High Court of Australia awards former employee $1.4m in damages for psychiatric injury

On 11 December 2024, the High Court of Australia (High Court) opened the door to the possibility of damages being awarded for psychiatric injury for breaches of the employment contract when it awarded A$1.4 million to an employee. Employers are at greater risk of compensation awards for psychiatric injury at work.

Background

Mr Elisha, a former employee of Vision Australia, was the subject of misconduct allegations following his attendance at a work-related trip in March 2015. While Mr Elisha was staying at accommodation arranged by Vision Australia, it was alleged that he engaged in aggressive and intimidating behaviour when he made a noise complaint to the hotel’s reception, and again when he checked out of the hotel the following day.

Following this incident, Mr Elisha was stood down, and invited to attend a meeting to respond to the allegations. Vision Australia stated that the meeting would be conducted in accordance with its Enterprise Agreement and disciplinary procedure. After the meeting, Vision Australia accepted the hotel’s version of events, and terminated Mr Elisha’s employment for serious misconduct.

Finally, when Vision Australia communicated the reasons for its decision to terminate Mr Elisha’s employment, it referred to Mr Elisha’s “pattern of aggression”. The High Court found that such allegation had not been put to Mr Elisha, yet, was used by Vision Australia “to conclude that his version of the hotel incident was not to be believed”.

Significantly, Vision Australia’s disciplinary process was described by the primary judge as “unfair, unjust and wholly unreasonable” and “nothing short of a sham and a disgrace”.

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

High Court decision

The High Court allowed Mr Elisha’s appeal from the Court of Appeal, finding Vision Australia liable for Mr Elisha’s psychiatric injury.

Specifically, the High Court found Vision Australia in breach of Mr Elisha’s employment contract, and considered that Vision Australia’s disciplinary procedure was incorporated into their agreement. In reaching its decision, the High Court considered the drafting of specific clauses within the employment contract which demonstrated an intention of the parties to be bound by Vision Australia’s policies and procedures. In referring to the decision in Romero V Farstad Shipping (Indian Pacific) Pty Ltd (2014) FCAFC 177, the High Court stated that:

“…the existence of clear language with sufficient emphasis upon the need for compliance with the terms of a company policy indicates an intention that such terms will be contractually binding”.

In turning to the availability of damages for Mr Elisha’s psychiatric injury arising from breach of contract, the majority found that the Court of Appeal and Vision Australia’s reliance on the principles in Addis v Gramophone Company Ltd [1909] AC 488 (Addis) were misplaced for three key reasons.

1. Addis did not decide that damages can never be recovered for psychiatric injury arising from the manner of termination of an employment contract;
2. Addis was decided more than a century ago “in a difference social context” which has been overtaken by recent decisions in both the United Kingdom and Australia;
3. In Baltic Shipping Co v Dillon (1993) 176 CLR 344, four members of the High Court held that damages were available for psychiatric injury from breach of contract and this decision did not suggest there was an exception for employment contracts.

Finally, when considering remoteness of damage between Vision Australia’s contractual breach and Mr Elisha’s psychiatric injury, the High Court found the damage was not too remote to be compensable, and that there was a “serious possibility” that Mr Elisha would suffer a serious psychiatric injury. The High Court concluded that the causal sequence of Vision Australia’s breach and Mr Elisha’s psychiatric injury was “entirely predictable”, and that without Vision Australia’s breach, Mr Elisha’s employment would not have been terminated for the alleged misconduct.

The High Court found for Mr Elisha, reinstating the compensation that was awarded at first instance.

Key takeaways

The High Court’s decision delivers a key message to employers to understand the implications of their employment contracts and policies, and ensure they are carefully drafted and, as appropriate, adhered to. When conducting a disciplinary process, employers should understand their legal obligations and comply with them.

The key takeaways for employers moving forward:

1. Pay attention to the drafting of employment contracts: Where an employment contract contains references to an employer’s policies or procedures it is possible that they will be considered part of the agreement, unless it is expressly stated that they do not apply.
2. Policy health check: Employers should consider reviewing their current disciplinary policies and assess whether they remain fit for purpose. Do they ensure fairness to all parties during the process? Are investigation procedures clearly set out?
3. Awareness of obligations: Are leaders and other relevant staff members aware of their obligations under your policies and procedures? Are staff members trained to apply these procedures in practice, and are confident to do so accurately?

If you would like further information, please reach out to Chris Molnar, lead partner in our Australian employment team and Accredited Specialist in Workplace Relations.