contract – even if this was not the intention of the issuing party – should prompt a review of employment contracts and policy wording. Employers must work to eliminate or minimise the risk of a breach of contract claim, particularly given the increase in psychological injuries in the workplace and can result in significant, as demonstrated in this case.

We consider that this decision may also serve as a reference to adverse action claims, where employees could include breach of contract damages to strengthen their negotiating position, particularly if backed by supporting medical evidence of an injury.

If any of the information in this article has raised questions or concerns about what this decision may mean for your business or if you have another workplace matter you require assistance with, please reach out to our experts for a confidential chat here.

About our authors

Michal Roucek is a Partner and Solicitor at Citation Legal and is based in Sydney and has also worked in London. Since 2009, he has worked exclusively in workplace and industrial relations law and is known as a safe pair of hands in dealing with complex workplace disputes and strategic litigation in the full suite of employment, workplace relations, industrial relations and executive level. Michal is an interest-based advocate recognised by both the business and union-employee communities as a conciliatory and innovative problem solver. He is focused on outcomes and solutions for clients.

Mitchell Hickey is a Senior Associate in Citation Legal which is part of Citation Group. He has an interest in all things legislation, safety and ER/IR related and regularly provides advice on workplace matters to find solutions for clients. Mitchell has a keen interest in solving complex problems for clients and regularly appears in the Fair Work Commission, Australian Human Rights Commission and the Federal Circuit and Family Court of Australia as well as other courts and tribunals.