Week 5 - Implied contract terms

3 sources of employment contract terms

1. Expressed contract terms

2. Ancillary contract terms

3. Implied contract terms

Expressed contract terms

Any contract term that the parties explicitly agreed to

• Stated in the contract (either written or spoken)

Ancillary contract terms

Documents that are physically separate from the employment contract, but whose rules and terms can form part of the contract

• If the employer does not tell you about the ancillary documents, they cannot hold you accountable to what is on those documents

Implied contract terms

Not explicitly stated in the contract, but are read into contracts by judges (assumed)

• Fills the void in expressed contracts

• You cant cover everything in a contract, so implied terms cover what is not expressed

• Every contract in Canada (non-unionized), includes the standard implied terms unless the parties agree otherwise

• These terms govern the parties relationship, even though one or both parties may be unaware that the terms exist (they are still applicable regardless of being aware)

• The implied terms are the foundation of the employment contract

Short contracts and implied terms

It is not uncommon to have a very short contract (oral or written), the problem tends to be that if you are with an employer for a long period of time, relationships evolve, responsibilities increase, etc. There is a possibility that the original short contract will not cover everything you encounter over time.

• This is where implied contract comes in and fills the void

Potential issues not covered in the expressed contract

• Must the employee do whatever the employer asks?: No, only what is reasonable and within the scope of their job

• Can the employer add new tasks to the employees job or take away existing tasks?: Yes, but there are limits

• Are layoffs permitted if there is a shortage of work?: No, unless it is expressed in the contract or part of industry standards that the employee accepted

• What is required to terminate the contract?: Reasonable notice or pay in lieu

• Can the employee compete against the employer either during employment or after the employment relationship is over?: during employment, no, after employment, yes, unless there is a clause in the contract

Additional information on implied contracts

• Implied contracts are under the common law regime

• The implied terms are rules/decisions made by judges and inserted into or “read into” the contract

• Implied terms are considered “default contract terms”, in that they fill gaps left by the contracting parties

• Implied terms are as real as expressed terms, the supreme court of canada explains they are equivalent in effect (taken just as seriously)

2 Methods courts use to imply contract terms

1. Implied terms “in fact”

2. Implied terms “in law”

Implied terms “in fact”

The court decides a term should still be included because it is what the parties must have intended, even if they didnt express it directly. This is called implying a term “in fact”

• The court isnt giving new terms, it is simply giving effect to what both parties likely assumed would be part of the deal

2 Legal tools to imply terms “in fact”

• Business efficacy test

• Officious bystander test

Business efficacy test

“Would the contract make sense or work properly without this term?”

• if not including the term would make the contract unworkable or not make sense, the court may imply the term to give the contract “business efficacy” (practical meaning)

Officious bystander test

“If someone had asked the parties about this term at the time of the agreement, would they have immediately agreed it was obvious?”

• If a reasonable outsider interrupted the parties during contract formation and said “shouldnt the contract include { }?” and the parties would reply “of course!”, the court may infer that the term was implicitly understood

Implied terms “in law”

When the courts apply this, it is not trying to figure out what the parties intended. Instead, its saying “regardless of what the parties wanted, we believe this type of contract should include this term as a matter of legal policy and fairness” It is not about what the parties thought, its about what the law says should be included in this kind of contract

When do courts apply terms in law?

When:

1. It would be unfair or unworkable not to

2. The relationship involved a power imbalance (like in employment)

3. A certain type of term has become so standard that its treated as part of the legal baseline

   • This approach reflects: legal duty (what one party legally owes the other), public policy, and consistency with precedent (stare decisis - courts follow earlier decisions)

   • This includes reasonable notice of termination, duty of mutual trust and good faith, safe working conditions, and duty of loyalty and fidelity

How judges use implied terms to shape employment contracts

When judges imply terms “in law” into employment contracts, they are doing more than interpreting the agreement, they are actively shaping what the employment relationship legally looks like. 

• This gives judges a lot of discretion to determine what rights and obligations should exist, even if the contract is silent on those points

Judges acting as pseudo-legislators

They create or enforce legal standards of conduct that apply across all employment relationships

Implied terms that regulate the conduct of employees

The courts have developed a long list of standardized implied terms that are assumed to apply to all employment contracts:

• Obey lawful employer orders

• Serve the employer faithfully and cooperate in advancing the employers commercial interests

• Not compete against the employer or use information to harm the employer

• Report to work when instructed and avoid lateness and unauthorized absences

• Be honest

• Perform work competently and safely

• Avoid intoxication at work

• Avoid harassment of others

• ^ These are all often lumped together by the courts under a general “implied duty of fidelity and faithful service”

• Provide reasonable notice of resignation

Note: when the employee involved is addicted to alcohol or drugs, human rights laws may impose obligations on the employer that may restrict the right of the employer to terminate the employee.

Implied terms that regulate the conduct of employers

• Provide reasonable notice of termination of an employment contract (most frequent issue in the common law regime)

• Provide a reasonably safe work environment

• Duty of good faith, honesty, and fair dealing in the performance and termination of employment contracts (implied good faith)

• Obligation to permit employees to work (or to not prevent employee performance) : an indefinite temporary layoff and an unpaid suspension violate this implied term, since both involve the employer refusing employees the opportunity to perform their end of the contract. This is true even if the layoff is caused by a global pandemic (covid) that reduces the employers business

• To compensate employees for work performed

Quantum meruit (the amount it deserves)

Permits judges to order payment for services based on fair assessment of the value of the services when a contract does not specify a rate of pay or where there was no formal contract entered into in relation to that labour