‘Sham’ termination caused psychiatric injury, High Court rules in landmark workers’ rights case

A century-old precedent has been overturned by the High Court of Australia, with an employer being ordered to pay over $1.4 million to a former employee who claimed psychiatric injury arising from a breach of employment contract.

The High Court of Australia has handed down a landmark decision, ordering Vision Australia to pay $1,442,404.50 in damages for breaching the terms of an employee’s contract through a “disgraceful” termination process, which led to psychiatric injury.

For nine years, Adam Elisha was an employee at Vision Australia before he was subsequently dismissed after an investigation was launched into allegations of misconduct. This dismissal came by way of a defective disciplinary process, which was described as both a “sham” and “disgrace”.

Following his dismissal, Elisha commenced proceedings in the Supreme Court of Victoria against his former employer, alleging that he sustained a severe psychiatric injury resulting from the “disgraceful” investigative process, administered by Vision Australia, which ultimately led to the termination of his employment.

The primary judge found that Vision Australia was in breach of Elisha’s employment contract in how it investigated the alleged misconduct, determining that Vision Australia should pay damages for the psychiatric injury that Elisha suffered as a result of the process.

At the time, Elisha was awarded $1,442,405 in damages.

However, in November 2023, after an appeal by Vision Australia, the Court of Appeal decided to overturn the damages awarded. Despite acknowledging that the investigation did not allow Elisha the opportunity to respond to the allegations, the Court of Appeal held that damages for psychiatric injury were not available for the breach of contract, for two reasons:

1. “The Court of Appeal held that damages for psychiatric injury were unavailable for a breach of contract other than where the psychiatric injury was consequent upon physical injury caused by the breach of contract or where the very object of the contract was to provide enjoyment or relaxation.”

2. “The Court of Appeal held that damages for Elisha’s psychiatric injury could not be recovered because the psychiatric injury was too remote from the breach of contract by Vision Australia.”

After this decision, Arnold Thomas & Becker – representing Elisha – sought special leave to appeal to the High Court, seeking a determination on the matter in regards to the Court of Appeal’s conclusion that damages for psychiatric injury were not recoverable for breach of employment contract.

The matter was heard by the Full Court in October.

Now, the High Court has held that the liability for psychiatric injury is not beyond the realm of contractual duty.

Therefore, the psychiatric injuries Elisha suffered by way of the disciplinary process were not too remote to be recovered as part of the breach of contract claim.

The High Court determined that, although the precise way in which the breach by Vision Australia caused Elisha’s psychiatric injury was somewhat irrelevant, an important element in the causal sequence by which Elisha’s psychiatric injury occurred was that “without Vision Australia’s breach, Elisha would not have been dismissed for alleged misconduct”.

“This causal element was entirely predictable in light of the nature of Vision Australia’s breach. That causal element is significant,” the judgment said.

The judgment held that “for many workers, ‘dismissal is a disaster’. 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; i.e., a person’s livelihood, identity, and self-esteem,” it said.

According to the High Court, the Court of Appeal’s finding “omits the relevant detail of the breach that actually occurred and the manner by which it caused psychiatric injury. [Therefore] the ground of appeal concerning breach of contract by Vision Australia should be upheld.”

As a result, the High Court ordered that the original damages award be reinstated to Elisha.

The decision, Arnold Thomas & Becker noted in a statement, overturns over 100 years of precedent from the English case of Addis v Gramophone Co Ltd [1909] AC 488, which formed the basis for common law courts to deny workers a right to recover damages for psychiatric injury suffered as a result of breach of contract on the basis that such damages were not available

Nick Korkliniewski, a senior associate at Arnold Thomas & Becker, believes this sets a precedent for the “destigmatisation of psychological injury”.

“In its simplest form, our client’s case was that his employer should have taken reasonable care and properly followed their own disciplinary procedures if they were to terminate his employment,” Korkliniewski said.

“Community expectations around rights to psychological safety at work and the destigmatisation of psychological injury means that the time was right for the law to recognise the requirement of an employer to consider their employee’s psychological health in the course of investigative and disciplinary processes.”

It cannot be understated how much of a landmark decision this is in terms of an employer’s duty of care pertaining to their employees. Not only does it draw extra attention to the process in which dismissals based upon allegations are carried out, but it also creates the potential risk of breaching an employee’s contract, by which they can claim notable damages for psychiatric injury.

In an op-ed, published in October and reflecting on the-then looming High Court decision, Travis Schultz, managing partner of Travis Schultz & Partners, said: “If the High Court expands an employer’s duty, it will be difficult for an employer to satisfy a court that the risk of psychological harm in a disciplinary or termination process was not foreseeable or not insignificant.”

“As Bob Dylan observed back in 1964, ‘the times they are a-Changin’.”