Summary

On December 11^th, 2024, the High Court of Australia established a significant precedent allowing damages for psychiatric injury to be awarded in cases involving a breach of an employment contract. This development broadens the scope of recoverable damages, recognising psychiatric injury as a distinct category.

Mr. Elisha first took his case to the Supreme Court of Victoria, where he argued Vision Australia, his employer, failed to adhere to the disciplinary procedure incorporated into his employment contract, which constituted a breach of contract. Elisha was awarded $1,442,404.50 in damages for psychiatric injuries caused by the breach. Vision Australia appealed to the Court of Appeal of the Supreme Court of Victoria, which overturned the ruling. Mr. Elisha appealed that decision to the High Court of Australia that the Court of Appeal erred in law by ruling he was not entitled to recover damages.

Mr. Elisha’s employment was terminated in May 2015 following an incident in a hotel where Elisha was alleged to have acted aggressively towards the hotel manager, the circumstances of which were later disputed. Vision Australia was informed of the allegations and gave a letter to Elisha stating he was to stand down and attend a disciplinary meeting to respond to the allegations of misconduct. The letter contained the allegations from the hotel incident but omitted references to other unsubstantiated claims of a pattern of aggressive behaviour. As the omitted allegations were not disclosed, Elisha was deprived of the opportunity to respond. Consequently, Vision Australia failed to adhere to the process outlined in the 2015 Disciplinary Procedures policy, which led to the wrongful termination of Elisha and the breach of contractual protections.

Psychiatric Injury as a Recoverable Damage

In the aftermath of his wrongful termination, Mr. Elisha developed a major depressive disorder, rendering him incapable of working in the foreseeable future. As noted by the primary judge in the Supreme Court, “the psychiatric injury likely built as time passed as he continued to ruminate over what occurred”. 

Under common law, mental distress is generally not recoverable as damages for a breach of contract, even if mental distress is likely to occur from the breach. Mental distress is only awarded when the main purpose of the contract is to “provide enjoyment, relaxation or free from molestation”.

However, the High Court of Australia distinguished between psychiatric injury and mere mental distress as different types of damage. The Court clarified that psychiatric injury refers to a medical diagnosable condition and is part of a class of physical or personal injury. This is supported by Rix LJ in Essa v Laing Ltd noting that mental distress or injury to feelings “is a common-day experience and is something distinct from illness”.

The dissenting judge, Steward J, noted the term “psychiatric injury” may be too broad, in the same way “physical injury” would be too broad. Steward J suggested common law needs to distinguish between serious psychiatric injuries, such as acute schizophrenia, and mild forms of depression when awarding damages for psychiatric injuries.

The High Court’s Decision

The first issue considered was whether Vision Australia could be held liable for psychiatric injury. The Court considered what liability the parties reasonably contemplated and were “willing to accept” when the contract was formed. 

Vision Australia relied on the law made in Addis v Gramophone Company Ltd (1909), stating damages could not be awarded for how a dismissal process occurred, even if the procedures were flawed. The High Court overturned the long-standing ratio decidendi of Addis v Gramophone Company Ltd (1909) for three reasons. First, the case did not state that damages can never be recovered for psychiatric injury. Second, the social context in 1909 is significantly different from what it is today, revealing the necessity for a revaluation of the principles. Third, the Court in Baltic Shipping Co v Dillon recognized psychiatric injury was part of a class of physical or personal injury, which has recoverable damages. There was also no suggestion that any category of contracts was excluded for recovering damages for physical or personal injury. Following that reasoning, the High Court found that Vision Australia was liable for the psychiatric injury caused by their breach of Elisha’s employment contract.

The second issue considered whether Vision Australia’s argument, that the damage was too remote from the breach, was correct. Remoteness concerns whether the parties reasonably contemplated the damage and manner of its occurrence as a “serious possibility”, at the time of the contract. The precise psychiatric injury suffered did not need to be considered, only the general manner of its occurrence as a serious possibility.

The Court found when Vision Australia entered the 2006 employment contract, it was within their reasonable contemplation that failure to follow the dismissal procedure, resulting in a wrongful termination, would lead to a serious possibility Mr. Elisha would suffer a psychiatric injury. As such, the psychiatric injury was not too remote from the breach and damages were reinstated.

What does this mean for employment law?

This new precedent now allows damages to be awarded for breaches of employment contracts resulting in psychiatric injuries. However, it is unlikely damages will be awarded for minor psychiatric injuries, which would likely fall under mental distress which has no recoverable damages. As Steward J noted, there will need to be a distinction drawn between “psychiatric injury” and “serious psychiatric injury”.

This marks a significant step towards the social destigmatisation of psychological injury, acknowledging that work can be a source of identity, self-esteem, and livelihood for people. The case highlights that dismissals for some people can have a high emotional and psychological effect, especially when the procedure is not followed and handled unfairly.

Employers must follow the disciplinary procedures laid out in their company policies, as failure to adhere will now lead to paying the price. 

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