Relational Contract Theory Notes

ESSAY 3 – Relational contract theory

‘It is no longer right to equate a contract of employment with commercial contracts. One possible way of describing a contract of employment in modern terms is as a relational contract” (LORD STEYN) (2003).

This statement from Lord Steyn (dissenting) in Johnson has considerable weight. Traditional commercial contract law is “ill-equipped to deal with problems arising out of contractual relations” (Gaudel, 1998), and the history of the classical law of contract can be seen as a “desperate attempt to incorporate doctrinal refinements which will allow it to deal with the awkward facts presented by relational contracting” (Macneil). Instead the relational theory of employment contracts provides a “remarkably powerful explanation” (Boyle, 2007) of the changes in the law of the employment relationship which have occurred. This has particularly been as a result of the development of the mutual duty of trust and confidence and implied terms. This trust duty has increasingly signified and represented the relational aspect of employment contracts and meant vast increases in duties for both employers and employees. However, the decisions of Johnson and Edwards put a break on the relational theory. Despite this, it is submitted that the relational theory is increasingly evidenced in practice and is right as a matter of principle. Indeed, “it may not be fanciful” to suggest that the obligation will come to be seen as “the core common law duty” which dictates how employees should be treated during the course of the employment relationship (Brodie, 1998).

The traditional commercial contract theory is “inadequate” (Boyle, 2007) as an explanation of the law of the contract of employment. As Atiyah explained, the model of contract theory that underlaid the classical law of contract was the model of the market where contracting parties bargained and negotiated by making offers, counter-offers and accepting them. The fairness of the bargain is irrelevant. Not one of these features of classical contract law is an “accurate description of the reality of the employment relationship given the unequal bargaining power of employer and employee, and the legal incidents implied into all contracts of employment” (Boyle, 2007). Instead, the main differences identified by Macneil between relational contracts and one-off discrete transactions are as follows. First, in relational contracts, the parties engage in social exchange as well as economic exchange. Second, relational contract tend towards long life. Third, in relational contacts, future co-operation is required. Fourth, relational contracts involve a great deal of exchange that cannot be or is not measured e.g. psychic satisfactions such as prestige and power. Finally, the complexities of the contractual relation will inevitably require a great deal of mutual participation in planning. It is thus clear that the employment contract is “at the very relational end of the discrete/relational spectrum” (Boyle, 2007).

The “single most important development in the law of the contract of employment” (Freedland, 2003) in recent years has been the recognition of a generally implied term as to mutual trust and confidence. In Malik this was introduced as an obligation not to “without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”. This duty “can be described as a quintessentially relational norm” (Boyle, 2007), and the relational nature of modern contract law can now be found throughout the whole spectrum of the employment contract/relationship from (1) entry, (2) content, (3) variation and (4) remedies.

(1) ENTRY INTO EMPLOYMENT RELATIONSHIP

Franks demonstrates that obligations in law can “now evolve in line with the way the relationship is conducted” (Brodie, 2011) as dealings between the parties over a period of years was held to be capable of generating an implied contractual relationship despite on the face of it Franks being a casual worker repeatedly hired by the same employer.

(2) CONTENT

The trust duty has transpired into much greater responsibilities for both employers and employers being implied into contracts. In Spring, Lord Slynn noted “the changes which have taken place in the employer/employee relationship, with far greater duties imposed on the employer than in the past...to care for the physical, financial and even psychological welfare of the employee”. As a result of the trust duty, therefore the employer now has an obligation to bring info concerning occupational benefits to the notice of the employee (Scally), operate pension schemes in good faith (Imperial Tobacco), protect an employee’s reputation and employability (Malik) and provide a healthy working environment (Waltons & Morse ). The employment contract’s mutual relational nature is emphasised by the...

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