Employment contracts may include terms that require the employer, when terminating the employment contract on grounds such as poor performance, misconduct or redundancy, to do so in a particular manner. If the employer breaches those terms, the dismissed employee may bring an action in a court seeking damages to compensate for losses flowing from the breach. Typically, the damages awarded primarily concern the earnings and other benefits the employee has foregone because of the wrongful termination of the employment contract.

In Elisha v Vision Australia Limited (2024), the High Court considered a case about an employment contract that incorporated a disciplinary procedure. In breach of the procedure (and, therefore, the employment contract), the employer failed to provide the employee with a letter prior to the disciplinary meeting. At the meeting, the employee was effectively ambushed with misconduct allegations made against him, including an allegation he engaged in a pattern of aggressive behaviour. The employer ultimately acted on those allegations in terminating the employment summarily. If a proper process had been undertaken, the employment contract would not have been terminated summarily and the employee would not have developed the serious psychiatric injury from which he suffers.

The High Court considered the legal principle adopted in previous decisions that prevent recovery of damages for breach of contract where those damages seek to compensate the claimant for mental distress. This principle is based on the idea that non-fulfilment of contractual expectations will invariably cause distress to the innocent party and, unless the contract contains a promise that the party will be provided with a degree of enjoyment or relaxation, damages for mental distress are not recoverable.

The High Court declined to apply this principle to prevent the claimant from recovering damages for psychiatric injury flowing from the breach of the term in his employment contract concerning the manner in which the contract would be terminated. It was then willing to allow recovery of damages for a breach of an employer’s contractual duty if that outcome might fairly be regarded as having been contemplated by the employer and employee when they made the contract, and the employer being willing to accept that liability. In other words, when the employer and employee entered into the employment contract, they would have reasonably supposed that breach of the disciplinary procedure would probably result in the employer being liable for damages for any psychiatric injury flowing from that breach.

The High Court ruled that when the employer and employee made the contract, they would have reasonably contemplated that it was seriously possible that a breach of the disciplinary procedure would result in the employee suffering psychiatric injury. This is apparent from the fact the employer had a procedure that imposed requirements for procedural fairness and provided for a support person to attend any disciplinary meeting with the employee. The employer had also established processes of support, including counselling for employees, to anticipate and address risks of psychiatric injury, including in relation to the process of dismissal.