Playbook 2: The Employment Contract Playbook
Formation, Implied Terms & Termination
Summary: This playbook examines the contract of employment — from formation through express and implied terms, the employer's and employee's implied duties, wrongful dismissal, and the assessment of damages. Key cases include Malik v BCCI (mutual trust and confidence), Bardal v The Globe and Mail (reasonable notice), Waksdale v Swegon (termination clause enforceability), and Swarp Spinning Mills v Chileshe (measure of damages).
Chapter 1 — The Contract of Employment
1.1 Formation – Offer, Acceptance, Consideration, and Certainty
The contract of employment is formed through the ordinary principles of contract law: offer, acceptance, consideration, and an intention to create legal relations. The offer may be made by the employer or the prospective employee, and acceptance occurs when the offer is unequivocally accepted.
For an employment contract to be valid, there must be consideration flowing between the parties — the employee's work in exchange for the employer's payment. The terms must also be sufficiently certain to be enforceable.
1.2 Express Terms – Written Statements, Collective Agreements, and Works Rules
Express terms are those explicitly agreed between the parties, whether in writing, orally, or by conduct. Written statements, collective agreements negotiated between employers and trade unions, and works rules incorporated into the contract all form part of the express terms.
Key sources of express terms:
- Written statement of employment particulars — required by statute in many jurisdictions
- Collective agreements — may be incorporated into individual contracts
- Works rules and handbooks — may constitute contractual terms if incorporated
1.3 Restraint of Trade and Garden Leave Clauses
Restraint of trade clauses seek to restrict an employee's activities after termination. Such clauses are prima facie void as being in restraint of trade but may be enforceable if they protect a legitimate business interest and are reasonable in scope, duration, and geographical area.
Garden leave clauses require an employee to stay away from work during their notice period while remaining employed. These clauses are generally enforceable and serve to protect the employer's confidential information and business interests.
Chapter 2 — Implied Terms – The Hidden Rules
2.1 Terms Implied in Fact – Necessary to Make the Contract Work
Terms implied in fact are those that are necessary to give business efficacy to the contract or are so obvious that they "go without saying." The classic test from BP Refinery (Western Port) Pty Ltd v Shire of Hastings requires that the term to be implied must be reasonable and equitable, necessary to give business efficacy to the contract, so obvious that "it goes without saying," capable of clear expression, and not contradictory to any expressed term of the contract.
An example is the implied term that a delivery driver must hold a valid licence — necessary for the contract to function effectively.
2.2 Terms Implied by Law – Duties that Apply to Every Employment Relationship
Terms implied by law are duties that attach to every employment relationship as a matter of law, regardless of the parties' intentions. These are distinct from terms implied in fact and are imposed by the courts to reflect the inherent nature of the employment relationship.
As Lord Wilberforce suggested in Liverpool City Council v Irwin, courts may imply terms where the contract is ineffective without them or where the court is concerned to establish what the contract is. The implied duty of mutual trust and confidence is the most significant term implied by law in modern employment contracts.
2.3 Terms Implied by Custom and Practice
Terms may also be implied by custom and practice when repeated conduct creates contractual rights. For example, where an employer has consistently paid a Christmas bonus for many years, a term may be implied that the bonus is payable.
Key limitations: Implied terms cannot contradict express terms. As noted in the New Zealand Court of Appeal, terms implied by custom and practice must be consistent with the express terms of the contract.
Chapter 3 — The Employer's Implied Duties
3.1 Duty to Provide Work and Pay
The employer has an implied duty to provide work and pay. However, the duty to provide work is limited — in many cases, an employer may be entitled to pay an employee without requiring them to work, provided the employee is ready and willing to work. The duty to pay is, however, fundamental; an employer who fails to pay wages due is in repudiatory breach of the contract.
3.2 Duty to Take Reasonable Care of the Employee's Health and Safety
The employer owes a duty to take reasonable care of the employee's health and safety, both physical and mental. This duty extends to providing a safe system of work, safe premises, and competent fellow workers.
As Lord Nicholls stated in Malik v BCCI, employers must "not engage in conduct likely to undermine the trust and confidence required if the employment relationship is to continue in the manner the employment contract implicitly envisages."
3.3 Duty of Mutual Trust and Confidence – The Cornerstone
The duty of mutual trust and confidence is the cornerstone of the modern employment relationship. It requires that an employer shall not, without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.
In Malik v BCCI [1998] AC 20, the House of Lords held that the implied term of trust and confidence was breached when the bank operated a dishonest and corrupt business, which left employees with a stigma that made it more difficult to find employment. The bank was held liable for financial losses caused by this breach.
As Lord Steyn stated, a "balance has to be struck between an employer's interest in managing his business as he sees fit and the employee's interest in not being unfairly and improperly exploited."
3.4 Duty to Provide Reasonable Notice of Termination
In the absence of an express provision, the employer has an implied duty to provide reasonable notice of termination. What constitutes reasonable notice depends on the circumstances, and the courts have developed a multi-factor test to determine the appropriate notice period.
However, where the parties have expressed detailed provisions as to the right of either party to terminate, it is ultimately a question of construction as to whether they intended those provisions to be comprehensive. If they did, the intention will prevail and there will be no implication of a right to terminate on reasonable notice.
Tonga Law Reports (2010)
Chapter 4 — The Employee's Implied Duties
4.1 Duty of Fidelity – Loyalty, Confidentiality, and Non-Solicitation
The employee owes a duty of fidelity to the employer. This includes duties of loyalty, confidentiality, and not soliciting the employer's customers for personal benefit. The duty of fidelity requires the employee to act in good faith and not to compete with the employer during the employment relationship.
As one court noted, the duty of fidelity includes "not to abuse his master's confidence in matters pertaining to his service" and to account to the employer for any secret commission or remuneration received.
4.2 Duty to Obey Reasonable Instructions
The employee has an implied duty to obey the lawful and reasonable instructions of the employer. This duty is fundamental to the employment relationship and is often described as the "duty to obey" or the duty of subordination.
As noted in the case law, "the duty to obey the lawful orders of the master" is one of the core implied duties of a servant. A refusal to obey a reasonable instruction may constitute a breach of contract and, if serious enough, may amount to repudiatory conduct justifying summary dismissal.
4.3 Duty to Exercise Reasonable Care and Skill
The employee must exercise reasonable care and skill in performing their duties. An employee who is negligent in their work may be in breach of contract and may be liable for damages if the employer suffers loss as a result.
In addition to the duty of care, an employee must also be honest and diligent in the master's service. The duty to be diligent requires the employee to devote their time and attention to the employer's business during working hours.
4.4 Duty to Not Work for Another Employer During Working Hours
The employee has an implied duty not to work for another employer or for themselves during working hours. As the High Court of Zambia held in Copperbelt University v Akombelwa, an employee is bound not to work for another employer during normal working hours.
This duty reinforces the employer's right to control the employee's time and attention during the employment relationship. An employee who works for another employer during working hours without permission may be in breach of the duty of fidelity and may be subject to disciplinary action.
Chapter 5 — Wrongful Dismissal – Breach of Contract
5.1 Termination Without Notice – When an Employer Fails to Provide Reasonable Notice
Wrongful dismissal occurs where an employer terminates the employment contract without providing reasonable notice or pay in lieu of notice, in circumstances where the employee was not in repudiatory breach. The employee is entitled to damages for breach of contract.
Where the employer has provided less notice than the employee is entitled to (whether under an express contractual provision or the implied duty to provide reasonable notice), the employee may bring a claim for wrongful dismissal. The normal measure of damages is the salary and benefits the employee would have received during the reasonable notice period.
Tonga Law Reports (2010)
5.2 Termination for Cause – Justifying Summary Dismissal
Summary dismissal (termination without notice) is justified only where the employee has committed a repudiatory breach of contract — conduct that goes to the root of the contract. Examples include gross misconduct, wilful disobedience, or serious negligence.
The employer bears the burden of proving that the employee's conduct constituted repudiatory breach. Termination clauses must comply with statutory minimum standards. In Waksdale v Swegon North America Inc., the Ontario Court of Appeal found a termination clause unenforceable because it permitted termination "for cause" in circumstances broader than the statutory requirement.
5.3 Damages – The Normal Measure and Departures
The normal measure of damages for wrongful dismissal is the salary and benefits the employee would have earned during the reasonable notice period. This includes any bonus or incentive compensation that forms an integral part of the remuneration package.
In Swarp Spinning Mills Limited v Chileshe, the normal measure of damages was departed from by considering the manner of termination as well as the scarcity of jobs, and the court awarded 24 months' salary.
However, courts may depart from the normal measure in exceptional circumstances. For example, in Wilsher v Olympic Wholesale (2026), the court awarded 14 months of Wallace damages on top of a 19-month notice period, totalling 33 months of pay in lieu of notice.
Chapter 6 — Assessing Damages for Wrongful Dismissal
6.1 Factors Considered by Courts – The Bardal Test
The starting point for determining what constitutes reasonable notice is the landmark decision of Bardal v Globe and Mail Ltd. (1960). The factors to be considered include, but are not limited to:
- Character of employment — senior executives are entitled to lengthier notice periods
- Length of service — longer service generally merits longer notice
- Age of the employee — older employees may find it harder to secure new employment
- Availability of similar employment — in light of the employee's expertise, training, and qualifications
As the court noted, there is no formula or rule of thumb to determining reasonable notice for all types of employees. Each case must be viewed on an individual basis.
Bardal v Globe and Mail Ltd. — Lexology
6.2 Bonus and Incentive Compensation During the Notice Period
In Paquette v. TeraGo Networks Inc., the court established a two-step test for determining whether an employee is entitled to bonus compensation during the common law notice period:
- Was the bonus an "integral" part of the employee's compensation scheme?
- Does the wording of the incentive plan unambiguously alter or remove the employee's common law rights?
The Court of Appeal found that the "active employment" requirement in the plan did not prevent the employee from receiving compensation for bonuses that would have been received during the notice period. The wording of a bonus plan must be clear and unambiguous that a former employee is not entitled to the bonus that would have been received during the common law notice period.
Paquette v TeraGo Networks Inc. — Hicks Morley
6.3 Mitigation – The Employee's Duty to Reduce Loss
The employee has a duty to mitigate their loss by making reasonable efforts to find alternative employment. Failure to mitigate will result in a reduction in the damages award. The burden of proof lies on the employer to demonstrate that the employee failed to take reasonable steps to mitigate.
Bardal v Globe and Mail Ltd. — Lexology
Chapter 7 — Key Case Clips: Contract & Termination
⚖️ Malik v Bank of Credit and Commerce International [1998] AC 20 — Mutual Trust and Confidence
The House of Lords held that the implied term of mutual trust and confidence was breached when the bank operated a dishonest and corrupt business, leaving employees with a stigma that handicapped their future employment prospects. The bank was held liable for financial losses caused by this breach.
⚖️ Bardal v The Globe and Mail Ltd. (1960) — Factors for Reasonable Notice
The landmark decision establishing the factors for determining reasonable notice: character of employment, length of service, age of the employee, and availability of similar employment. There is no formula or rule of thumb; each case must be viewed on an individual basis.
⚖️ Waksdale v Swegon North America Inc. (2020) — Termination Clause Enforceability
The Ontario Court of Appeal confirmed that if any portion of a termination clause breaches statutory minimum standards, the entire termination provision becomes void and unenforceable. The court refused to give effect to severability clauses. The correct approach is to consider whether the termination clauses, read as a whole, violate the statutory standards.
⚖️ Swarp Spinning Mills Limited v Chileshe — Normal Measure of Damages
The normal measure of damages was departed from by considering the manner of termination as well as the scarcity of jobs, and the court awarded 24 months' salary. In contracts of employment, damages for inconvenience are also permitted.
⚖️ Paquette v TeraGo Networks Inc. — Bonus Entitlement During Notice Period
The Court of Appeal established a two-step test: (1) Was the bonus an "integral" part of the compensation scheme? (2) Does the incentive plan unambiguously alter common law rights? The "active employment" requirement alone is insufficient to preclude a bonus during the notice period.
FAQ
What is the difference between a term implied in fact and a term implied by law?
A term implied in fact is specific to the particular contract and is necessary to give business efficacy to that contract or is so obvious that it "goes without saying" (the BP Refinery test). A term implied by law is a duty that attaches to every employment relationship as a matter of law, regardless of the parties' intentions — the duty of mutual trust and confidence is the most significant example.
Hodder, J., Employment Contracts — AustLII
What did Malik v BCCI decide?
In Malik v BCCI [1998] AC 20, the House of Lords held that the implied term of mutual trust and confidence was breached when the bank operated a dishonest and corrupt business. The bank was held liable for financial losses suffered by employees who were left with a stigma that handicapped their future employment prospects. The decision established that the implied term could give rise to damages beyond the employment relationship.
Dublin Institute of Technology
What is the Waksdale principle on termination clauses?
In Waksdale v Swegon North America Inc., the Ontario Court of Appeal confirmed that if any portion of a termination clause breaches statutory minimum standards, the entire termination provision becomes void and unenforceable. The correct approach is to consider whether the termination clauses, read as a whole, violate the statutory standards. A single offending phrase anywhere in the termination section can invalidate an entire termination clause.
Mondaq — Waksdale v Swegon
References
Marson, J. & Ferris, K., Business Law, 6th Ed. — Oxford Law Trove
Hodder, J., Employment Contracts, Implied Terms and Judicial Law-Making (2002) — AustLII
Implied Term of Trust and Confidence — Dublin Institute of Technology
Waksdale v Swegon North America Inc. — Mondaq (2025)
Bardal v Globe and Mail Ltd. — Lexology
Paquette v TeraGo Networks Inc. — Hicks Morley
Wilsher v Olympic Wholesale — Dentons (2026)
National University of Singapore Law Journal
Swarp Spinning Mills v Chileshe — Scribd
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