Nothing implied: Construction as a means of curbing excessive use of power in employment contracts
Lawyers regularly review their precedents to ensure that they preserve the power employers have over their employees. They do so knowing that Australian law imposes a heavy burden on those who seek to constrain the excessive use of such power through the implication of terms into the contract, either at law or in fact. However, the Australian courts, at least at the intermediate appellate level, have shown a preparedness to constrain the exercise of an unfettered discretion conferred upon the employer to determine bonus payments. This paper draws on the principles upon which such constraints are built and recent developments in Canada and the United Kingdom to consider the potential application of general principles of construction of contracts to protect against abuse of power by the employer over the employee.
The implied term as to trust and confidence was looked upon by some as a panacea for the scourge of unfair conduct by employers directed to their employees. This was particularly so for inadequate disciplinary and investigative procedures, conduct contrary to company policies and procedures, and decisions on discretionary bonuses or a refusal to grant increases in remuneration. Following the High Court decision in Commonwealth Bank of Australia v Barker,i trust and confidence has been banished from our shores.
Some have sought to fill the void by grasping the olive branch of an implied term as to good faith, not yet rejected by the High Court. However, the High Court has imposed a significant burden on a party to a contract seeking to establish a new form of implied term at law. Rather than look to implied terms to constrain the exercise of an otherwise unfettered discretion, it may be more productive to consider existing tools. One of these, perhaps the most important, is the well-established set of principles governing the construction and interpretation of contracts.
After first considering the general principles governing construction of contracts and the implication of terms, this paper considers the state of play in relation to trust and confidence, good faith and co-operation. After then identifying the unique features of contracts of employment as a class, and identifying the types of powers that standard form contracts generally seek to preserve for the employer, it draws on general principles of construction and the experience in Canada and the United Kingdom to suggest that a reasoned and principled approach could, on an incremental basis, protect against the abuse of unfettered discretions conferred upon employers by standard form contracts by requiring that the discretion be exercised honestly and reasonably and not capriciously or arbitrarily. Otherwise, it may well be left to the parliament to provide adequate protection.
The general principles governing construction of contracts have been settled for some time.
Construction of contracts
The content of a contract is ascertained objectively. The task of the court is to determine the meaning of a document made by others. It takes into account "what reasonable men in that situation would have intended to convey by the words chosen".ii
In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limitediii, the High Court provided a concise summary of relevant principles from established authorities.iv The objective assessment is made by reference to the text, context and purpose of the contract. It requires a consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. Generally, it is enough to refer to the words of the contract alone. If an expression is capable of only one meaning, evidence of events, circumstances and things external to the contract cannot be adduced to contradict that plain meaning. However, recourse to events, circumstances and things external to the contract may be necessary to identify the commercial purpose or objects of the contract or to determine the proper construction where there is a constructional choice. Reference can be made to those external events, circumstances and things which are known to the parties or which assist in identifying the purpose or object of the transaction. This may include its history, background and context and the market in which the parties were operating.v
Sir Anthony Mason recognised that the scope of a party's obligations and contractual powers under the contract will be defined by reference to the attainment of the objects of the contract. If a contract confers power on a contracting party in terms wider than are necessary for the protection of the legitimate interests of that party, the courts will interpret the power as not extending to action that exceeds what is necessary for the protection of the party's legitimate interests. Alternatively, the courts may conclude that the power is being exercised in a capricious or arbitrary manner or for an extraneous purpose.vi
The courts presume that the parties intended to produce a commercial result. This calls for a construction which avoids making commercial nonsense or inconvenience.vii The courts prefer a construction which ensures the congruent operation of the various components of the contract as a whole.viii A contract will be construed, so far as possible, in a manner which does not permit one party to take advantage of their own wrong.ix
Elizabeth Peden, a strong advocate of the role of co-operation in the construction of contracts, suggests that the tenets of these construction "presumptions" are based on a theory of co-operation. Courts construe contracts to make them work. The various rules of construction flow from this…
Other featured articles in this issue include:
A red-tape band-aid or a solution? Lessons from the United Kingdom's Gangmasters (Licensing) Act 2004 for temporary migrant workers in the Australian horticulture industry by Sayomi Ariyawansa Lexis Advance | LNAU
Scoping reasonable adjustments in the workplace: A comparative analysis of an employer's obligation to accommodate a worker's disability under Australian and Canadian laws by Emma Purdue Lexis Advance | LNAU
i Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; (2014) 312 ALR 356;  HCA 32 (Barker).
ii Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; (1982) 41 ALR 367;  HCA 24 (Codelfa) at 352-3 (Mason J). See also Byrnes v Kendle (2011) 243 CLR 253; (2011) 279 ALR 212;  HCA 26 at - (Heydon and Crennan JJ).
iii Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; (2015) 325 ALR 188;  HCA 37 (Mount Bruce Mining) at -.
iv Reardon Smith Line v Hansen-Tangen  3 All ER 570; Codelfa, above n 2; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; (2004) 211 ALR 342;  HCA 52 (Toll v Alphapharm); Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; (2014) 306 ALR 25;  HCA 7.
v Mount Bruce Mining, above n 3, at - (French CJ, Nettle and Gordon JJ) (citations omitted).
vi Sir Anthony Mason, 'Contract, Good Faith and Equitable Standards in Fair Dealing' (2000) 116 LQR 66 at 70-1, 76.
vii Mount Bruce Mining, above n 3, at .
viii Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; (2005) 214 ALR 410;  HCA 17 at  (Gleeson CJ, McHugh, Gummow and Kirby JJ).
xi Heugh v Central Petroleum Ltd (No 5)  WASC 311 (Heugh) (Le Miere J) at  citing New Zealand Shipping Co Ltd v Societe Des Ateliers Et Chantiers  AC 1; Suttor v Gundowda Pty Ltd (1950) 81 CLR 418;  HCA 35; Cheall v APEX  2 AC 181.