Contracts – stating your intentions

labour-guideBy Judith Griessel, Griessel Consulting

Employers generally have an adversity towards bulky and ‘legalistic’ employment contracts. The all-time favourite is still a “letter of appointment” of 2 or 3 pages, stating terms and conditions such as position, salary, leave and working hours – and perhaps something about confidentiality. It usually starts end ends with a friendly paragraph to welcome the prospective employee to the team.

Understandably, employers feel comfortable drafting such a letter without legal assistance. Alternatively, master contract templates are used again and again by simply changing the individual details as required and usually with a fair amount of “cutting and pasting” involved.

Inevitably, situations arise where determination of an employment dispute hinges on the contents of the employment contract/agreement – or, in many instances, on what has been left out of it. The interrelation of the various clauses of the contract is also an issue – it must be a holistic document with all of the clauses being relevant to the particular individual’s employment and without contradictions due to selective amendments to master templates.

In Air Traffic and Navigation Services v Esterhuizen (668/2013) [2014] ZASCA 138 (25 September 2014) the Supreme Court of Appeal had to determine a dispute about the interpretation of an employment contract and incentive agreement. This matter involved a civil claim instituted by the employer against the employee for breach of contract.

  • The employer had introduced an incentive scheme in order to retain its highly trained air traffic controllers. The employee agreed to the stipulation that he would receive monthly retention payments in addition to his normal remuneration, in return for remaining in the employer’s employ for a fixed term of 4 years. His permanent contract was amended accordingly and in particular, the notice clause was substituted with a new clause that the employment contract ‘is not terminable by either party prior to the expiry of the fixed-term period’. The agreement also provided for consequences that would follow upon a breach of its terms.
  • The employee however resigned from his employment after a year. He refused to withdraw his resignation and the employer cancelled the contract. The employer approached the High Court and caused summons to be issued based on a breach of the agreement.
  • The benefit the respondent would have derived under the scheme over the four year period amounted to R584 162. As at the date of his resignation, he had been paid R156 319. The employer claimed payment from the employee of the sum of R427 843, being the monthly incentive amounts it (the employer) would have paid to the employee for the remainder of the fixed term, had he not resigned.
  • This claim was dependent on the interpretation of the retention agreement. It was common cause between the parties that the purpose of the retention agreement was to retain employees in certain job categories for fixed periods. The employer’s main argument was that the premature unilateral termination of the retention agreement by the employee upon his resignation, amounted to a breach and triggered the provisions of clause 10.2 of the agreement in terms of which the employee became contractually liable to the employer for repayment of what he had actually received under the scheme; or alternatively what he would have received had he continued in the employer’s employ for the fixed term. The employer explained to the court that this clause was intended to have the effect that an employee who prematurely resigned could end up owing the employer an amount in excess of what he had actually received under the scheme, and that this was done in order to achieve the purpose of the scheme, i.e. that the employee remain in its employ for the agreed period.
  • The employee’s defence was based on another clause (clause 6) in the agreement, which made provision only for repayment of retention payments already received in the case of early termination of the fixed term employment due to specific reasons, including resignation. He argued that the provisions of clauses 6 and 10 were ambiguous and mutually destructive.
  • The High Court had criticised the ‘poorly drafted’ agreement as having gaps in it and its interpretation thereof rendered clause 10 meaningless and led to the dismissal of the employer’s claim.
  • On appeal, the SCA however followed a different approach and came to the conclusion that an examination of the entire contract, particularly having regard to its primary purpose to retain the service of specialist employees, yielded a clear meaning and made the agreement coherent.

“[15] The word ‘terminated’ in clause 6.1 is ambiguous: it may refer to termination by virtue of a right to give notice under the agreement or a deliberate breach by one party amounting to a repudiation of the agreement. In this respect the agreement is incoherent and confusing, but clarity emerges when one reads all four sub-clauses, from which it is apparent that the termination of the employee’s services to which it refers is a termination at the instance of the employer, i.e, the appellant. If the word ‘resignation’ in clause 6.1.1 is taken to encompass the situation where an employee has a bona fide reason to resign, and such resignation is accepted by the employer, then clauses 6 and 10 can be read together without any conflict. Where the resignation of the employee is accepted by the employer, the repayment procedure set out in clause 8 would be triggered.  This is the only interpretation which makes the agreement coherent, particularly having regard to the primary purpose of the agreement, namely, to retain the service of specialist employees such as the respondent.

[16] An interpretation to the effect that the word ‘resignation’ in clause 6.1.1 refers to a unilateral act by an employee and not a breach of the contract, would lead to the absurdity that clause 10 of the agreement, which deals with any breach of the contract, would be superfluous and in fact have no practical meaning at all. This could never have been the intention of the parties. In the exercise of interpreting documents, courts are slow to impute superfluity to a document and an interpretation which has this effect should not readily be accepted. The preferred approach is to give some effect rather than no effect to the words. Wallis JA in Bothma-Batho pointed out that ‘[a] sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document’. Having regard to the purpose of the agreement, it is clear that it must be the appellant’s prerogative whether or not to accept a resignation as termination as contemplated in clause 6.1 or consider it a breach under clause 10.”

  • The SCA thus favoured an interpretation that gave greater effect to the contract’s perceived purpose rather than that of the High Court which had rendered certain clauses meaningless. Consequently, the appeal succeeded and the (former) employee was ordered to pay the full R427,843 to the employer.
  • The court also confirmed the principles surrounding termination of fixed term contracts, i.e that none of the parties has the right to terminate such a contract prior to the expiry of the fixed period, unless there is a specific provision permitting termination on notice during the contractual period.  In the absence of such a stipulation, early termination of the fixed term contract by the employee is therefore a repudiation and the employer has an election to either hold the employee to the contract; or to accept the repudiation, cancel the contract and claim damages for breach of contract.
  • In this case, the effect of removing the notice clause from the employee’s initial contract and replacing it with a clause ‘that the employment contract was not terminable by either party prior to the expiry of the fixed-term period’, was that the employee waived his common law right to terminate the contract on notice and was precluded from resigning prior to the expiry of the fixed term. In exchange for so waiving his right, he received retention payments from the appellant. The premature termination of his employment by resigning was therefore contractually impermissible and amounted to a breach of the respondent’s obligations under the retention agreement.

This is but one example of the sorts of issues that could arise in relation to employment contracts. There are many others. The hybrid nature of the employment contract, having one leg in labour law but also one firmly planted in the common law environment, should make it clear to employers that “being fair and equitable” does not necessarily safeguard them from legal consequences.

So – still don’t see the point of a properly drafted and comprehensive employment contract with the appropriate legal terminology? Think it is just too complicated? Attractive as it may seem, that 2-page letter of appointment (even for unskilled staff) potentially exposes the employer to all sorts of risks. So does working off a master template if not customised, reviewed and regularly updated. Getting it right and spending a bit of money to do so, may well save you a lot of trouble down the line.

For more information please contact Judith at

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