Abstract
This article articulates a theory of relational contract, as an alternative to traditional freedom of contract philosophy. The law has moved away from freedom of contract to some extent, and it can be criticised on the basis of its unrealistic assumptions and detachment from the typical reality of parties’ contracting. Relational contract theory is a possible suitable alternative theoretical framework. It may be useful in relation to contract interpretation. Specifically, it can be utilised to support a broader approach to contract interpretation, with the court focussing on the entirety of the parties’ relations, including the written terms and also subsequent performance. It enjoys some support in the United Kingdom and in other common law jurisdictions. It can support the view taken by two justices of the High Court of Australia in a recent contract interpretation decision involving employment contracts. The article favours the approach taken by these justices, rather than that of the majority, whose judgment reflects classic contract law sentiments at odds with the general direction of contract law in comparative jurisdictions.
Introduction
Many of the rules of contract were sourced during an era in which the doctrine of freedom of contract prevailed. Of course, over time, some of these rules have been ameliorated in some of their otherwise harsh consequences by principles of equity, other principles of the common law, and/or statute. Nonetheless, important aspects of contract law, including of particular relevance here contractual interpretation, hark from an industrial revolution era of the nineteenth century. This includes a traditional general rule that, in interpreting contractual provision, evidence of how the contract was performed is not relevant to its interpretation, applying the parol evidence rule, though a more nuanced contextual view has subsequently developed. In two recent High Court of Australia decisions, division was evident on this matter, with a majority of the justices adopting the traditional rule, and a minority indicating evidence of subsequent performance could or should be taken into account in interpreting the parties’ written agreement.
In the latter part of the twentieth century, some contract law scholars developed a relational contract theory. This theory is highly critical of traditional freedom of contract philosophy, and its manifestation in particular rules of contracting. The theory argues freedom of contract notions are unrealistic and unreflective of how most parties actually conduct themselves in contracts, how important the written terms are, how they view their contractual relationships and how they resolve contractual disputes. As will be seen, acceptance of this theory would lead to a re-think in terms of how the Australian contract law deals with issues of subsequent performance and contractual interpretation. This re-think has occurred in comparative countries, though concededly these jurisdictions have not necessarily expressly linked their reform of the law in this area to relational contract theory. This theory has so far had minimal impact on the Australian contract law, and has received limited attention from the Australian scholars. 1 This article will suggest it warrants serious consideration. For space reasons, the article will not consider other possible doctrines that might apply to such a situation, including estoppel, waiver or unjust enrichment. Nor will it consider the suitability of general principles of contract law to the employment context.
Part II of this article will briefly explain traditional freedom of contract philosophy, and explain how relational contract theory fundamentally differs from it. The discussion will focus particularly on what relational contract theory might tell us about contractual interpretation, and the relevance of subsequent performance to that process. Part III will consider case law in the United Kingdom and Australia regarding the use of subsequent performance in interpreting contracts, and note the position in the United States, Canada and New Zealand and in international trade materials. Each of these jurisdictions (apart from Australia) has accepted evidence of subsequent performance as an aid to contractual interpretation. Part IV considers recent High Court decisions involving employment situations, where two justices adopted a position similar to that pertaining in these other jurisdictions, but a majority maintained the traditional view that such material was generally irrelevant and ought not be considered. Part V will argue the Australian law should be willing to accept such evidence, at least in some cases. Relational contract theory can be utilised to support and justify this position. Acceptance of this position does not necessarily undermine other fundamental principles of contract law, such as the objective theory of contract. Part VI concludes. This article is considered to make a contribution to the literature by examining two important recent High Court of Australia employment decisions through the prism of relational contract theory, with broader implications for contract interpretation generally.
Relational contract theory and freedom of contract
Prior to discussing the development of freedom of contract principles and relational contract theory, it is worth pointing out that contract law until the late eighteenth century was primarily based on executed contracts (what parties were already doing and had already done, involving concepts of benefits and/or reliance), not executory contracts (promises regarding future activity). 2 In some ways, the shift to executory contracts fed the rise of notions of freedom of contract, with a focus on the terms of the engagement, rather than factual evidence of what had occurred or was occurring.
Freedom of contract
Freedom of contract principles that maintain an agreement voluntarily entered into by parties should be respected and given effect to by the courts. 3 The voluntary aspect was critical because the fact the contract and its terms reflected free choice legitimated exercise of state power against an individual, through the law's enforcement of contractual promises. 4 A court is not, and should not be, in the business of re-making the parties’ agreement into something that a judge might individually believe would make for a ‘better’ contract, however that might be defined. 5 It is argued the role of the court is to give effect to the parties’ agreement, and the best evidence of what the parties agreed is the written terms of their engagement. 6 This is a formalist position. The court's review role here is limited – concerned to ensure the procedural requirements for entry into a contract have been met, not the substantive fairness of clauses. 7 The parties, not outsiders, are the best judges of what is in their best interests. 8 This approach assumes parties are rational, utility-maximisers, 9 who are in a position to determine what is in their best interests, and have it reflected in contractual terms. It assumes parties have access to adequate information in order to make informed judgments about that, and sufficient bargaining power to secure an agreement reflecting their optimal wishes. Contracts involve an exchange of promises, and perform a risk-allocation function. This approach assumes the fungibility, of interchangeability, of goods and services, 10 thereby minimising the importance of the identity of the contracting parties, and particularly the relationship they have with one another. 11
Freedom of contract is said to support a (relatively) free market economy, where contracts are encouraged in order to provide for efficient exchange of scarce resources. This is the ‘classical’ contract law model, reflecting the invisible hand theory of classic Adam Smith economics prevalent at the time. 12 It is a public policy. 13 At the height of the freedom of contract approach, courts would often eschew consideration of the factual matrix in which the dispute arose, preferring to resolve disputes purely on legal grounds, which involved formalism. Atiyah notes one reason for this was simply that the courts were being kept very busy with a high volume of commercial disputes, and a focus on legal principles, without delving into sometimes complex factual scenarios, permitted them to decide cases quickly. 14 Given later discussion in the article, concerning the implications (if any) for contractual interpretation of actual performance (i.e. facts), this is considered particularly noteworthy. The courts’ tendency in the past to fixate on the written word of the contract, sometimes in the face of actual reality quite to the contrary, might be explicable on such a basis. Of course, it hardly seems like a reasonable justification today for such an approach.
Some laud this formalist approach on the basis it reduces transaction costs – one of the aims of focussing on the written terms of the contract is to reduce the ambit of disagreement between the parties as to what their agreement was. If this possible ambit of disagreement is minimised, so too is the risk of, and cost associated with, resolving that dispute. 15 Freedom of contract is also often lauded on the basis that it provides those conducting business with the kind of certainty and predictability that they require from the legal system. 16
Freedom of contract principles are reflected in the recent High Court of Australia decisions in CFMMEU and ZG Operations, 17 in focussing on the express terms of the contract to the exclusion of consideration of subsequent performance. These cases will be discussed below.
Criticisms of freedom of contract approach
Atiyah documents the decline of the principles of freedom of contract from about 1870. He discusses many reasons for this, including the increased recognition of inequalities of wealth and power within society. Political changes in favour of extending the right to vote to more people reflected an increased acceptance that individuals were and should be treated as equals. This came into conflict with contract principles that favoured the wealthy and powerful. 18 Atiyah concludes that by the late 1880s, freedom of contract as a political slogan was finished. 19 He further claims that this model was a ‘failure … notwithstanding its formal perpetuation to the present day as a body of general principle’. 20
Ten years ago, the High Court discussed freedom of contract principles. In ANZ Group Ltd v Andrews, albeit in a different contractual context, all members of the Court rejected any suggestion that ‘untrammelled’ freedom of contract provided a universal legal value in the common law. 21 Obviously, development of equitable principle, development of other doctrines in the common law, including unconscionability, implied terms, frustration, estoppel and development of restitution (to say nothing of statutory reform) 22 have reflected realisation that fundamentalist freedom of contract principles, of themselves, are (sometimes) insufficient to lead to outcomes most would view as acceptable and reasonable. 23 Some say that developments of these ‘add-ons’ to freedom of contract threaten to ‘undermine the integrity’ of the classical discourse. 24
Most scholars today accept the assumptions that underlie freedom of contract sentiments are highly questionable. We understand the reality that in many cases, contracts are not the product of negotiation between two parties of approximately equal bargaining power. In practice, there is often a large disparity in bargaining power between the parties, and the stronger party is in a position to, and does, literally dictate the terms of the agreement. That party (more likely, their legal representative) will typically draft the terms of engagement, with little or no input from or negotiation with the other party. This is often true in the current context of an organisation that engages a worker to perform particular services or tasks. As the cases have reflected, often that organisation is in a position to draft terms of the engagement between the parties. 25 Clauses may be taken from standardised banks of templates. Contracts will often, innocently or deliberately, contain significant gaps. Individuals and organisations are not always rational utility-maximisers. 26 The promise of certainty may be illusory, 27 and may conflict with what most regard as justice. 28 A myopic focus on contractual terms may increase transaction costs, by encouraging and rewarding efforts to incorporate provision for every possible contingency ex ante in the contract. 29 Self-interest may not be a zero-sum, I-win-you-lose game, but might include an element of co-operation that might be necessary in order for both parties to win. 30
This reality is important for current purposes. It can mean the words utilised in the contract do not in fact reflect the parties’ actual intentions, 31 and the objective view of contracts, to the extent that it assumes that the words used reflect the parties’ actual intentions, falls short in doing so. Empirical evidence suggests there is often a wide gap between the parties’ contractual terms and their actual performance. 32 This may be because the original technical terms never accurately reflected the parties’ actual intentions (for the reasons outlined in the previous paragraph) or because it was drafted by lawyers who may not have fully appreciated the parties’ intentions; 33 it may mean that the parties’ intentions are dynamic, rather than static, 34 or that for some other reason, it is difficult to allocate all risks associated with the contract at the time of agreement. 35 It may be a combination of these. It may reflect the relational nature of contracts, as explained below, where parties value the ongoing relationship between the parties, rather than enforcing contractual provisions to the letter on a particular occasion. 36 Parties in such a situation may not see the need for a detailed contract, or if such is foisted upon them by legal representatives, may not intend it to reflect the entirety, or even the substance, of the parties’ agreement. 37 The assumption that contracting parties are in fact rational utility-maximisers has been questioned. 38
John Stuart Mill sagely observed limitations of freedom of contract: (An) exception to the doctrine that individuals are the best judges of their own interest, is when an individual attempts to decide irrevocably now what will be best for his interest at some future and distant time. The presumption in favour of individual judgment is only legitimate, where the judgment is grounded on actual, and especially on present, personal experience; not where it is formed antecedently to experience, and not suffered to be reversed even after experience has condemned it. When persons have bound themselves by a contract, not simply to do some one thing, but to continue doing something … for a prolonged period, without any power of revoking the engagement … (any) presumption which can be grounded on their having voluntarily entered into the contract … is commonly next to null.
39
In efficiency terms it is not clear that all parties should be directed towards trying to draft complete, fully contingent and interpretation-proof contracts, bearing in mind the likely costs. Use of flexible standards, gaps in the agreement, beginning work and letting performance firm up the obligations may in fact be the most efficient way of managing the commercial relationships. 41
Formalism continues to have adherents in the literature. 42
Relational contract theory
Deep dissatisfaction with freedom of contract principles, and the sometimes harsh outcomes they cause, obviously led to development of new legal principles. However, it also manifested in new contract law theories. One such theory is relational contract theory. Relational contract theory is championed by scholars such as Ian Macneil and Stewart Macaulay. 43 This theory suggests that the freedom of contract model of contract law is based on an inaccurate picture of the relations between contracting parties. It may not reflect the parties’ expectations. If this is true, this is considered to be a major flaw. 44 Of all areas of the law, commercial law, including the law of contract, has a deep history of being influenced by commercial practice. 45 Lord Mansfield's position as a legal luminary is partly based on the work he did to incorporate well-established principles of commercial practice into commercial law (lex mercatoria). 46 Thus, a suggestion that a fundamental aspect of commercial law does not reflect commercial realities has a bite to it that would not exist in other contexts. Once this is accepted, it is usual, though clearly not inevitable, 47 to lead to an argument that commercial law must be reformed so that it is consistent, or more consistent, with typical commercial behaviour, including standards of fair dealing and co-operation. 48
Evidence of typical commercial behaviour is available in model template contracts. In the United Kingdom, Clause 10.1 of the New Engineering Contract (2005, 3rd ed) and Clause 10.2 of the 4th edition (2017) expressly required parties to work together in a spirit of mutual trust and co-operation; 49 in Australia, clause 2 of draft AS11000 General Conditions of Contract required parties to conduct themselves in good faith, but it has not (yet) been formally adopted. There has also been an increase in the use of alliance/partnering contracts and enterprise contracts. 50 The flavour of co-operation in these agreements can seem at odds with traditional contract law, which is seen as adversarial in nature. These contracts may reflect a project-centric, rather than party-centric, approach consistent with relational contract theory. 51 A leading judicial advocate has noted the increased use of express good faith clauses in contracts governed by the United Kingdom law. 52
Justice Leggatt expressed this view succinctly: There is sometimes a tendency of English commercial lawyers to view commerce as it if were a kind of Darwinian struggle in which everyone is trying to gain at the expense of those with whom they do business and where, even when parties have made a contract, that does no more than set limits on the pursuit of profit at the other party's expense … this model of commerce and of contract … does not in my view correspond to commercial reality (based on my experience advising commercial clients) … it is a mistake to see contracting as an essentially zero sum game is which one party's profit is automatically the other party's loss. The essence of trade and commerce is reciprocity which benefits both parties and makes each party better off. To achieve such mutual gain, the parties agree to cooperate with each other … if contract law is to perform that function effectively, it (must) recognise that not all the shared understandings and expectations which contracting parties have and which are necessary to realise their joint aims are ever spelt out … in their contract.
53
Discrete contracts and relational contracts
The adjective ‘relational’ is used to describe many contracts, in contrast with a ‘discrete’ model of contracting that is said to underpin classic contract law. Discrete contracting assumes one-off transactions between parties who are not known to one another. Each is a rational utility maximiser who knows what is in their best interests and has the knowledge and bargaining power to ensure that the contractual terms reflect these interests. In a discrete contracting model, the wording of the contract assumes great significance. Thus, great effort is taken to draft it, particularly given legal requirements and the possibility of non-performance. A discrete model tends to discount other aspects of the parties’ relationship, including what happened (if anything) between these parties prior to the execution of the current contract, and what happened after its execution. 54 It is assumed parties are in an adversarial relationship. 55
In the view of relational contract scholars, the classic freedom of contract model is based on a fiction, which impacts its utility. Classic freedom of contract assumes discrete, one-off transactions, and its doctrines attempt to resolve disputes involving such transactions.
56
In truth, most contracts are between parties who are known to each other. Their ongoing relationship has a value to them, which discrete contract law models ignore. This value may be intangible, which is perhaps why discrete contract law ignores it, but it should not be ignored, because it explains how parties actually behave in practice. For a relational contract scholar, it is essential to look beyond the written terms of the agreement between the parties, to understand the full scope of the parties’ relations.
57
Precisely because they may have an ongoing relationship, with a deep history and a long expected future, the parties’ written agreement may be sparse, not reflecting all that has been agreed or would have been agreed if the parties had desired to complete a comprehensive written contract.
58
Macneil says a ‘vast amount of economic activity is carried on at least partly on this basis’.
59
Macaulay notes in relation to the classic contract law ‘discrete’ approach often fits the facts poorly. The parties’ contract records in detail their plan for all foreseeable contingencies in a written record. Performance is guided by this plan, and any disputes that cannot be avoided by reference to it can be resolved by interpreting it. However, this story better fits situations where trust is limited .. more commonly .. people agree on some terms but not everything, and just start performing … in a relational contract, often it is hard to say when the contract is formed. Moreover, it is not likely to be formed once and for all. Rather than a scene frozen in a still photograph, a relational contract is more like an ongoing motion picture.
60
The need for a contract law system enhancing discreteness and presentiation will never disappear … such a system will, however, continue to rub in an unnecessarily abrasive manner against the realities of coexistence with relational needs for flexibility and change. Only when the parts of the contract law system implementing discreteness and presentiation are perceived … not as an independent system but only as integral parts of much larger systems, will unnecessary abrasion disappear. By no means will all abrasion disappear … because real conflict exists between the need for reliability of planning and the need for flexibility in economic relations. What will disappear is the abrasion resulting from contract law founded on the assumption that all of a contractual relation is encompassed in some original assent to it, where that assumption is manifestly false. 61
Relatedly, leading contract law scholar Hugh Collins talks about a three dimensional view of contracting behaviour, including the business relation, the economic deal, and the contract. He says that classical law typically ignores the first of these, notwithstanding its significant importance. The ‘business relation’ aspect is consistent with relational contract theory, explaining why parties are not as concerned with express contractual terms as the law tends to be, and why parties will often eschew exercising express contractual rights in favour of maintaining good relations etc. 62
The relational contract theory work of Macaulay in particular was partly empirical. He undertook qualitative research with businesses and their legal advisers to ascertain their contractual practices. The research found that express contractual terms were often incomplete, particularly around performance issues. However, this did not matter particularly, because on almost all of the occasions where a dispute arose between the parties, they settled it informally, without recourse to the contract or to legal action. Internal mechanisms within businesses typically work to ensure parties’ performance conforms to expectations. Business is concerned with maintaining good contractual relations with those with whom they deal, and that they preserve a good reputation within the marketplace in terms of their business practice. These forces, rather than contractual provisions, tend to dictate contractual performance. 63 Some interviewees reported that they disfavoured very high degrees of specificity in contracts, because that might encourage the other contracting party to perform to the letter, rather than the spirit, of the contract, and because it might reflect low levels of trust between the parties. 64 In other contexts, for example contracts intended to endure over a long period, it may not be possible or desirable to expressly allocate all risks at the time of agreement. In such a context, the parties might legitimately and reasonably expect a spirit of mutual co-operation between the contracting parties. 65
There is some judicial support for such a theory. In GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd, Finn J of the Federal Court, accepted that a sub-contract was a ‘long-term relational one’, to which obligations of mutual trust and confidence applied. 66 It was briefly described by three members of the High Court in Commonwealth Bank v Barker as one of ‘uncertain application’, 67 and was not argued in that case. Members of the United Kingdom Supreme Court referred to employment as a ‘relational contract’, 68 and members of the Court of Appeal have referred with apparent approval to the concept – Jackson LJ in Amey v Birmingham City Council referred to the ‘relational’ nature of the contract it was considering, with implications for how it should be interpreted. 69
There is some evidence of acceptance of relational contract theory in cases involving alleged undue influence and/or unconscionability, though the courts typically do not use the language of relational contracts. For example, a relatively recent case involved a party wishing to invalidate a pre-nuptial and post-nuptial agreement on the basis of both doctrines. 70 The court explained that undue influence was presumed to exist in respect of transactions involving particular relationships. 71 In other cases, undue influence was not presumed, but it was open for one party to show their will was overborne by another. This might often occur because of the relationship the parties had. In relation to unconscionable conduct, one of the requirements was that the party claiming its existence was required to show they were at a special disadvantage compared with the other. 72 Again, one of the ways in which a special disadvantage might exist could be that the parties have an existing relationship, for example a familial relationship (as occurred in one of the leading Australian cases on unconscionable conduct). 73 Though this category of cases may be explained as an application of relational contract theory, it should be emphasised again that the High Court did not couch its decision in such language.
The discrete contract approach assumes ‘presentiation’ is readily achievable
On the discrete model of contracting, a high degree of ‘presentiation’ is possible. 74 Macneil defines ‘presentiation’ to mean making something present in time or place. In the discrete model of contracting, presentiation is easy to achieve – it is not difficult to articulate today promise/s to do things that will take place tomorrow. It is acknowledged that, with some contracts, presentiation is possible – if I contract to purchase a bottle of water, it would be relatively easy to settle on the terms of future performance, partly because performance is easy and simple, requirements to perform can be readily articulated and performance will occur momentarily after the contract is entered into. Macneil says that ‘presentiation of a transaction involves restricting its expected future effects to those defined in the present’. 75 Classical contract law reflects presentiation – with its reification of the written terms over everything else, and the way in which it seeks to generally exclude other evidence such as the history of the parties’ relationship, pre-contractual negotiations, or actual performance after execution of the contract.
However, Macneil says that most contracts are not like this. Specifically, relational contracts (including employment contracts) are not like this, for several reasons. 76 Firstly, they typically occur over a longer period, making it more difficult to ‘presentiate’. Secondly, performance is not necessarily easy and simple. Thirdly, it is much more difficult to articulate requirements to perform. 77 Macneil views contracts as a continuum, with discrete contracts at one end and relational contracts at the other end. As a given situation moves closer to the ‘relational’ end, presentiation plays a less important role. He says that more aspects of the relations between the parties must, of necessity, be left to future determination. 78 Leggatt J accepted this point in Yam Seng Pty Ltd v International Trade Corp Ltd, concluding that ‘contracts can never be complete in the sense of expressly providing for every event that may happen’. 79 Many years earlier, Atiyah had made a similar point: ‘we know too much about social behaviour to believe that people in general can calculate future chances and maximise their satisfaction over any period of time’. 80 He opines that English business people ‘have no great desire to use contracts as instruments of risk allocation concerning unknown future events’, and business people are ‘often constrained to agree to adjustments to contractual terms where subsequent events make the original contract no longer capable of performance on a fair basis’. 81 He states that executory contracting is declining, in favour of a more flexible approach based on notions of reliance and benefit, a throwback to the pre-Industrial Relations era focussed on what has actually occurred or is occurring, rather than a fixation on contract terms. 82 Similarly, Macaulay concludes that ‘the object of contracting is not primarily to allocate risks, but to signify a commitment to co-operate’. 83
Definitional difficulties – which contracts are relational?
It is acknowledged that not every contract type is, of its nature, relational. 84 A casual purchase of goods from a food outlet during a road trip would be one example. There is no prior planning; the parties are strangers to one another, and will unlikely encounter each other again. However, many other contract types would be relational. Goetz and Scott attempted a definition of such contracts, stating that ‘a contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations’. 85 They cited employment contracts as being within this definition, because it was not possible to specify in detail in advance the precise nature of the worker's obligations regarding performance, and because of the impossibility of knowing in advance unforeseen contingencies that may impact on performance subsequent to the execution of the contract. Case law supports the view of employment contracts as being relational in nature. 86
In Yam Seng Pte Ltd v International Trade Corp Ltd,
87
Leggatt J (as he then was) indicated that other examples of relational contracts might include joint ventures, franchise arrangements and long-term distributorships. He suggested such relationships were characterised by a high degree of mutual trust and confidence. Leading contract law scholar Hugh Collins suggests the following features indicate a contract may be relational:
Expectation of a longer-term business relationship; Investment of substantial resources by both parties; Implicit expectations of co-operation and loyalty that shape performance obligations to give business efficacy to the arrangements; and Implicit expectations of mutual trust and confidence, not merely avoiding dishonesty.
88
Collins says this list is a helpful guide, but no more than that.
89
In GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd, Finn J acknowledged that in relational contract situations, there was a need to adjust terms to take into account unforeseen events and circumstances. Fairness and commercial reasonableness would be of assistance in guiding such variations.
90
In Bates v Post Office Ltd (No3), Fraser J articulated a list of eight factors to assist in determining whether or not a contractual relationship was relational in nature:
No express terms express to the contrary; Contract will be long-term in nature, reflecting the parties’ intention; Parties intend their bargain will be performed with integrity, faithful to the bargain; Parties are committed to collaborating with one another in the performance of their contract; Spirit and objectives of the contract may not be able to be exclusively expressed in the contract; Parties repose trust and confidence in one another (but not in the sense of a fiduciary relationship); Contact expected to involve a high degree of communication, co-operation and predictable performance between the parties, based on mutual trust and confidence and expectations of loyalty; Each of the parties has made a substantial investment in the subject matter of the contract; and The parties’ relationship may be exclusive in nature.
91
The list was expressed not to be exhaustive. It was not necessary that all elements be present in order that a contract be viewed as relational in nature.
Macneil also clearly views contracts involving the engagement of workers to be relational, classifying them as ‘contracts of adhesion’, where typically there is little or no negotiation as to the terms of the engagement. 92 This places them far from the assumptions underlying the ‘discrete’ view of contract.
Some relational contract theorists distinguish between discrete contracts and relational ones, primarily on the basis that the former represents a one-off transaction between strangers, while the latter reflect contracts between parties in a pre-existing relationship. Obviously, it can sometimes be difficult to determine when an originally discrete contract has morphed into a relational one. Is it the second occasion on which parties contract that their arrangement morphs from a discrete one to a relational one? Attempts have been made to define relational contracts, whether based on the length of the parties’ relationship, the nature of the contractual obligations (for example, whether the contract concerns the purchase of a simple commodity, on the one hand, or involves the delivery of highly skilled labour, on the other), and whether it is possible for the parties to reduce the full scope of their contract to writing. 93 Some have derided such attempts on the basis that all, or virtually all, contracts are relational. 94 It can be acknowledged that it can be difficult at times to determine whether or not a particular relationship is relational, and this is a weakness in the theory.
Kimel argues The crux of the matter is that the relationship in question is such that it has the propensity to generate norms, define or inform parties’ expectations, provide sources of reassurance, facilitate co-operation, create interdependence … over and above, indeed potentially instead of, what can be gleaned from the express terms of the contract or contracts to which they are parties, and over and above what is provided by the bare legal norms and legal mechanisms that underlie or support these contracts.
95
It must also be acknowledged that some theorists argue it is overly simplistic to categorise contractual relationships as being either discrete (where self-interest is paramount) or relational (where co-operation is paramount). In many cases, contracts involve both self-interest and commitment to the parties’ agreed bargain. 98 To be fair, some of Macneil's work acknowledges this. Some argued a further weakness that, at times, Macneil discussed the individual-centred, freedom of contract approach as being mutually exclusive to a relational, co-operative approach. Yet, at other times, he sought to build a ‘third way’ that attempted to embrace both, though he was criticised for the impossibility of doing so. 99
Consequences of a finding that contracts are typically relational
A relational view of contracting potentially has many potential implications for the law of contract generally, though Macneil did not specify in great detail what these should be, 100 and this failure has been documented in the literature, 101 and identified as a further weakness of relational contract theory. 102 He did not advocate for special rules that would be applied to a class of contracts considered relational; he seemed to wish to change the approach taken to contracts generally, in light of the realities of contracting, which he believed classical contract law effectively ignored. 103 He identified a trust norm applicable to contracts; sub-categories of this norm included preservation of the contractual relation, harmonisation of conflict, propriety of means and role integrity. 104 Similarly, Collins identified specific consequences of a relational contract. These are: (a) interpretation of contracts in a deeply contextual manner; (b) dynamic variation and adjustment of contractual obligations; (c) recognition of binding, intermittent contracts in the context of long-term business relations; and (d) mandatory contractual obligation to perform it in good faith. 105
There is not space here to discuss all possibilities. One would be recognition of a doctrine of good faith,
106
as Collins suggested. This principle remains contentious in the Australian
107
and United Kingdom
108
contract law, while being accepted in Canada
109
and the United States.
110
I have written about it elsewhere,
111
and a discussion here would be beyond the scope of the current article. Other supporters of a relational view of (some) contracts have expressed the link between it and good faith.
112
It might include duties of co-operation,
113
fidelity to the bargain,
114
and reasonableness,
115
meeting of legitimate and reasonable expectations,
116
and avoiding ‘opportunistic’ behaviour.
117
It might include substantive fairness.
118
It is not the equivalent of a fiduciary duty.
119
The Australian High Court has generally eschewed the imposition of fiduciary duties within the commercial context,
120
and acceptance of the relational nature of contracting would not necessitate this being overturned. The immediate focus here is on its application to support use of evidence of actual performance to interpret contract provisions.
121
This would be encompassed within the second of Collins’ identified principles discussed just above, as Collins himself recognised: In a relational contract, it will be the parties’ current reasonable expectations that form the substance of the obligations of the parties, not their historical expectations, and probably not inconsistent express terms of the contract.
122
Business partners engaged in sustained and repeated dealing do not fully plan for and allocate risks in their contract. Instead, the parties depend on relational norms such as flexibility and reciprocity to administer their agreements. Therefore the social context and the great sea of custom form the foundation of the parties’ bargain. Critically, relational norms can govern transactions that end up in litigation only if extrinsic evidence regarding the parties’ surrounding context may be submitted to identify the context of such norms. 124
Macneil took a similar view: Adjustments of existing contractual relations occur in numerous ways. Performance itself is a kind of adjustment from original planning. Even meticulous performance of the most explicit planning transforms figments of the imagination, however, precise, into a new, and therefore different, reality. A set of blueprints and specifications, however detailed, and a newly built house simply are not the same. Less explicit planning is changed even more by performance … the vaguely articulated duties of a secretary are made concrete by (their) actual performance of a day's work. Perhaps this is merely a way of saying that planning is inherently filled with gaps, and that performance fills the gaps, thereby altering the relations as originally planned.
125
Relational contract scholars say that, to the extent that the law of contract continues to cling to a formalist rather than substantive view of a contract, its very legitimacy is placed in jeopardy. 126 There is significant scholarly support for such an approach to contractual interpretation. 127
Acceptance that contracts are typically relational may have important implications for the question of remedies for breach. This important issue has been explored in more detail in recent literature, 128 and will not be considered in detail here.
In summary, Part II has placed relational contract theory into the traditional context of contract law principle involving freedom of contract doctrine. The assumptions made by the freedom of contract doctrine are not realistic today, if indeed they ever were. Although recently, some members of the High Court appeared to re-embrace a version of freedom of contract, 10 years ago the Court expressly acknowledged it was not a ‘universal legal value’. An alternative way of viewing parties’ contract is through a relational approach. This approach is argued to more realistically explain most contract situations, which involve repeated engagement between parties, high degree of trust and confidence, and behaviour informed by the need to maintain good relations between the parties. Most contracts are relational, not discrete, as the freedom of contract model presumes. In such a situation, the letter of the agreement does not warrant the reification it gets in the freedom of contract approach. Contrary to what freedom of contract might suggest, it is typically difficult for contracting parties to ‘presentiate’. This practically limits the ability of any contracting parties, even if they wished to, to comprehensively agree today about every possible issue that might arise in future. Because parties typically do not place the reliance on the written terms that classic contract law assumes, because of the typically high trust and confidence the parties repose in each other, and because of the practical difficulties of presentiation, the reality is that contracting parties leave much of their agreement unstated in the written agreement. This is based on their expectations of trust and co-operation.
Practically, if commercial law reflects and should reflect commercial practice, this leads (should lead) to the conclusion that the court should not be fixated on the written agreement in resolving a dispute between the parties, but consider extraneous circumstances, including subsequent performance. Part III now considers the extent to which common law courts either continue to apply the freedom of contract model to this issue or have moved away from it, and accepted evidence of subsequent performance as being relevant to contractual interpretation. Acceptance of relational contract theory would support the latter.
Relevance of subsequent performance to contractual interpretation in the United Kingdom, United States, Canada, New Zealand, in international contractual documents and in Australian law prior to 2022 decisions
Some relevant general principles of contractual interpretation
One relevant principle, consistent with freedom of contract principles, is the parol evidence rule. The (presumptive)
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rule is that Where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a court must look to the formal deed and to that deed alone.
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Courts will generally consider ‘surrounding circumstances’ in the interpretation of contractual provision. 143 Further, courts will respond where the literal interpretation of the words does not make commercial sense. 144 A court will tend to lean towards an interpretation reflecting ‘business common sense’, 145 which can include reasonable expectations of the parties. 146 Parties may argue the written contract was not intended to reflect the entirety of their agreement. 147 Parties may also agree to a variation to the contract after its drafting is complete. Obviously, on occasion, it is also possible to imply terms into contracts, though this occurs sparingly, 148 and is separate from and not part of the interpretation (construction) of the original contract. 149 Some argue that the classical model of contract law inevitably relies upon, but does not acknowledge, implied dimensions of contractual relationships, 150 and this is not limited to circumstances of ambiguity. 151
Obviously, a relational approach to contracting would support a non-literal approach to contractual interpretation envisaged by this focus on context, not merely text, the implication of terms, and a consideration of surrounding circumstances, reasonable expectations of the parties and what is commercially sensible. 152 This would not require a finding of ambiguity as a pre-condition to such analysis.
Australian authorities – relevance of actual performance as well as contract terms in contractual interpretation
The High Court at one time seemed to adopt a practical approach to the determination of a given relationship. Considering a contract that purported to define a relationship as being one of principal/agent rather than employment, three members stated that: If in practice the company assumes the detailed direction and control of the agents in the daily performance of their work and the agents tacitly accept a position of subordination to authority and to orders and instructions as to the manner in which they carry out their duties, a clause designed to prevent the relation receiving the legal complexion which it truly wears would be ineffectual.
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The matter was again considered in the context of bicycle couriers, and the status of their engagement, in Hollis v Vabu Pty Ltd.
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There the written contractual documentation between the company and the couriers was sparse. It did not make express provision for many matters, including the courier's rate of remuneration. In some respects, contents of the written documentation did not match the reality – for instance, the written contracts referred to payment of annual and sick leave, but the High Court noted no such payments were actually given. This led five members of the Court to observe: The relationship between the parties, for the purposes of this litigation, is to be found not merely from these contractual terms. The system which was operated thereunder and the work practices imposes by Vabu go to establishing ‘the totality of the relationship’ between the parties (citing Mason J in Stevens); it is that which is to be considered.
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The joint reasons referred to both the contractual documentation ‘and the work practices imposed by Vabu’ 163 in determining whether or not the couriers were employees. The joint reasons referred to the fact that the couriers had little control over the manner in which their work was performed. 164 They referred to payment arrangements that occurred in practice. 165 Given that the brief contract terms were included in the judgment in Hollis, it can be confidently said that these matters were not the subject of express contractual provision. As a result, it was essential, in order for the court to completely understand the nature of the parties’ relationship, to refer both to the written terms of the engagement, and how the engagement operated in practice. Members of the Court agreed that it was the substance of the agreement that mattered, and that labels were not determinative. 166
On the other hand, three members of the Court subsequently agreed with comments of a United Kingdom court that ‘it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made’. 167 Carter acknowledges this is the orthodox position in the Australian law. 168 Sir Anthony Mason acknowledged this was the traditional rule, but opined there were ‘rational grounds’ for discarding it. 169 If this were at one time the United Kingdom position, it will now be shown that that jurisdiction's courts have now departed from this position, at least with respect to some types of contract.
United Kingdom authorities – relevance of actual performance as well as contract terms in contractual interpretation
The Privy Council in Narich Pty Ltd v Commissioner of Pay-Roll Tax considered the question whether the court was limited in its consideration of the evidence to the contents of the parties’ written contract. It concluded: Subject to one exception, where there is a written contract between the parties whose relationship is in issue, a court is confined, in determining the nature of that relationship, to a consideration of the terms, express or implied, of that contract in the light of the circumstances surrounding the making of it; and it is not entitled to consider also the manner in which the parties subsequently acted in pursuance of such contract. The one exception to that rule is that, where the subsequent conduct of the parties can be shown to have amounted to an agreed addition to, or modification of the original written contract, such conduct may be considered … by the court.
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(emphasis added)
In Carmichael v National Power Plc, 172 the House of Lords considered whether tour guides were employees. One issue was whether an exchange of correspondence between the parties amounted to a contract. In denying that it was, Lord Irvine noted the possibility that a lower level decision maker had determined that the correspondence did not reflect the entirety of the parties’ bargain, that there were other sources through which the parties’ true intention could be gleaned. This comments apparently opened the door to the possibility of evidence of conduct subsequent to contract formation being used to determine the true nature of the parties’ relationship.
This possibility was subsequently developed in cases where a written contract existed between the parties. Courts became more prepared to accept that, even in the absence of evidence of a sham, 173 the written agreement may not reflect the actuality of the parties’ agreement. 174 In tenancy cases, the courts were prepared to overlook clauses in contracts purporting to make agreements licences, when in ‘reality’ the agreements were leases. 175 The court determined this reality by evidence of what occurred, or more precisely what did not occur, subsequent to the entry into the agreement. 176 These cases could not have been decided based on the sham doctrine, because there was no evidence that both parties intended to deceive as to the true nature of the arrangements. 177
Bomball suggests a nascent doctrine of ‘pretence’ to describe another circumstance in which the courts will ignore the content, or at least part of the content, of the written contract. This could occur where neither of the parties intend that the contract will be performed as written, that a particular clause or clauses are to be of no effect. This is not a sham as conventionally defined because there is no common intention to deceive. 178 Others say the pretence doctrine is reflected where the dominant party to the contract does not intend a contractual clause to be enforced as written. 179
An approach to the relevance of subsequent conduct in determining the true nature of the parties’ relationship clearly different than Narich was apparent in Autoclenz Ltd v Belcher and Others. 180 There the workers were engaged to clean cars. The firm engaging the workers asked workers to sign an agreement. This agreement sought to emphasise that the relationship between the parties was one of client and independent contractor, rather than employer and employee. It expressly permitted contractors to sub-contract the work out, provided the sub-contractor complied with the requirements of the contract. The contract required contractors to perform the work in a good and workmanlike manner, and to meet all taxation and insurance obligations themselves. The contract stated the cleaners would not be required to provide services on any particular occasion, and the company had no obligation to offer work to cleaners over any particular timeframe.
The Supreme Court found that, in reality, the cleaners were effectively employees.
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The reasoning is particularly important, given the contract was written to apparently emphasise an intention that the parties not be in an employment relationship. As noted above, the Court has been prepared to look beyond labels in determining the real nature of the relationship. To that extent, Autoclenz did not herald a new approach. What was noteworthy, however, was the willingness of the Court to look beyond the written terms of the contract. This was not a case where subsequent performance indicated an agreed variation to the original terms – recall that this was the exception provided in the earlier Narich decision to its general admonition that the contractual terms were the sole means by which to determine the status of the parties’ relationship. The Court suggested that a different approach might be justified in relation to employment contracts, as opposed to other commercial contracts,
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because of the unequal bargaining power between the parties. This could lead to a contract being created that was one-sided and potentially artificial, not accurately reflecting either the parties’ actual intentions, or how the contract in fact was performed. This led the court to the following conclusion: So the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part.
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The Court concluded that, in several ways, the contractual terms did not reflect the actual performance of the contract. Firstly, it accepted factual findings of lower decision making authorities that the cleaners were in fact obliged to perform work offered to them, and Autoclenz was under an obligation in fact to offer them work (both of which were contrary to the express terms of the engagement). The Court accepted the factual finding that cleaners could not in fact sub-contract the work out, again directly contradictory of the express terms of the agreement. 185 It supported application of the law, in such a case, to the facts reflected in the contract as actually performed, rather than that in the written terms.
This approach has been applied subsequently. In determining whether Deliveroo drivers were employees or independent contractors, a Central Arbitration Committee noted the importance of determining all relevant evidence, and stated that this included the written contract and evidence of how parties conducted themselves in practice. The Committee noted evidence of how the parties conducted themselves in practice might be so persuasive as to suggest this reflected the parties’ true obligations. These comments were cited and apparently approved in the Court of Appeal as being consistent with Autoclenz. Underhill LJ added that the Committee was ‘alive to the possibility that the terms of the … contract might not reflect the true agreement between the parties’. 186
Recently in Uber BV & Ors v Alsam & Ors
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, the United Kingdom Supreme Court reflected on the importance of the Autoclenz decision: The Autoclenz case shows that, in determining whether an individual is an employee or other worker for the purpose of the legislation, the approach endorsed in the Carmichael case is appropriate even when there is a formal written agreement (and even if the agreement contains a clause stating that the document is intended to record the entire agreement of the parties). This does not mean that the terms of any written agreement should be ignored. The conduct of the parties and other evidence may show that the written terms were in fact understood and agreed to be a record, possibly an exclusive record, of the parties’ rights and obligations towards each other. But there is no legal presumption that a contractual document contains the whole of the parties’ agreement and no absolute rule that terms set out in a contractual document represent the parties’ true agreement just because an individual has signed it. Furthermore, … any terms which purport to classify the parties’ relationship, or to exclude or limit statutory protections by preventing the contract from being interpreted as a contract of employment or other worker's contract are of no effect and must be disregarded.
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Thus, the United Kingdom law has moved away from an exclusive focus on the written terms of an agreement as per the parol evidence rule and freedom of contract principles, and become increasingly willing to consider conduct after the contract was executed in terms of contractual interpretation. As indicated, this is consistent with more general trends in contractual interpretation in the United Kingdom.
Academic support for a focus on the substantive, including actual performance
Much of the scholarly writing in this area (discussed below) suggests that courts should focus on the economic realities of the situation, the direction in which the United Kingdom law has moved, as opposed to a consideration confined to the terms of the contract. Obviously, this divide can appear in relation to numerous contractual issues. One is the question of actual contractual performance, as opposed to the written terms. Sometimes, but obviously not always, this arises in an employment context, where the issue of whether a worker is an employee or independent contractor is raised, and arguments made that the written terms do not reflect, and perhaps were never intended to reflect, the realities of the engagement. Some of the comments referred to below, and the recent High Court decisions, occur in that context. Of course, this is not the only possible context in which the discussion might appear. And it is acknowledged some of the comments below occur in the broader labour law context of the rights of workers, not contractual interpretation per se, though in this context, the issues overlap.
Leading labour law scholar Andrew Stewart criticises the status quo on the basis that it permits parties (in particular, the employer) to frame an arrangement in a way so as to achieve desired ends (specifically, a finding that the worker is not an employee) although the realities are quite different. As he puts it: As Gray J so memorably put it … ‘the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck. The fact is though that it is possible under Australian law to do just that. If the contract that governs the parties’ relationship has enough duck-like features, most courts … will be persuaded that they are looking at a duck – even if the underlying reality of the relationship would suggest a rooster. The key to this, and to the success of the drafting strategy just described, is the preoccupation that most judges have with the formal terms of the arrangement they are scrutinising.
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David McLauchlan favours evidence of subsequent conduct being relevant to questions of contractual interpretation, in limited cases.
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His view is that subsequent conduct is or may be relevant if it sheds light on the parties’ intentions in entering into the contract. To that extent (only), he says evidence of subsequent conduct is relevant. In contrast, if subsequent conduct relates to a matter the parties had not considered as part of contractual deliberations, it is impossible to say that the conduct relates to the parties’ intentions in entering into the contract; in such circumstances, he would deny the relevance of subsequent conduct. There is some judicial support for the view of McLauchlan.
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Writing extra-judicially, Lord Nicholls stated Evidence of the parties’ subsequent conduct is sought to be used as a means of identifying the meaning borne by the language of the contract from its inception. The fact that this evidence only came into being after the contract was made can hardly be a good reason for declining to admit it.
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Business people and, for that matter, ordinary people, simply do not understand a rule which excludes from consideration how the parties have in the course of performance interpreted their contract. The law must not be allowed to drift too far from the intuitive reactions of justice or men and women of good sense: the rule (excluding evidence of) subsequent conduct may have to be re-examined.
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Support for use of subsequent conduct in contractual interpretation from international and comparative law sources
International contract materials also contemplate the use of subsequent conduct as an aid to contractual interpretation. For example Article 8(3) of the United Nations Convention on Contracts for the International Sale of Goods states that, in determining the ‘intent of a party or the understanding a reasonable person would have had’, all relevant circumstances are to be considered, including parties’ conduct subsequent to the creation of the contract. Article 4 of the UNIDROIT Principles of International Commercial Contracts (2016) states that contracts should be interpreted according to the common intention of the parties or, where that cannot be gleaned, the meaning that a reasonable person would put on the terms used. Article 4(3)(c) states that in applying the Article, conduct of the parties subsequent to the conclusion of the contract is relevant. 198 This position reflects civil law practice. 199
The United States commercial law recognises a doctrine of ‘course of performance’, which is evidence of how a contract is performed in fact by either party, where the other party has knowledge of how the contract is being performed in fact, has an opportunity to object to it, but does not do so. 200 In such a case, the ‘course of performance’ is relevant in determining the meaning of the parties’ agreement. This includes giving specific meaning to particular terms, including supplementing or qualifying terms. Wherever possible, express terms and course of performance must be interpreted so as to be consistent with one another. 201 If this is unreasonable, express terms will prevail over the course of performance. 202 Stephen Charles observed that the United States had demonstrated for many years the workability of contractual law that included consideration of subsequent performance in contractual interpretation. 203 It must be acknowledged that the United States commercial law typically takes a subjective, rather than objective, view of the parties’ intentions. Whether this makes a difference in how important subsequent performance is to contractual interpretation is considered in Part V below. Evidence of subsequent conduct may be relevant to contractual interpretation in Canada 204 and New Zealand. 205 In both contexts, such evidence may be used to provide objective evidence as to what the parties intended by agreeing to particular terms of the written agreement. 206 The Ontario Court of Appeal also outlined some reasons to be wary about the use of such evidence, 207 and provided criteria for assessing the weight to be given to such evidence. 208 However, it is (or may be) utilised.
In conclusion, the United Kingdom law has moved from a general position reifying the written terms of the contract above all else, to the exclusion of evidence of subsequent performance, to a position whereby subsequent conduct is taken into account. This reflects the position in the United States, Canada, New Zealand and in international contract law materials. It enjoys significant academic support. After an initial period where the Australian law took a similar position, more recent sentiments indicate a return to freedom of contract principles where evidence of subsequent conduct is generally excluded. The next Part will demonstrate that this remains the majority view of the High Court, though two justices dissent from that position.
The 2022 employment decisions – CFMMEU and ZG Operations
CFMMEU
Construct was a labour-hire company providing workers in the construction industry. Mr McCourt signed a services agreement with Construct. This agreement described him as a ‘self-employed contractor’. The contract did not guarantee the contractor would receive any particular work, and the contractor was free to decline work offered and to work for others. The contract stated Construct would not be liable for paying annual leave, sick leave or long service leave, which would typically be payable in respect of an employment relationship. The contractor acknowledged he was not an employee of Construct. The contractor was to provide tools of trade and equipment required by the builder. Construct liaised with construction companies regarding the provision of labour. It would typically negotiate with the company as to the payment rate for the labour supplied, duration etc. The personnel supplied were able to negotiate a higher rate. He was asked to commence work on a construction company's work site, Hanssen. He was given that company's induction form and rules, and was informed he would be directed and supervised by an employee of Hanssen. Construct attended the site occasionally but did not direct Mr McCourt as to the work he should do. The contractor would be paid once they had issued an invoice to Construct. Both the trial judge and the Court of Appeal found that the agreement between Construct and McCourt involved an independent contractor–client relationship, rather than an employment relationship. This was based on the existing law whereby a number of factors were considered to determine the nature of a relationship, including questions of control (see further below), as well as the terms on which Mr McCourt was engaged. The High Court by a majority of 6–1 allowed an appeal against the decision of the Full Court, concluding that Mr McCourt was an employee of Construct. There were essentially two main questions to be considered – how to determine whether or not the workers were ‘employees’ and the relevance of actual performance of the contract in interpreting it. Though admittedly, the second of these questions helped to answer the first, the following discussion relates to the second question only.
Kiefel CJ Keane and Edelman JJ (‘first joint reasons’) placed emphasis on the terms of the contract between the parties to ascertain the true nature of the relationship between them, especially when it was common ground that the agreement between the relevant parties was entirely written: Where the parties have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract. Where no party seeks to (argue that the contract is a sham or should otherwise be held invalid) there is no occasion to seek to determine the character of the parties’ relationship by a wide-ranging review of the entire history of the parties’ dealings. Such a review is neither necessary not appropriate because the task of the court is to enforce the parties’ rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require.
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While reaching the same conclusion as the first joint reasons, Gageler and Gleeson JJ (‘second joint reasons’) took a different approach, which emphasised what occurred during the McCourt's performance of his contractual obligations, taking this together with the precise terms. They drew a distinction between the formation of a contract and its performance. The second joint reasons concluded it was imperative to look at the totality of the circumstances, including performance, to clarify the parties’ obligations. This was because sometimes the terms of the engagement were opaque, obscure or ambiguous, and sometimes the court was faced with a standard form agreement where the clauses might have been prepared by one of the parties with little or no input from the other, and such as to ‘dress up’ the relationship to be something different from what it in fact turned out to be. 212 Gageler and Gleeson JJ concluded that in relation to both contracts entirely in writing, and those partly in writing and partly oral, that the manner of performance of the contract had to be considered. 213 To be clear, Gageler and Gleeson JJ did not dispute that ordinary contractual principles were to be applied in interpreting employment agreements; their difference with the first joint reasons was to the relevance of parties’ subsequent conduct in that interpretation exercise. 214
Gordon J generally agreed with the first joint reasons that it was a matter of construing the contract pursuant to which the worker was engaged. It was not a matter of considering how the contract had been performed in construing the contract, though Gordon J acknowledged conduct subsequent to formation could be relevant to other issues, including determining whether or not the contract was a sham. 215 Steward J agreed with the approach of Gordon J. 216
ZG Operations
These differences of approach were evident in ZG Operations. The factual matrix differed – this case concerned the classification of truck drivers engaged by the appellants. The appellants had originally been employees of a previous owner of ZG Operations. The arrangements were restructured, with the drivers being re-engaged as independent contractors, who would provide and use their own trucks and equipment to complete the work. The truck drivers relevantly set up partnerships involving their wives, and provided the services through that vehicle. The question was whether the relationship between the parties was one of employment or independent contractor. All members of the High Court allowed an appeal against a finding by the Full Federal Court that the relationship was an employment one.
Kiefel CJ Keane and Edelman JJ (‘first joint reasons’) again emphasised that the question must be answered by construing the contract between the parties. It was not a sham, and there was no suggestion it had been altered by subsequent conduct. The first joint reasons concluded that the Full Federal Court had erred in considering aspects of how the parties’ actually performed the contract. It had considered evidence that there was an expectation that the trucks would feature the livery of the appellants, that they would wear uniforms contained that company's branding and that the reality of the number of hours the truck drivers worked to meet the appellant's obligations meant that there was little opportunity to work for other businesses, and the appellants did not do so. Further, they had been engaged by the appellants over a long period of time. 217 The Full Federal Court considered these matters in considering the ‘totality of the circumstances’. However, the first joint reasons concluded that these matters ought not to have been given significance, and nor should any disparity in bargaining party between the parties. 218 There were other legal remedies for unfairness in contract terms.
Gageler and Gleeson JJ applied the same approach they had taken in CFMMEU, focussing on the substance of the relationship, as reflected in contractual performance, together with the express terms. Thus, they largely agreed with the approach taken by the Full Federal Court, although they disagreed with its reasoning, finding that the fact the truck drivers used their own equipment, and had their own business structure, suggested that they were in truth independent contractors. 219 Gordon and Stewart JJ adopted the approach of Gordon J in CFMMEU.
Consideration
Criticism of approach of first joint reasons
The first joint reasons is essentially a manifestation of a freedom of contract that seeks to give primacy to the written terms of the contract, disregarding all else. This article has already discussed difficulties with that approach. As discussed earlier, a relational view of contract suggests that the parties, because of their typically long-standing relationship, simply do not reduce all aspects of their agreement to writing. As noted above, it is not possible to presentiate in the way that freedom of contract principles assume. Simply giving effect to the terms of the parties’ bargain assumes the written contract is a product of a healthy negotiation between parties of relatively equal bargaining power. It is fairly common knowledge this is not the reality of much contracting, including in particular employment-type contracts. The assumptions implicitly underlying the reasoning of the first joint reasons are, with respect, not realistic.
It is submitted that the second joint reasons contain a much more realistic view of contracts, specifically acknowledging that the terms may be standard form in nature, determined by the more powerful party and presented to the worker with little or no negotiations. 220 Though concededly Gageler and Gleeson JJ did not expressly refer to relational contract theory, their view of the realities of contracting, and conviction that the ‘true character’ of a relationship can only be gleaned by a consideration of all of the circumstances, including manner of performance, is consistent with a relational view of contracts. 221
Though the first joint reasons gave essential primacy to the written terms of the contract above all else, it recognised that an exception might exist when the contract is a ‘sham’. The orthodox definition of a sham, drawn from the decision in Snook v London and West Riding Investments Ltd, 222 is that it involves a contract where both parties intend that the actual arrangement will differ from the agreed contract terms. It is possible a broader view could be taken of the concept, as has occurred in a subsequent United Kingdom Supreme Court decision in Autoclenz. 223 However, the High Court of Australia in CFMMEU and ZG Operations made surprisingly little use of that precedent, despite its apparently central relevance to the issues raised; so frankly, it is not known what definition of ‘sham’ will be applied in the Australian context. On the assumption it applies the orthodox definition, that exception is arguably too narrow. It is submitted that in many cases, it will be the party who drafted the contract who might intend that performance will differ from contractual terms. The other party to the contract may not have turned their attention to the matter, or may simply have no effective choice other than to sign the contract prepared by the other. In a situation like that, it would be nigh on impossible to prove that both parties intended contractual performance to differ from the written terms. The ‘sham’ exception as currently conceived arguably poses too high a bar to work effectively, 224 and the first joint reasons were wrong (with respect) to rely on it as effectively a panacea for situations where there may be a difference between contract performance and written contractual terms.
A further reason the first joint reasons give for now taking into account all of the parties’ dealings is that to do so would effectively be about ‘form(ing) a view as to what a fair adjustment of the parties’ rights might require’. 225 Respectfully, this is not considered to be an accurate reflection of the alternative position to theirs adopted by Gageler and Gleeson JJ. The approach of these justices is to seek to understand the true nature of the parties’ relationship by considering the ‘bigger picture’ of the parties’ relations – here the written contract is important, but only one piece of a bigger puzzle. Other pieces should also be considered, including post-execution performance. This enquiry is designed to get a fuller picture of the parties’ agreement; respectfully, it is not designed to make a ‘fair adjustment of the parties’ rights’; nor is it about estoppel or waiver. 226 Gageler and Gleeson JJ do not express themselves in this way, and it is considered to be an inaccurate portrayal of their views and approach.
Given that Gageler and Gordon JJ favour a view broadly consistent with relational contract theory, and that one member of the joint reasons, Keane J, has been replaced, it is considered realistic that the High Court might in future adopt a relational contract view. The approach has been accepted to some extent in the United Kingdom; it should not be thought that such an approach reflects ‘judicial activism’ or an inappropriate exercise of judicial power, to develop the common law in this manner. Emphatically, it is for the courts to state, and develop, common law principles.
Is consideration of subsequent conduct contrary to the objective approach to contractual interpretation?
Lord Steyn had previously stated that ‘evidence of the subsequent conduct of the parties could only become admissible as relevant to construction if the objective theory to the interpretation of contracts was abandoned’. 227 However, respectfully he apparently subsequently adapted his position, arguing that evidence of how the contract had been performed was relevant in its interpretation. 228 Since this article does not propose an alteration to the orthodox position that an objective view must be taken of the parties’ intentions in determining the nature of the bargain, the question must be asked as to whether consideration of subsequent conduct is compatible, or not compatible, with an objective approach to contractual interpretation. It might be argued that a focus on the parties’ actual performance is by its nature subjective, focussing on what the parties have actually done as a source of wisdom regarding contractual meaning, and that this permits subjectivity to seep into what the common law traditionally regards as an issue to be determined objectively.
Firstly, international contractual instruments apparently do not regard there to be any necessary inconsistency between an objective view and consideration of subsequent conduct. We know this because both the Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles contemplate consideration of the common intention of the parties or, where this cannot be ascertained, the meaning that reasonable people would provide to the words the parties used. This resembles, respectively, a subjective and objective approach to contractual interpretation. But regardless of which one is used, the instruments both contemplate use of subsequent conduct. Notably, it is not only to be used when the court is determining the common intention of the parties (subjective); it is also contemplated to be used when that cannot be determined, and so the court is considering how reasonable people would interpret the words used (objective). In other words, the commercial law experts who drafted these instruments did not see a necessary inconsistency or incompatibility between an objective approach to contractual interpretation and a consideration of conduct subsequent to contract formation.
Secondly, it is considered possible to view subsequent conduct objectively. Evidence of subsequent conduct can be interpreted through the lens of how a reasonable person would interpret such conduct, not what the person subjectively intended by engaging in such conduct. In this way too, consideration of subsequent conduct can occur on an objective basis, consistent with general principles of common law contractual interpretation. Judge McDougall of the New South Wales Supreme Court has expressed this view: I consider the better view to be that subsequent conduct and events are admissible with regards to the implication of terms, but only where that subsequent conduct and events illuminate an objective matter, as opposed to subjective understandings of the contract.
229
The view of relational contract scholar Ian Macneil is that the objective theory of contract is basically an illusion forced by the view of contracts as discrete rather than relational: The limited extent to which it is possible for people to consent to all the terms of a transaction, even a relatively simple and very discrete one, soon forces the development of legal fictions expanding the scope of ‘consent’ far beyond anything remotely close to what the parties ever had in mind. The greatest of these … is the objective theory of contract … the classic … contract is founded not upon actual consent but upon objective manifestations of intent … in classical law manifestations of intent include whole masses of contract content one or even both parties did not know in fact (refers to legal interpretations of all the terms the parties used in the contract … it is necessary into cram such absurdities into ‘objective consent’ in order to avoid recognizing the relational characteristics of the system.
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Collins favours a broader contextual view: It is argued that the real intentions of the parties must be discovered not only in their express statement but also in the implicit understandings surrounding the transaction. Although these intentions may not have been expressed openly, the context may have rendered that formality superfluous … the parties followed the forms required for a binding contract in order to signal their commitment and trustworthiness, but their expectations of how the transaction should be understood are not confined to the express statements contained in the terms of their agreement. To uncover those latent intentions, legal reasoning must … examine the context of the transaction … to discover a complete picture of the parties’ intentions and expectations.
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Finally, I should acknowledge that one possible limitation of relational contract theory is that it says nothing about power imbalances that may inhere in particular contracts. Some may criticise relational contract theory on the basis it makes a liberal presumption that the parties are of relatively equal bargaining power, a presumption that of course does not always (or often) reflect reality. My response is that both the common law and the statute have sought to respond to the admitted reality of these inequalities. Thus, the fact they exist should not undermine the utility of relational contract theory. It is not part of that theory to deal with such inequalities; other areas of the law do so. If they are considered inadequate to the task, they should be reformed.
Conclusion
Much of the traditional law of contract was crafted consistently with freedom of contract doctrine rampant during the nineteenth century. However, the law has to some extent turned away from such a philosophy, dissatisfied with the results it sometimes brings. In the past 50 years, new contract law theories have emerged. Chief among them has been relational contract theory, arguing that many of the assumptions underlying freedom of contract philosophy are inaccurate. There is force in these criticisms. Specifically, relational contract theory eschews total, or near total, reliance on the written terms of an agreement between the parties to determine their contractual rights and responsibilities, on the basis that because parties’ relations are typically relational, they often do not reduce all of their bargain into the written contract. Further, given many relationships are longer term, the kind of presentiation assumed by freedom of contract is unrealistic. There is much promise in relational contract theory. Specifically in the current context, it can be utilised to theoretically justify consideration of parties’ contractual performance, as a relevant factor in contract interpretation.
The article has documented that most jurisdictions have moved in this direction, including the United Kingdom, United States, Canada, New Zealand and in international commercial circles. However, recent High Court of Australia decisions have taken a contrary view, despite earlier judgments indicating something different, and a majority took an orthodox freedom of contract position. Gageler and Gleeson JJ favoured a broader view of contractual interpretation, including consideration of actual performance, and this article has found there is much to commend that view. It reflects the kind of realistic view of actual contracting implicit in relational contract theory, and can be utilised consistently with the objective approach to contractual interpretation.
Footnotes
Conflict of interest
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.