Seminar 4

Terms of the Employment Contract

Terms of Contracts

•Contracts can have:Express TermsImplied Terms

Express Terms• What are express terms?• What could be some express terms in an employment

contract?• Generally, express terms are binding even if they are

unfair.• Why is this so?• However, exceptionally, they are not enforceable if they

are: illegal (eg: they are against certain unoverridable

provisions of certain statutes like the Employment Act and CPF Act) or against public policy.

Terms Against Public Policy: Restraint of Trade Clause

• An example of a term which is often found in employment contracts and which may be against public policy is the restraint of trade clause.

ROT Clauses• For such a clause to be valid it must be reasonable. To be

reasonable:

• (a) The employer must have a legitimate interest to be protected.

(i) Where the clause seeks to prevent working for a competitor or setting up a business in competition, there will be legitimate interest if the employee had access to trade secrets or highly confidential information or the employee had the ability to pull over customers.

(ii) Where the clause seeks to prevent the solicitation of customers, there will be a legitimate interest if the employee had the ability to pull over customers.

• (b) The clause must not be wider than necessary in terms of area, time and scope of limitation.

Too Wide?• Example: ROT in contract of a baker:

(i) Singapore(ii) Whole World

(i) 6 months(ii) 60 years

(i) Cannot work as a baker(ii) Cannot work in a restaurant, bakery or cafe

ROT Clauses (Con’d)• If the ROT clause is unreasonable, it cannot be

enforced. • But there is a narrow exception. For instance, it is

possible for the court to delete the offending parts without introducing grammatical difficulties or new terms. In such an instance, the rest of the clause may be enforceable. But note: this is not commonly done.

Example: - (i) Singapore or Malaysia- (ii) South East Asia• If ROT clause is valid, can be enforced by means of an

injunction and employee may be liable for damages for loss suffered by employer.

Other types of restraints that may be found in employment contracts:

• There can be other types of restraints such as:

Obligation to work for the employer for a certain period of time (eg: bond).

Personal restraints (eg: obligation to maintain a certain weight/marital status).

Obligation not to do any outside work while employed with this company.

Other Restraints (Con’t)

•For such other restraints are valid unless totally unreasonable in the circumstances.

Restraints (Con’t)• Also note: sometimes, the contract could have

a pre-agreed/liquidated damages clause in relation to a breach of a restraining clause.

• Such a pre-agreed/liquidated damages clauses would only be valid if the stated amount is a genuine pre-estimate of the possible loss.

• If it is an arbitrary/extravagant figure – it won’t be enforceable. In such a situation, only the actual losses can be claimed.

Implied Terms

• Terms may be implied by 1 of 3 ways:

• (1) By Statutes

• (2) On the basis of a very well established Custom (But note: not common)

Case Example:• Sagar v Ridehalgh:• Employer claimed he had a right to deduct from cotton

weaver’s wages for bad work.• This had been practiced in the factory for more than 30 years.• This was also the practice is the whole of the cotton weaving

industry at that time.• What do you think the court decided?

Implied Terms• (3) By Courts - on some grounds such as:- It is so obvious it goes without saying (also known as

the “officious bystander” test) and- It is necessary for business reasons to imply such a

term (also known as the “business efficacy” test).

• What could be some implied terms using this test?

• Should the parties leave it to the courts to imply terms on the above grounds or should they strive to provide for everything expressly as far as possible?

Summary• Like all contracts, employment contracts too contain express terms.• Express terms (whether verbal or in writing) are valid and binding

unless they are illegal or against public policy.• The main example of a term which is against public policy – is the

restraint of trade clause. If the restraint of trade clause is unreasonable, it generally would not be enforceable. If it is reasonable, it would be enforceable by means of an injunction and/or damages.

• Like all contracts, employment contracts too contain implied terms.• Terms may be implied by statutes, custom or courts. It’s not common

for terms to be implied on the basis of custom. But the other two methods are common and we shall look at some examples of terms implied through such means in subsequent seminars. But in relation to terms implied by the courts – since it may sometimes be difficult to tell whether a term will be implied or not – it is better for the parties to expressly provide for this in the contract where possible.

Readings:

• Basic Text: Chapter 3 (3.11-3.12, 3.15, 3.17, 3.22-3.23, 3.30-3.32, 3.34, 3.38-3.40, 3.42-3.45, 3.59-3.60, 3.63-3.64, 3.66, 3.69-3.72, 3.74-3.75).