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On 11 December 2024, the High Court of Australia in Elisha v Vision Australia Limited [2024] HCA 50 awarded damages of $1.44 million to a former employee for a psychiatric injury suffered because of the employer’s breach of contract.

The decision overturned the longstanding view that psychiatric injury caused by a breach of an employment contract cannot be compensated. The reasons damages for psychiatric injury were available to the employee in this case were:

  1. The employer did not follow the disciplinary processes set out in their policies, which were expressly incorporated into the employee’s employment contract.
  2. The employee’s loss was not ‘too remote’ – at the time the contract was entered, the loss was a reasonably expected consequence of a breach of the contract.

The decision is an important reminder for employers to ensure their policies and procedures are not unintentionally incorporated into employment contracts. The decision also highlights the need to ensure that settlement agreements are carefully drafted to release the employer from any future claims an employee is able to make in relation to their employment.

Background

Mr Elisha commenced employment with Vision Australia in 2006 as an adaptive technology consultant. Mr Elisha's employment contract stated:

  • “In addition, Employment Conditions will be in accordance with…Vision Australia Policies and Procedures. Breach of the Policies and Procedures may result in disciplinary action”; and
  • “I agree to comply with…all other Company Policies and Procedures.”

In March 2015, Mr Elisha was involved in an incident while he was staying in a hotel for work. The hotel owner alleged that Mr Elisha was aggressive and intimidating when he called reception during the night to make a noise complaint and then also during check out.

As a result of the hotel owner’s complaint, Mr Elisha was stood down pending a disciplinary meeting. Mr Elisha was provided with a letter that:

  • confirmed the disciplinary meeting would be conducted in accordance with Vision Australia’s enterprise agreement and its disciplinary procedure, and
  • informed Mr Elisha of the allegations against him, which were confined to misconduct during the hotel incident and based on the evidence of the hotel owner.

During the disciplinary meeting, Mr Elisha read out a written response in which he said that he “vigorously” denied any of the alleged misconduct and “never behaved in any verbally aggressive nor intimidating manner”.

Vision Australia then terminated Mr Elisha’s employment for serious misconduct after finding that it preferred the hotel owner’s evidence and because Mr Elisha had displayed a “pattern of aggression” during his employment.

Following the termination, Mr Elisha was diagnosed with major depressive disorder and an adjustment disorder with depressed mood.

Mr Elisha initially filed an unfair dismissal claim in the Fair Work Commission, which was settled for $27,248.68 under a deed of settlement. The release clause in the deed stated that it applied to the “employment, proceedings and the termination” (emphasis added).

In August 2020, Mr Elisha commenced proceedings seeking damages for his psychiatric injury.

Supreme Court of Victoria

At first instance, the Supreme Court found in favour of Mr Elisha and awarded him damages of $1,442,404.50. In doing so, the Court held that:

  • Breach of contract: the disciplinary procedure had been incorporated into the employment contract and Vision Australia had therefore breached the contract when it failed to provide Mr Elisha with a letter, prior to the disciplinary meeting, containing all the allegations against him (including the allegation as to a pattern of aggressive behaviour during his employment). The Court also noted that from the point Mr Elisha’s manager had become involved, the disciplinary process was “nothing short of a sham and a disgrace”.
  • Remoteness of injury: Vision Australia should have reasonably contemplated that there was a serious possibility that Mr Elisha may experience distress and possibly a psychiatric injury if it failed to follow the procedures which had been incorporated into the employment contract and this failure led to his wrongful termination.

Vision Australia argued that Mr Elisha was barred from commencing these proceedings because of the deed of settlement the parties had entered when Mr Elisha’s unfair dismissal claim was resolved. However, the Court found that the release, by reason of the operative word “and” in the phrase “employment, proceedings and the termination”, was limited to matters related to the unfair dismissal proceedings only. This meant Mr Elisha was not barred from later bringing his breach of employment contract and negligence claims as they fell outside the scope of the release.   

Court of Appeal 

On appeal, the Court of Appeal overturned the first instance decision. While it agreed that Vision Australia had breached the employment contract (by failing to inform Mr Elisha about the allegations and give him an opportunity to respond to claims of a pattern of aggression), it found that Mr Elisha could not receive compensation for his psychiatric injury because:

  • damages for psychiatric injury are unavailable for a breach of contract, other than where:
    • the psychiatric injury follows a physical injury which was caused by the breach of contract, or
    • the object of the contract was to provide enjoyment or relaxation, and
  • Mr Elisha’s psychiatric injury was too remote from the breach of contract by Vision Australia.

Vision Australia’s submissions and the Court of Appeal decision both substantially relied upon the longstanding decision of the House of Lords in Addis v Gramophone Company Ltd [1909] AC 488 (Addis).  Addis held that where an employee is wrongfully dismissed from their employment, the damages for the dismissal cannot include compensation for the manner of the dismissal, injured feelings, or the loss the employee may sustain from the fact that the dismissal itself makes it more difficult for them to find new employment.

High Court of Australia

Mr Elisha appealed the Court of Appeal's decision on two grounds, arguing the Court of Appeal had wrongly concluded that:

  • damages for his psychiatric injury were not recoverable as part of a claim for breach of contract, and
  • Vision Australia did not owe Mr Elisha a duty to take reasonable care to avoid injury to him in the implementation of the disciplinary processes. This argument had failed at each instance and given the acceptance of the breach of contract claim, there was no need for it to be decided by the High Court.

In deciding Mr Elisha’s first ground of appeal, the High Court held that it is possible for an employee to recover damages for psychiatric injury caused by a breach of contract regarding the manner of dismissal. It found that the Court of Appeal’s reliance upon Addis was “misplaced” for the following reasons:

  • Firstly, Addis did not decide that damages can never be recovered for psychiatric injury arising from the manner of termination of a contract of employment.
  • Secondly, Addis was decided more than a century ago in a different social context and has been overtaken substantially by more recent decisions in the United Kingdom and Australia.
  • Thirdly, four members of the High Court in Baltic Shipping Co v Dillon (1993) 176 CLR 344 had held that damages for psychiatric injury were available for breach of contract, without any suggestion of an exception for employment contracts.

After determining that Mr Elisha was entitled to seek damages for his psychiatric injury, the High Court next considered whether the injury was too remote from Vision Australia’s breach of contract. The Court applied the established test from Hadley v Baxendale (1854) 9 Ex 341, being:

  • 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
  • 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”.

The High Court concluded that Mr Elisha’s loss was not too remote and the precise psychiatric injury he suffered did not need to have been foreseen at the time the contract was entered. Rather, it was reasonable to expect that Mr Elisha would have been so distressed by the manner in which Vision Australia breached the employment contract and by the consequences of the breach for him, including dismissal for alleged misconduct from the employment that he had held for nearly a decade, and there was a serious possibility that Mr Elisha would suffer a serious psychiatric injury.

Key takeaways

  • Carefully review employment contracts—Employers should carefully review their employment contracts to ensure that any disciplinary processes outlined in policies, enterprise agreements or similar documents have not been accidentally or unknowingly incorporated as contractual terms.
  • Exercise caution in drafting deeds of release—Employers should ensure that release clauses in deeds of release and settlement agreements are broadly drafted to capture future claims relating to the employee’s employment.
  • Understand the risks of breach of contract claims—Employers should be aware that employees may be entitled to claim damages for psychiatric injuries resulting from breaches of their employment contract, including the manner of termination. These claims may not be "too remote" if the risk of injury was reasonably foreseeable when the contract was entered.

 

 

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