A new era – botched disciplinary and dismissal processes can give rise to psychological injury claims says the High Court of Australia

Elisha v Vision Australia [2024] HCA 50 (‘Elisha’) is a landmark decision when, on 11 December 2024, the High Court held that employers can, in certain circumstances, be liable for contractual damages if an employee suffers psychiatric harm when disciplined or dismissed.

Legal context

Since the decision of the High Court in Baltic Shipping Co v Dillon [1993] HCA 4, damages for psychiatric injury were available for breach of contract without any suggestion of an exception for employment contracts.

In the decision in Addis v Gramophone Company Ltd [1909] AC 488 the view taken in Australia was that damages with respect to psychiatric harm caused by the breach of an employment contract were not precluded. The decision in Elisha as far as breach of employment contracts are concerned, has taken this one step further.

The facts

Mr Adam Elisha commenced employment with Vision Australia Ltd (‘Vision Australia’) as a consultant in September 2006.

It was alleged on 23 March 2015 Mr Elisha acted in an aggressive and intimidating manner, during a work-related stay at a hotel, to the hotel’s proprietor. However, the circumstances of the incident were disputed.

Following internal reports from Mr Elisha’s colleagues who reported the alleged behaviour to Mr Elisha’s manager, an internal investigation was undertaken.

On 19 May 2015, the worker’s manager met with Mr Elisha and advised him there was a serious complaint against him. Mr Elisha’s manager informed him that he was to be stood down. He was given a letter outlining allegations that Mr Elisha had breached a number of Vision Australia’s policies and was told a disciplinary meeting had been organised on 26 May 2015.

The meeting and Mr Elisha’s dismissal, the Achilles heel for Vision Australia

During the meeting on 26 May 2015, Mr Elisha denied the allegations made against him. However, Vision Australia preferred the hotel proprietor’s narrative of the alleged incident.

Ultimately, Vision Australia determined based on a supposed lack of remorse, the hotel proprietor’s recount, and previous allegations of aggressive behaviour to terminate Mr Elisha for misconduct on 29 May 2015. However, Mr Elisha was not told the allegations of previous aggressive behaviour were the subject of the investigation. Subsequently, Mr Elisha was diagnosed with depressive disorder.

The beginning of the end

Mr Elisha commenced legal proceedings claiming damages for his psychiatric injury in the Supreme Court of Victoria on 27 August 2020.

The proceedings were brought on two bases:

1.     breach of the terms of his contract employment

2.     negligence in failing to provide "a safe system of investigation and decision-making with respect to discipline and termination of employment". 

Justice O’Meara, the primary judge, found that the disciplinary process Mr Elisha was subject to was ‘unfair, unjust and wholly unreasonable’, labelling Vision Australia’s process as ‘nothing short of a sham and a disgrace’. Justice O’Meara found that Vision Australia had breached cl 47.5 of the Vision enterprise agreement and its 2015 Disciplinary Procedure, which were incorporated into Mr Elisha’s employment contract. Justice O’Meara found Vision Australia breached Mr Elisha’s contract of employment in failing to provide a letter outlining all the allegations it was considering as part of the disciplinary process.

Justice O’Meara concluded the possibility of psychiatric harm was considered at the time the contract was entered into and Vision Australia had anticipated this risk. Consequently, Justice O’Meara awarded damages of $1.44 million for lost earnings and pain and suffering resulting from breach of contract.

However, Justice O’Meara rejected Mr Elisha’s claim for damages for breach of Vision Australia’s duty of care to provide a safe system of investigation and decision making for disciplinary action and termination as he said damages for a breach of this nature were ‘not presently recognised by common law’.

On appeal, Justices of Appeal McLeish, Kennedy, and Macaulay overturned Justice O’Meara’s decision that damages for psychiatric injury were available for breach of contract. The Court said ‘an employer owes no duty of care to avoid injury to employees in the implementation of processes leading to and resulting in … termination’ and that Mr Elisha’s injury was ‘too remote from the breach of contract by Vision Australia’.

The High Court’s decision

The High Court rejected Vision Australia’s submission that its 2015 Disciplinary Procedure was not incorporated into Mr Elisha’s 2006 employment contract and held psychiatric injury is part of a class of physical or personal injury for which damages can be awarded for breach of contract.

Whether psychiatric injury caused by a breach of contract is too remote

The primary issue before the High Court was determining whether Mr Elisha’s psychiatric injury was too remote to entitle him to recover damages for breach of contract. Hadley v Baxendale [1854] 9 Ex 341 (‘Hadley’) established two tests to determine whether damage was too remote to entitle a party to damages for contractual breach:

1.     whether the loss suffered by the claimant was in the contemplation of the parties at the time the contract was signed, and

2.     whether the loss suffered by the claimant was not merely a possibility but was not unlikely.

The High Court adopted this approach and found that psychiatric damage could be imputed as having occurred ‘in the ordinary course of things’ (Hadley) and could reasonably be said to have been in contemplation of both parties as a ‘serious possibility’ at the time the contract was signed. Ultimately, Chief Justice Gageler and Justices Gordon, Edelman, Gleeson, and Beech-Jones rejected Vision Australia’s submission that Mr Elisha’s claimed psychiatric damage was too remote, adopting a view that the category of harm (psychiatric injury) only need be considered, and the precise type of psychological injury need not have been contemplated. The High Court grounded this reasoning on modern societal views on employment and stated:

‘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.’ An unfair process of termination for alleged misconduct could affect all three of those interests’.

Do employers owe a common law duty of care regarding investigation and decision-making with respect to discipline and the termination of employment?

The NSW Court of Appeal decision of New South Wales v Paige[1] held they do not.

However, the majority of the High Court decided it was not necessary to determine the correctness of that decision for the purpose of Mr Elisha’s appeal.

So, at this time the decision in Paige remains good law.

However, from a workers compensation perspective, that may make little difference assuming an employer’s policy indemnifies it for psychiatric injury resulting from breach of a contract of employment.

What does this mean for employers?

From the employment law perspective, there is likely to be a flow on effect when a cause of action is pleaded in the Federal Circuit Court and Family Court of Australia or the Federal Court of Australia in general protections claims, including allegations of damages for psychiatric injury. This will also be the case for breach of contract claims.

Key takeaways for employers

• ensure that contracts of employment do not incorporate a disciplinary process

• ensure that contracts of employment explicitly state that policies do not form part of an employee’s contract

• ensure that termination clauses in contracts of employment clearly state that termination can occur at any time and for any reason

• when drafting a letter to an employee where misconduct is alleged, ensure the letter contains all the allegations relied on by the employer which the employee will be required to respond to.

Employers should reach out to Bartier Perry’s legal team for assistance and advice regarding the issues raised in this article or for any other matters.

Authors: Shawn Skyring & Will Murphy