Implied Terms in Contracts - Essay Example

Implied Terms in Contracts A fundamental principle is that a contractual term is capable of being implied, only in the event that this term is in accordance with the express contractual terms. Contracts, at present, are by and large in writing. Nevertheless, there are several instances, wherein the parties had discovered, at a later date that they had not made suitable arrangements for some specific eventuality1. Implied terms that relate to the common law, can be categorised into two distinct classes. These are instances where a discontinuity transpires in the employment contract. In such cases, there is the distinct possibility of implying a term into the contract of employment, provided the court can be convinced of the necessity to do so. This is termed the implied term of fact. There is another class of implied terms in employment contracts. These concern terms that the courts deem to be innate in employment contracts2. Such implied terms are denoted as implied terms of law. In instances, where the employment contract had not specified the manner, in which to deal with a particular development; the courts may be requested to insert a suitable term to deal with the lacuna in the contract. Whenever, a party is desirous of relying on an implied term, it become incumbent for it to convince the court that the implied term, in question was apparent to the extent that neither of the parties had felt the necessity to specify it explicitly3. In addition, reliance on an implied term can also be undertaken by a party to a contract, if it can convince the court that the term was indispensable for ensuring the efficiency of the business. It had been the long standing contention of employers that they were not under any contractual obligation to behave in a reasonable manner towards their employees. This has been disproved by the courts, which deem a duty of trust and confidence to be inherent in employment contracts, and that such duty can be implied automatically4. The courts have stipulated the circumstances under which they might imply terms into an employment contract. However, such intervention, will be only in instances of sufficient gravity5. A term is implied into a contract, when one of the following conditions is satisfied. First, the term is of such normalcy or it is so obvious that there is no necessity to express it explicitly6. Second, the term is indispensable for effecting the contractual agreement. Third, it is customary for this term to be incorporated into such contracts7. In General Billposting8 the general rule was established that if the employer’s behaviour was deplorable to the extent that an employee could assume that his contract of employment had been terminated, then the employer is precluded from effecting restrictive covenants that apply after the termination. This was held in Cantor Fitzgerald9. In order to promote business efficacy, the implied terms theory had been applied to contracts. With the passage of time this has been generalised to include definable classes of contractual relationships10. In Scally v Southern Health and Social services Board, the terms of the employment contract had not been negotiated with individual employees11. This particular employment contract offered the employees a right that was of considerable value. However, it had to be claimed by the employee. Since, an employee could not do so, unless it had been intimated to him, there was an implied term, whereby the employer had to provide this information to the employee12. This is not only a reasonable requirement, but also equitable. In Ali v Christian Salvesen Food Services Ltd, the employment contract had not specified overtime payments for premature cessation of service. The court opined that the payment of such overtime amounts could not be implied into the contract13. This ruling provides a safeguard from unscrupulous employees, who discontinue employment, in order to procure substantial and unjustified severance benefits. . In Sagar v Ridehalgh and sons Ltd, a term was deemed to be implied into the contract of employment, as it was the custom in that specific industry14. In White v Reflecting Roadstuds, the appellate authority ruled that the tribunal had wrongly established constructive dismissal. The tribunal had concluded that the right to transfer an employee to a different job entailed an implied term of reasonableness, accroding to which, there could be no reduction in remuneration15. As such a term was not required by either business efficacy or the law, and the employer was not guilty of any fundamental breach. Mutual trust and confidence are duties that exist between employees and their employers. The outcome of these duties is that reasonable and adequate care is to be exercised, so that there is avoidance of injury to others. These duties have become a part of the common law, under the guise of implied terms in employment contracts16. Thus, these terms have assumed a mandatory status in employment contracts, and some of the more important examples of these are maternity and paternity leave and pay. Hence, there is a marked departure from the erstwhile notion of freedom of contract. There is scant regard for the assumed or unstated intentions of the parties to an agreement; and it is the stipulations of the judiciary that hold sway. This situation has enabled the judiciary to establish standards, in relation to certain genres of agreements; which supercede the commonplace notion that contractual obligations result from agreements between the parties17. A significant amount of difficulty is involed in establishing a direct connexion betwixt these common law duties and duties that arise on account of the relationships that exist among the people. An important facet of this situation is that these duties admit of exclusion, via stipulation in the contractual terms. Nevertheless, the pertinent legislation precludes the exclusion of the implied duty to exercise reasonable care to ensure that others are not caused an injury18. The statute, Unfair Contract Terms Act 1977, makes it very clear that no contract, including a contract of employment, can circumvent liability in negligence that results death or personal injury19. This act describes negligence as including the duty to exercise reasonable care or skill, irrespective of whether it is tortious or contractual20. Albeit, an employment contract comprises of an explicit mobility clause that empowers the employer to require an employee to work at some other place, such right should not be utilised in an arbitrary manner, with mala fide intent, or in a manner that serves to erode mutual trust and confidence. For instance, in United Bank Ltd v Akhtar, the employee was transferred to another branch, and provided with just six days to relocate21. It was held that despite the existence of a transfer clause, in the employment contract, which expressly permitted the transfer of employees from one branch to another; there was an implied term in the employment contract that the employee was to be provided with reasonably sufficient time to complete the transfer to a different branch. In cases, where the implied terms are of a novel character, the courts have established tests that serve to discern the intention of the parties. The first of these tests is the Business Efficacy test. The objective of this test is to determine the contractual terms that are indispensable to the functioning of the contract. In The Moorcock, a wharf owner had been solicited by a ship owner for space to unload cargo. This was duly provided; however, after the ship had been docked, the ship was damaged to the lowering of the tide. The ship owner claimed damages from the wharf owner for having failed to ensure the safety of the docked ship22. The wharf owners attempted to avoid liability, by contending that its contract with the ship owner, did not specify that they had to prevent damage to the ship. The court held the wharfingers liable for the damage caused to the ship23. It was opined by the court that there was an implied warranty in the contract that was necessary to ensure business efficacy. In addition to the business efficacy test, the courts have established the Officious Bystander test. This test has been clearly demonstrated in Shirlaw v Southern Foundries. In this case the claimant, the managing director of a company, was dismissed. MacKinnon LJ ruled that any term that was left to be implied, without being expressed, was to be deemed to be obvious and integral to the contract24. The employer’s duty of cooperation is much more than a simple wage and work bargain. It transcends this simplistic notion and consists of a mutual exchange of promises, and a personal relationship between the employer and employee. The traditional model of employment contracts revolves around negotiations and wage based discussions25. Moreover, the employees are required to be loyal and courteous towards their employers, and desist from undermining the trust reposed in them. During the 19th century, the courts were reluctant to impose any duties, involving cooperation upon the employer. In that era, employers could terminate the contract of employment, without proper notice, prior notice or time to employees. Moreover, employers would dismiss employees whom they disliked. The employee was unlikely to claim damages for wrongful dismissal26. In addition, the employer was not required to maintain trust and confidence in the employment relationship. However, this situation changed with the development of unfair Higmingai Law; which provided the impetus to the courts to identify employers’ obligations towards the employees. This changed perceptions about the employment relationship. The duty of trust and confidence is recognised as fundamental to ensuring continuity of the employment relationship27. It requires the employer and the employee to treat each other with decency and courtesy. However, this is considered to be vague. Whilst implying terms to employment contracts, the courts tend to ignore the test of business efficacy or obvious consensus. In Courtlaulds Northern Spinning Ltd v Sibson, the employee had to function at two different sites28. Accordingly, a mobility clause had been incorporated into the contract. In addition, retrenchment without pay has become customary. A practice becomes custom and is implied into a contract, if it is general and reasonable29. It has become commonplace for employers to argue that it is customary to dismiss from service without pay. As such, implied terms exist in contracts, as they render the contract enforceable. Some of the implied terms are of such great importance that they need not be in writing, because they are specific to an employer or type of work. Some of these implied terms become a part of the contract due to custom over a period of time , although they had not been clearly agreed upon by the parties. Bibliography Albion Automotive Ltd v Walker & ors, (2002) EWCA Civ 946 Ali v Christian Salvesen Food Services Ltd, (1997) ICR 25 Cantor Fitzgerald International v Bird and ord, (2002) IRLR 867 Courtaulds Northern Spinning Ltd v Sibson & TGWU (1988) IRLR 305 David Lewis and Malcom Sargeant, Essentials of Employment Law, CIPD Publishing, 2004 Deborah Lockton, Employment law, Cavendish 2005 General Billposting Co Ltd v Atkinson (1909) AC 118 Implied terms in employment contracts, 2008, Retrieved on 12 March 2010, from http://www.emplaw.co.uk/content/index?startpage=data/047001.htm Liverpool City Council v Irwin, (1976) 2 All ER 39 Lizzie Barmes, Common Law Implied Terms and Behavioural Standards at Work, 2007, Industrial Law Journal, Volume 36, Number 1 Norman Selwyn, Selwyn’s Law of Employment, Oxford University Press, 2006 Patrick Elias, Unravelling the Concept of Dismissal – II, 1978, Industrial Law Journal, Volume 7 Sagar v. H. Ridehalgh and Son, Limited (1931) 1 Ch. 310 Scally v Southern Health and Social Services Board (1991) IRLR 522 Unfair Contract Terms Act 1977 Southern Foundries Ltd v Shirlaw (1940) AC 701 The Moorcock (1889) 14 PD 64 United Bank Ltd v Akhtar (1989) IRLR 507 White v Reflecting Roadstuds Employment Appeal Tribunal (1991) IRLR 331 Read More