05 Nov 2009

Employment contract: High Court rules on contracts, collective agreements and ending the contract

by Saul Harben

Employers may need to seek legal advice on the interpretation of the terms of any collective or certified agreements (now called enterprise agreements under the Fair Work Act 2009) and how they interact with terms in the contract of employment.

In unfair dismissal cases the question sometimes arises as to when and how the employment relationship was brought to an end, particularly when there is a demotion in position. On 2 September 2009 the High Court of Australia, in the context of an unfair dismissal application, handed down a decision ruling on the interaction of a contract of employment with a certified agreement which purported to specify the employee’s position; and on whether the employment contract is lawfully brought to an end automatically, once the employer has acted to end it: Visscher v The Honourable President Justice Giudice [2009] HCA 34.

Essential facts

Mr Visscher applied for reinstatement for dismissal under the Workplace Relations Act 1996 (Cth). He argued that his permanent position with Teekay Shipping (Australia) Pty Limited was that of Chief Officer but in September 2004 he was required to be Second Mate on Teekay's fleet vessels. This was either dismissal or demotion, which the Act treated as dismissal.

Teekay argued that Mr Visscher had been promoted for a short time to Chief Officer, that promotion was rescinded and then Mr Visscher returned to his position of Third Mate. He was then promoted to Second Mate. Although he was paid as Chief Officer and performed those duties, Teekay argued that he was acting only as Chief Officer.

The Australian Industrial Relations Commission, at first instance and on appeal, held there was no unfair dismissal.

In the High Court

The High Court, in hearing an appeal from the Federal Court on judicial review of the Commission’s ruling, decided that the full bench of the Federal Court and the Commission had not asked the correct question. The Commission, it said, should now determine the contractual position between the parties and whether what Teekay had done amounted to termination of employment at its initiative or demotion. The High Court made some pertinent rulings on interaction of contracts and certified agreements and on legal principles relating to the contract of employment not automatically ending once the employer has repudiated it.

Interaction of employment contract with certified agreement

A significant issue concerned how the certified agreement interacted with the contract of employment. The certified agreement operated from 5 May 2002. It bound Teekay's employee who belonged to the Australian Maritime Officers Union. The section of the agreement which dealt with "Employee Performance and Career Profession" contained a Grading List in which Mr Visscher was listed a "Third Officer". Clause 23.4 stated: "The grading (or rank/services) list attached will be the basis for future promotions/transfers, etc.".

In the Federal Court proceedings, Justice Buchanan viewed the certified agreement "as having superior force" because of the Workplace Relations Act. The High Court agreed, stating that "the contract of employment cannot derogate from the terms and conditions of an award, which operates with statutory force. The same may be said of certified agreements."

The issue, however, was: what effect did the certified agreement have on Mr Visscher's grading?

The majority of the High Court answered this by referring to the certified agreement’s terms, ruling that:

  • the certified agreement contained nothing about reallocating positions of individual officers;
  • the certified agreement did not contain an intention to deal with reallocation of positions;
  • the only statement about positions was in the grading list annexed to the certified agreement;
  • the grading list stated a fact about Mr Visscher’s employment, "not a matter expressed to have been the subject of the agreement of the parties to the Certified Agreement"; and
  • the grading list was to be the basis of future promotions etc. and did not show an intention to change the positions of any officers in the list.

The majority concluded that the statement of fact in the appended list, which could have been corrected, was not a term of employment that bound Mr Visscher.

If under his contract of employment Mr Visscher was employed as Chief Officer, the certified agreement did not alter that term, the majority decided.

Conclusion on contract termination—automatic?

The majority concluded that when Teekay tried to rescind the contract by notification, the contract was not brought to an end automatically. Mr Visscher had to accept the repudiation before the termination of the contract would be effective.

The High Court, in concluding that the Commission had not asked the correct question in unfair dismissal proceedings, confirmed the legal principles that repudiation of the contract of employment by the employer had to be accepted by the employee and that the contract was not automatically ended by the repudiation. It also significantly affirmed that most employees would accept repudiation because, while keeping the contract on foot (that is, not accepting the repudiation) aided the chances of orders for specific performance of the contract, specific performance was rarely given as a remedy by the courts.

Implications for employers

While this case was decided on its own facts, there are some lessons for employers set out below.

  • A certified agreement has superior force but that agreement must be examined to ascertain what are the binding terms of the agreement. In this case, the annexed grading list did not alter the employee’s position nor did it intend to reallocate positions.
  • The principle that an employer's repudiation of the contract does not automatically bring the contract of employment to an end was affirmed by the High Court. The employee must accept the repudiation in order for it to be effective to end the contract.
  • The High Court confirmed the proposition that an order specifically enforcing the employment contract remains unusual. Thus it has not altered the long-standing principle about specific performance, despite suggestions from time to time over the years that the principle should change.

Employers may need to seek legal advice on the interpretation of the terms of any collective or certified agreements (now called enterprise agreements under the Fair Work Act 2009) and how they interact with terms in the contract of employment.

Employers may also need advice on bringing a contract to an end. Where the scenario is complicated, as in this High Court case, employers may need advice to be sure that their attempts to end the contract have legally ended the contract. This is important for many reasons, including the date of cessation of the employment relationship on which entitlements may depend, and the possibility, even though unusual, that an order for specific performance may be made where the employee has elected not to accept the employer’s actions as ending the contract.

Thanks to Marilyn Pittard for her help in writing this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.