High Court rules employer liable for psychiatric injuries resulting from breach of employment contract

In the recent decision of Elisha v Vision Australia Ltd [2024] HCA 50, the High Court allowed an appeal awarding $1.44 million in damages to a former employee for psychiatric injuries resulting from breach of a disciplinary procedure contained in an employment contract.

Background

Mr Adam Elisha was employed by Vision Australia as an adaptive technology consultant. In March 2015, he was on a work-related trip in regional Victoria when an incident occurred at his hotel. The circumstances of the incident are disputed, however one of the hotel’s proprietors, Ms. Trch, alleged that Mr. Elisha had been aggressive and intimidating towards her during his stay.

Vision Australia subsequently stood down Mr. Elisha and requested that he attend a meeting that would be conducted in line with Vision Australia’s enterprise agreement and Disciplinary Procedure. The allegations in the letter to Mr. Elisha were confined exclusively to the incident at the hotel.

During a meeting about the allegations, Mr. Elisha denied the allegations set out in the letter. The following day, Vision Australia terminated Mr. Elisha’s employment. In its deliberations, Vision Australia accepted Ms. Trch’s account of the incident over Mr. Elisha’s, and also considered that Mr. Elisha had been the subject of previous reports of aggressive behaviour. However, this was not disclosed to Mr. Elisha at the meeting.

Following the termination, Mr. Elisha was diagnosed with major depressive disorder and an adjustment disorder with depressed mood. He was found to have no capacity for work in the foreseeable future.

In June 2015, Mr. Elisha brought an unfair dismissal claim, which was settled for AU$27,248.68, being the maximum amount to which he could be entitled in that jurisdiction.

At trial in a breach of contract claim by Mr. Elisha, the primary judge characterised the disciplinary process as ‘a sham and a disgrace’ and held that Vision Australia breached the Disciplinary Procedure, which was incorporated into Mr Elisha’s employment contract, by failing to provide Mr. Elisha with a letter containing the allegations upon which Vision Australia ultimately acted in terminating his employment. The primary judge awarded damages for breach of contract, concluding that the risk of psychiatric illness was not too remote.

The decision was then overturned by the Court of Appeal.

Mr. Elisha appealed the Court of Appeal’s decision to the High Court. He relied on two grounds, being 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; and
• Vision Australia 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.

Decision

The High Court allowed the appeal.

In its decision, it rejected Vision Australia’s contention that the Disciplinary Procedure was not incorporated into Mr. Elisha’s employment contract, and held that psychiatric injury is part of a class of physical or personal injury for which damages are recoverable for breach of contract. It observed that, in any case, the scope of a contractual duty is determined by reference to the nature of the liability that the parties might fairly be regarded as having been “willing to accept”.

Further, the High Court held, by majority, that Mr. Elisha’s loss was not too remote because the kind of damage suffered (psychiatric injury) and the general manner of its occurrence was within the reasonable contemplation of the parties, at the time of the contract, as a serious possibility.

The High Court stated that the reasons why the primary judge held that Mr. Elisha was successful in his claim was based on a conclusion that Vision Australia had “…anticipated that risk by providing access to counselling and support”. The primary judge thus concluded that the parties should:

“be taken reasonably to have had in contemplation that distress and potential psychiatric illness was a risk that was a ‘serious possibility’, ‘not unlikely’ or ‘on the cards’ in the event that the protective processes directly contemplated by the terms of the contract were not followed and [Mr. Elisha’s] employment was therefore wrongly terminated'”.

What does this mean for employers?

This is a critical decision for employers and overturned a long-standing position about an employee’s ability to claim compensation for psychiatric injury arising from employment termination decisions.

In this case, the issue for Vision Australia was that their policies inadvertently became incorporated into Mr. Elisha’s employment contract. Therefore:

• Employers should review their employment contracts to ensure that they expressly state that policies and procedures are not incorporated into the employment contract.
• If policies and procedures are incorporated into employment contracts, employers should ensure that they comply with their obligations in terms of investigating workplace issues, especially if termination of employment is a possible outcome.
• Although policies and procedures are an important aspect of running a business, they should be worded to allow some flexibility or variation as required, depending on the situation.
• All relevant allegations that are being considered as the basis for termination should be put to employees and they should be afforded the opportunity to respond to all allegations.
• Employers should also consider who the ultimate decision maker is. If there has been ongoing tension between the employee and their manager, for example, then consider substituting in a “neutral” decision maker to assess the facts and circumstances prior to deciding whether to terminate.

Given it is common practice for employers to offer the services of employee assistance programs to employees under investigation or in the throes of being terminated, employers will need to tread cautiously when contemplating the provision of these services and ensuring there is no other evidence of contemplation of distress. This would be particularly the case in the circumstances of a long-standing employee being terminated after an investigation that may have some flaws.

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Authored by:
George Haros, Partner
Isabella Kiparizov, Lawyer