High Court finds employer liable for employee's psychiatric injury

What you need to know

• Employers who do not follow disciplinary and termination processes that are incorporated into contracts of employment may be liable for damages for a psychiatric injury resulting from breach of the contractual requirements.
• This decision clarifies that the general rule adopted by the House of Lords in 1909, that damages are not recoverable for distress or disappointment arising from a breach of contract by dismissal of an employee, does not apply to psychiatric injury arising from breach of the employment contract arising from the manner of termination. 

What you need to do

• Review and update contracts of employment and policies if you intend that disciplinary and termination processes are to be policy based and non-contractual. 
• If contracts of employment incorporate disciplinary and termination processes, ensure compliance with those processes.
• Provide due process and procedural fairness in investigation and disciplinary procedures.

Elisha v Vision Australia Limited [2024] HCA 50 – Background

Elisha v Vision Australia Limited [2024] HCA 50 involved a claim by a former employee of Vision Australia, Mr Elisha. Mr Elisha was alleged to have engaged in aggressive and intimidating behaviour towards a hotel worker while on a business trip. Vision Australia stood Mr Elisha down and commenced a disciplinary process in accordance with an applicable enterprise agreement, and a separate disciplinary procedure. The disciplinary procedure stated that an employee will be given an outline of allegations in writing before a disciplinary meeting, and will be given an opportunity to respond to the allegations. 

At the disciplinary meeting, Mr Elisha denied the alleged behaviour directed to the hotel worker. However, Mr Elisha was not notified that Vision Australia was considering prior allegations that he had engaged in aggressive behaviour, and he was not offered an opportunity to respond to them. Vision Australia terminated Mr Elisha's employment, relying on the alleged behaviour toward the hotel worker and, unbeknownst to Mr Elisha, the alleged prior behaviour. 

Following termination of his employment, Mr Elisha was diagnosed with serious psychiatric illnesses. Mr Elisha commenced proceedings in August 2020 in the Supreme Court of Victoria, claiming that the disciplinary procedure was incorporated into his contract of employment, such that the failure to notify him of the prior allegations and provide him with an opportunity to respond to them was a breach of contract resulting in psychiatric injury, for which damages should be awarded. 

Mr Elisha also claimed that Vision Australia owed a duty to provide a safe system of investigation and decision making with respect to discipline and termination of employment. This ground was unsuccessful at each stage of the proceedings, and was not fully considered by the High Court. 

First instance and Court of Appeal decisions

O'Meara J at first instance found in favour of Mr Elisha, awarding him $1.44 million. O'Meara J found that the hotel incident did not occur as alleged, and that the allegations of prior behaviour lacked foundation or substance and were purposely kept from Mr Elisha, with the disciplinary meeting being a "sham". 

The disciplinary procedure was held to be incorporated into the contract of employment, given the particular drafting of the contract, and failure to comply with the disciplinary procedure was held to be a breach of contract. O'Meara J held that the parties, on entering the employment contract, should be taken reasonably to have had in contemplation that distress and possible psychiatric illness was a serious possibility in the event that that the contract was not followed and Mr Elisha's employment was wrongly terminated.  

Vision Australia appealed the decision to the Court of Appeal of the Supreme Court of Victoria, which overturned the decision. The Court of Appeal agreed that the disciplinary procedure was incorporated into the employment contract, and that there was a breach of contract arising from the failures in the disciplinary process. However, the Court of Appeal applied the 1909 decision of the House of Lords in Addis v Gramophone Company Ltd [1909] AC 488 (Addis), which held that, where an employee is wrongfully dismissed, damages for the dismissal cannot include compensation for the manner of dismissal, or injured feelings, or for the loss the employee may sustain from the fact that the dismissal makes it more difficult to find new employment. It also found that damages were unavailable because the psychiatric injury was too remote from the breach of contract. 

High Court decision

Mr Elisha appealed to the High Court of Australia, with the majority of the Court (Gageler CJ, Gordon, Edelman, Gleeson and Beech-Jones JJ) finding in favour of Mr Elisha and Steward J dissenting.  Jagot J in a separate decision agreed with the orders of the majority. 

The High Court confirmed that the disciplinary procedure was incorporated into the contract of employment, and in making that finding, considered a clause of the contract that specified that employment conditions included policies and procedures with which Mr Elisha was required to comply. While the procedure was drafted in aspirational and non-binding language in some parts, the provision for notification of allegations to be followed by a disciplinary meeting provided specific assurances and promises about the process to be followed. 

As to whether damages were available for psychiatric injury resulting from a breach of contract concerning the manner of termination of employment, the Court did not accept Vision Australia's argument that Addis applied to preclude an award of damages.  

The majority said that reliance on Addis by both the Court of Appeal and Vision Australia was misplaced because: 

1. Addis  did not decide that damages can never be recovered for psychiatric injury arising from the manner of termination of a contract of employment. Rather, the position under Addis is that damages for injured feelings arising from the dismissal, or difficulty arising in obtaining new employment, were not compensable.
2. Addis was decided more than a century ago in a different social context and has been substantially overtaken by case law developments in Australia and the United Kingdom.
3. Four members of the Court had held in Baltic Shipping Co v Dillon (1993) 176 CLR 344 that damages for psychiatric injury were available for breach of contract without any suggestion of an exception for employment contracts. 

The majority then considered whether the damage suffered by Mr Elisha, being the psychiatric injury, was too remote from the breach of contract to be compensable. The majority held that the parties would reasonably have contemplated at the time of entering the employment contract that a serious possibility arising from such a breach of contractual duty as occurred was psychiatric injury. 

The Court said it was entirely predictable that a breach could cause psychiatric injury. Consistent with that, the disciplinary procedure incorporated due process requirements and an ability to have a support person, and Vision Australia provided support services to staff participating in disciplinary processes.  

It was not necessary that the precise injury suffered was contemplated by the parties at the time of entering the contract. However, it was reasonable to expect that Mr Elisha would have been so distressed by the manner in which the contract was breached, and by the consequences for him, including dismissal from long standing employment for alleged misconduct, that there was a serious possibility that Mr Elisha would suffer a serious psychiatric injury.

The Court found for Mr Elisha, with the effect that the first instance decision of O'Meara J was upheld.