Arena v Mario and Jennifer Pty Ltd [2006] SAIRC 30

2 The evidence and findings made below establish that a contract of employment was formed between the appellant and the respondent and that in the course of its formation there was a discussion between the parties about the respondent's incentive program.

3 It is also clear that at that time there were no details provided that expressly set out how awards of prizes or any qualifications attached to them were to be determined.

4 It seems to me that the legal status of the program is not clear-cut and could be characterised in many ways but each lead to the same result so far as this appeal is concerned.

5 In my opinion it is arguable that the discussion concerning the program, because it was so vague, had no contractual status. In that event it amounted to a mere representation. This was a conclusion that the learned Judge arrived at and if this is correct, for the reasons he advanced, the application in this Court had to fail.

6 It might be said that on the objective theory of contract the reference to the incentive program meant, "the program as it existed at the time of the contract's formation", albeit that the appellant did not know what its terms then were. This is the conclusion that the majority have arrived at and for the reasons they advance on this analysis the appellant's application had to fail.

7 Another approach is to view the situation as involving a primary agreement to form a contract of employment with a mutual intention to form a collateral agreement dealing with participation in the program. If that collateral contract was formed it could not on the objective theory of contract have been on the terms suggested by the appellant because there was no evidence capable of indicating the respondent's agreement to those terms.

8 If a collateral contract was not formed the only contract in existence was the contract of employment and on this analysis that contract of itself did not provide the appellant with the contractual rights upon which her claim was founded.

9 Finally one might characterise what occurred as the formation of a contract of employment with a mutual understanding that the appellant would participate in the program on terms determined by the respondent. This was an alternative conclusion reached by the learned Judge and for the reasons explained by him, on this analysis the term was so uncertain and illusory as to be incapable of enforcement.

10 This appeal to the Full Industrial Relations Court raises a number of issues concerning the construction and enforceability of an informal contract of employment.

11 The appellant, Vicki Arena, is a hairdresser, and the respondent, Mario and Jennifer Pty Ltd, operates a number of hairdressing salons. An employment relationship commenced following a discussion between the appellant and Mr Gauci, a director of the respondent in early 2000. There was no written contract. After a brief period in another salon the appellant managed the respondent's salon at Golden Grove.

12 Following the cessation of the relationship in late 2002 or early 2003, the appellant commenced proceedings pursuant to s 14 of the Industrial and Employee Relations Act 1994, as it was then known, seeking an order for payment of $14,990, which she asserted was a sum due to her by the respondent pursuant to her contract of employment. This claim was denied by the respondent.

13 The essential dispute between the parties is set out in the very brief pleadings. The particulars of claim assert that it was a term of her contract of employment that the appellant participate in an incentive program provided by the respondent to its employees; that pursuant to that incentive program the respondent agreed to provide a motor vehicle, being a Kia Rio, to the employee who achieved the highest sales/turnover for the respondent; that in the calendar year 2002 pursuant to the incentive program the respondent agreed to provide the vehicle to her, and that the respondent has not done so (Particulars of Claim Appeal Book p 8). The amount of the claim is equivalent to the asserted value of that make of vehicle.

14 The respondent denied the claim and by its Answer (AB 11) admitted that the appellant was employed as the manager of the Golden Grove salon; admitted that the appellant participated in an incentive program and admitted that it agreed to provide a motor vehicle being a Kia Rio to the employee who achieved the highest sales/turnover.

1 15 However, it asserted that there were additional terms of the agreement namely that:-

"2.4.1 the winner of the program was then required to remain employed with the respondent for a further period of two years;

2.4.2 at the end of two years the vehicle would be transferred to the winner who would then become the owner of the vehicle;

2.4.3 the winner was not entitled to become the owner of the vehicle unless the winner remained employed with the respondent for a further period of two years."

16 The respondent admitted that pursuant to the incentive program the appellant was to receive the vehicle, but only if she remained employed with the respondent for a further period of two years. Finally, it admitted that the vehicle was not provided to the appellant because she has not remained in that employment.

The hearing and determination of the Industrial Magistrate

17 Against the background of those pleadings, counsel for the respondent confirmed at the outset of the hearing before the Industrial Magistrate that the issue was whether it was a term of the incentive program that the appellant remain in employment for two years after winning the car (AB 22).

18 The evidence of the parties related to the terms of the incentive program, and in particular, whether the conditions attached to winning the car, asserted by the respondent, were terms of the employment contract.

19 It was the applicant's evidence that she had no knowledge of any conditions attaching to the prize until after she was informed that she had won the vehicle in December 2002.

20 The respondent sought to establish that she did know of the existence of the conditions of the incentive program. It relied upon the existence of an undated document outlining the rules of the program, entitled "Rules and Prizes" (AB 207 Exhibit A2), evidence of management meetings attended by the appellant in which the conditions of the incentive program were said to be discussed, "salon gossip" in respect of which it was said that the conditions were common knowledge and the knowledge of other employees, particularly a former winner of the prize, Ms Mayo. It argued that this evidence provided a safe basis for an inference that the appellant did know about the conditions prior to the awarding of the prize.

21 The Industrial Magistrate's findings were brief. She made a finding of credit favourable to the appellant. She preferred the appellant's evidence to that of Mr Gauci and certain other witnesses called by the respondent. However she accepted Ms Mayo's evidence, the topic of which was the existence of conditions upon which she was awarded a car in 1999.

* that there was no written contract of employment;

* that the appellant was made aware of the incentives such as holidays and cars from the advertisement of the position and the initial interview;

* that at that meeting there was no mention of any conditions attached to winning a car and that at no time thereafter was the appellant advised of any such conditions;

* that other employees present at a meeting in 1999 were informed of the incentive program and the conditions attached to the winning of a car, and there was `salon gossip' about the terms upon which the prizes were awarded;

* that in December 2002 the appellant won the `hairdresser of the year' award and was advised that she had won a car;

* that the car in question was a Kia Rio valued at $14,990;

* that subsequently the appellant attempted to arrange with the respondent to receive the monetary value of the vehicle so that she could obtain a different car;

* that it was then that she was advised that the car would remain registered in the respondent's name for two years;

* that as a result of obtaining this information the appellant resigned her employment.

23 On the basis of these findings the Industrial Magistrate reached certain conclusions. Firstly, the term of having to work two years after the prize was awarded was not a term of the contract of employment between the parties. Secondly, the evidence of salon gossip about the terms upon which the prizes were awarded was vague and equivocal and therefore an insufficient basis upon which such conditions could be imported into the contract. Thirdly, there was no evidence of custom within the hairdressing industry in metropolitan Adelaide associated with prize-giving upon which it could be implied that such a condition was a term of the contract.

24 As a consequence the Industrial Magistrate ordered the respondent to pay the appellant $14,990, from which it is implicit that she concluded that the respondent had a contractual obligation to provide the appellant with the car or its monetary value, having announced her as the winner of the car in December 2002.

25 The respondent appealed against that decision. The first ground of appeal was that the Industrial Magistrate erred in finding that the appellant was not aware of the condition that if she won the car she was required to remain working for the respondent for two years, after which time the car would then be transferred to her. At the hearing of the appeal before the learned Judge that ground was not pressed (AB 171).

26 The ground of appeal which was pursued was pleaded as follows:-

"2 In the alternative, it was not necessary for the respondent to prove that the applicant was aware of the Condition because:

2.1 it was a term of the applicant's employment that the applicant was entitled to participate in prize giving promotions occurring from time to time during the course of her employment with the respondent;

2.2 the promotion in relation to which the applicant won the car included the Condition;

2.3 the applicant's participation in the program was subject to the Condition whether or not the applicant was aware of the Condition;

2.4 the Condition was automatically a term of the applicant's employment with the respondent by reason of her becoming an employee of the respondent."

27 The thrust of the respondent's argument at the first appeal was that the Industrial Magistrate erred in her construction of the contract of employment and should have found that all of the aspects of the incentive program, including the conditions, formed part of the contract of employment. Mr Esau, counsel for the respondent, expressed this as a requirement that the appellant should take the incentive program as she finds it (AB 176).

28 Whilst Mr Esau was developing that argument the learned Judge raised what he described as "a more fundamental issue" (AB 176) identified in his reasons for judgment as "What was the status of the reference to the incentive program in the advertisement and the later discussions concerning it" (judgment par 22 AB 197).

29 This issue was identified as a matter requiring resolution. It was not a matter which arose at first instance and no party sought leave to raise it on appeal.

30 It was raised by the learned Judge with the specific acknowledgement that:-

"... the focus of the submissions before the learned Industrial Magistrate was directed towards whether or not the conditions that the appellant wished to impose upon Ms Arena's receipt of the motor vehicle were incorporated into her contract of employment" (judgment par 22).

31 It is clear from the transcript of the appeal hearing that the learned Judge raised the issue of the characterisation of the provision of incentives for the important reason that the jurisdiction of this Court is limited to sums owing pursuant to the Act, an industrial instrument or a contract of employment (s 14 Fair Work Act 1994). If the claim was based upon a representation prior to the making of the contract then a remedy in damages may lie elsewhere.

32 He also raised the issue whether the awarding of a prize might be a discretionary benefit that did not give rise to an enforceable right for a sum due pursuant to the contract of employment.

33 In this context His Honour referred counsel to the judgment of McHugh J in Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 150, and heard their submissions as to the relevance of that authority.

34 In his reasons for decision His Honour concluded firstly that the offer of incentives was a representation and not an enforceable term of the contract. Secondly and alternatively, he concluded that if at formation of the contract there was a contractual term which entitled the appellant to a car, holidays and other prizes as rewards for good performance, then without specification of the type of car, holiday or other incentive, and the criteria for the awarding of such prizes which left such matters to the discretion of the respondent, the term was so vague, uncertain and illusory as to be unenforceable.

35 As a further alternative, His Honour identified the December 2002 offer of the car prize, as a variation of the contract of employment on conditions, one of which being that the appellant remain in the employment for a further period of two years. As the appellant did not accept the condition, she did not accept the variation of the contract and therefore had no entitlement to the car or its monetary value.

36 The appellant has appealed against those conclusions and submitted that the Industrial Magistrate's findings of fact are not susceptible to interference on appeal as they were based on a finding of credit favourable to the appellant (Devries v ANRC (1993) 177 CLR 472 at 479). It was submitted that those findings of fact support the conclusion that the provision of the car without conditions was a binding term of the contract of employment and that the learned Judge's contrary conclusion is wrong.

37 Against that background Mr McRae, counsel for the appellant, developed three submissions. Firstly, he took issue with the appeal Judge's conclusion that reference to the incentive program and the giving of prizes was merely a representation which could not enliven rights actionable in this Court. Secondly, he submitted that the learned Judge was wrong when he determined that no effect could be given to the promise of incentives because such a term, based on the discretion of the respondent, was vague, uncertain, and illusory, or that the offer of the car with conditions in December 2002 constituted a variation of the contract.

38 Thirdly, he submitted that it was not open for the appeal to be determined on those issues which arose for the first time at the first appeal in circumstances that the contest between the parties before the Industrial Magistrate, as framed by their pleadings, assumed an enforceable term, the construction of which was central to the dispute.

39 As a consequence of that third point, Mr McRae submitted that the appellant, relying upon her understanding of the issues in dispute at first instance, was deprived of the opportunity of putting submissions on the alternative conclusions of the learned Judge, or leading evidence and putting submissions on a number of consequential topics. These included the implication of a term that, in the event that the appellant was declared the winner of an incentive, the respondent would deal fairly with her and transfer the incentive to her unconditionally, that the respondent was estopped from making the award of the car on conditions, and that the application of s 154 of the Act operates against such a conditional award.

40 It is to be noted that the third point concerning the conduct of the appeal was not specifically articulated in the appellant's grounds of appeal and no application was made to amend the Notice of Appeal accordingly. However, the point was referred to extensively in the appellant's second written submission filed on 7 October 2005 and in its oral submissions (particularly tr 25 - 32), and the respondent did not raise any procedural objection when those submissions were put at the appeal hearing. In those circumstances we regard the point as a further ground of appeal.

41 Mr Esau maintained the position which the respondent put at the earlier levels namely, that it was a term of the appellant's contract of employment that she participate in the incentive program which she must take as she finds it. If the program contains conditions then whether she knows about them or not, they are incorporated into her contract of employment.

42 Alternatively, the respondent argued that it was open on the evidence for the learned Judge to determine that the terms relied upon by the appellant were so vague, uncertain, and illusory as to be unenforceable. He also argued that the application of s 154 does not support a finding that the appellant should be entitled to the value of the car, and that there is no basis upon which it can be argued that other evidentiary material is relevant to a determination of the issues between the parties.

43 The learned Judge did not specifically identify the statement which he concluded was a representation rather than a contractual term. He referred to it in par 31 of his reasons (AB 198) as "the statements regarding the incentive program and the giving of prizes" (judgment par 31).

44 We make the assumption that it was the existence of a participatory incentive program pursuant to which prizes, including a car, could be awarded to the appellant which His Honour identified as the representation.

45 In reaching his first conclusion, reference was made to the distinction between a representation and a contractual term referred to in Ellul and Ellul v Oakes (1972) 3 SASR 377.

46 In that case, Zelling J stated at 387 that the main test as to whether a statement results in contractual liability is to be found in contractual intention. His Honour stressed the importance of making an objective assessment of such a statement to ascertain its status and posed the question whether:-

"On the totality of the evidence, must the person making the statement be taken to have warranted its accuracy, ie promised to make it good?"

Zelling J referred to certain other subsidiary considerations, two of which are of relevance here, namely the time which elapses between the time of the statement and the manifestation of the agreement, and the importance of the statement in the minds of the parties.

47 The most important indication that this was no mere representation is to be found in the answer filed by the respondent. It admitted that the appellant participated in an incentive program, and it admitted that it agreed to provide a motor vehicle, being a Kia Rio, to the employee who achieved the highest sales/turnover, subject to certain conditions.

48 In addition, there was considerable evidence which was consistent with that position. The contract was formed at the only interview. The appellant said that at the interview Mr Gauci told her about the incentives. "He had great incentives, that you win money and holidays and a car at the end of the year..." (AB 26), and that her understanding was "Whoever makes the most money out of all his salons wins the car at the end of the year" (AB 27). She said of participation "I had a goal. I always set myself goals and I try to achieve them" (AB 41). She said that when she started working for the respondent she understood that she had the right to participate in the incentive scheme (AB 41) and to try to win whatever was on offer (AB 41).

49 Mr Gauci's evidence was consistent with that of the appellant, and therefore notwithstanding the adverse finding as to his credit, can be relied upon for this purpose. In examination-in-chief in reference to the interview he said:-

"We just talked about the job and which salon it was going to be - she wanted to know. We talked a bit about her wages and also we talked about that we do have incentive programs that you could win a car, win a trip, other bits and pieces you can win" (AB 74).

50 When speaking generally about the incentive program he agreed that "simply by reason of your employment you are eligible" and that is the case for every employee (AB 86). In cross-examination, when asked about the incentive program he said as follows:-

"Q. Mr Gauci, your incentive program is something that you place a fair degree of importance on.

Q. Also, it's something you include when you advertise a position, you make reference to it.

Q. Can you tell us why you do that, why you include it in your advertisements.

A. I just think it - to attract the hairdressers that are prepared to work hard and receive something at the end of the day.

Q. It's part of what you've got in mind for a new employee from the very beginning, the incentive program.

Q. It's part and parcel of their employment from the beginning, isn't it.

He also agreed that he told the appellant at the interview that if she worked hard and made the most money for the company she would win the car (AB 90).

51 Taking into account the pleadings and applying the objective approach referred to in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461 to the evidence of both parties about the incentive program, the proximity between the statements and the formation of the contract and the importance which each party placed upon the statements, a reasonable person in the position of the parties would have understood that participation in the incentive scheme was intended to be promissory and not a mere representation. The learned Judge erred in reaching a contrary conclusion.

52 The alternative basis upon which the learned Judge decided this appeal related to whether a promise to participate in the incentive program and the opportunity to win prizes was a promise giving rise to an enforceable obligation. He concluded that it did not, for the reason that the offer of prizes was vague, uncertain, and illusory.

53 The applicant's evidence and the findings of the Industrial Magistrate establish that she was told when the contract commenced that she was entitled to participate in the employee incentive program which was already in existence at that time. She was told that various types of prizes were given as incentives based on sales results.

54 She was told that the employee who achieved the highest sales for a year would win a car. She was told that the car was a Kia Rio (tr 39).

55 Her position is that she was announced as the winner of the car for the year 2002 and that she is therefore entitled to the car or its value.

56 What is implicit in that position is that she relies upon the terms of the incentive program to bring her claim for the value of a Kia Rio. There was no other independent promise upon which she could rely.

57 Furthermore, it is implicit in the reasoning of the Industrial Magistrate that she has found that the incentive program was incorporated into the contract, and that there was no other contractual term upon which her claim could be based.

58 However there was evidence, accepted by the Industrial Magistrate, that Rules existed in relation to the incentive program, including the conditions relied upon by the respondent. It was also accepted that these Rules were not known to the appellant.

59 As the claim is based on the incentive program, it is important to note that there were other aspects of the program determined by the respondent by practice which were not known to the appellant.

60 The appellant's evidence established that her knowledge of the incentive program at the time that the contract was formed was very limited. She knew that she could win money, holidays or a car, she knew that prizes were awarded at the end of the year (AB 26). She also knew that sometimes weekends away and watches were awarded (AB 27). She knew that the car prize was awarded at the end of the year to "whoever makes the most money out of all his salons" (AB 27). She knew that the car was a Kia Rio (AB 32).

61 Subsequently at regular managers' meetings she and other managers were advised of other incentives for staff (AB 42).

62 The matters which she did not know about can also be ascertained from her evidence. Although her evidence establishes that she won $1000 in 2000, and a trip to Bali in 2001, she did not know she was in the running for the money prize until it was announced, and did not know she was in the running for the Bali trip until it was mentioned by a sales representative of the company which provided the prize (AB 57).

63 Although she was awarded the car in 2002 because she won "hairdresser of the year" based on being the highest income earner for the year there was no discussion about any terms and conditions concerning the awarding of a car prize at the time that the contract was formed (AB 26). This lack of detail included that she was not told how the winner was selected, she was not told how the winning figure was calculated, or by whom. Although she knew that the income was considered for a particular year, she did not know the starting and finishing dates of the period or whether the figure was calculated on a gross or net basis (AB 38). There was no discussion about how the car would be presented, about its registration, or its maximum value (AB 38). There was no discussion about what was meant by "whoever makes the most money" (AB 40).

64 It is in that context that the appellant is seeking to enforce, as a term of the contract, that if awarded the car as part of the incentive program she is entitled to it absolutely with no conditions. Because she was not informed of the conditions, she argued that it did not form part of her contract of employment. This amounts to a selective importing of parts of the incentive program into the contract, and not others. If she is relying upon the incentive program to establish the entitlement to a car, then it must be that the whole of the incentive program as it existed in practice was imported into the contract, and that would include the conditions set out in the Rules (Exhibit A2 AB 207), and the employer's practice of applying those conditions as established by the evidence of Ms Mayo.

65 Given that the parties were not in dispute that they had formed the contract of employment on the basis that the appellant would participate in a then existing incentive program, there is a proper basis to infer that it was an actual term of the contract that the program would be administered by the respondent in accordance with the Rules then in place. It is reasonable to suppose that the parties intended that the agreement that the appellant participate in the incentive program be effective - a term to the effect that the appellant would be eligible in accordance with the then existing Rules was necessarily incidental to her effective participation in the scheme. It could not be concluded other than that the parties would have intended that the scheme be applied to the appellant as it would have been to other employees. The inference of a term on this basis is consistent with the approach regarding inference of contractual terms adopted by White J in Griggs v Noris Group of Companies (2006) SASC 23 at pars 19 - 21.

66 Further, this approach is consistent with the general principle of construction of contracts which assumes, among other things, the need to arrive at a practical businesslike and commercially realistic interpretation which leads to a reasonable result consistent with the object of the contract. These principles have been applied to employment contracts: Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693 at 708 - 9 per Kirby J; and also to relatively informal arrangements.

67 The respondent wished to offer employment incentives which rewarded good performance by employees, but which also provided it with the benefit of the extra exertion by employees who were striving to win the incentive on offer. It does not offend the concept of commercial sensibility and the achievement of a reasonable result consistent with such an employment contract to recognise that the potential benefits available under the rules of the incentive program are balanced by obligations which require a successful employee to provide an ongoing level of commitment in order to obtain the full benefit of the incentive. It must be remembered that the prize of a car was to be immediately available to the appellant. The parties fell out over the requirement that the appellant work two more years before the car was transferred into her name.

68 Furthermore, unless regard is had to the incentive program in its entirety then one is faced with the problem of uncertainty referred to by the learned Judge. Without reliance on the program as contained in the Rules and as practiced over time, one is left to conclude that the offering of prizes was discretionary resulting in no enforceable rights. There was, indeed, a level of ambiguity in the arrangements concerning incentives, however, to determine the matter on the basis of uncertainty has the effect of frustrating the contractual intentions of the parties, a matter to be avoided where possible (Biotechnology Australia Ltd v Pace (supra) per Kirby J).

69 In our view, the preferable approach is to treat the promise of participation in the incentive program as an effective term and to reach a conclusion as to its construction (Hillas and Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) All ER 494 at 499). Having done so, and reached the conclusion expressed in these reasons, it is not productive or necessary that we deal with the additional ground of appeal concerning the conduct of the appeal before the learned Judge.

70 Furthermore, as the incentive program is imported into the contract by inference from the interview and the subsequent dealings of the parties, the implication of terms does not arise (Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 422 per Brennan CJ, Dawson and Toohey JJ). And for the reasons outlined in Griggs v Noris Group of Companies (supra per White J at par 50), the appellant cannot rely upon s 154 of the Fair Work Act 1994 to establish an entitlement for a sum due which does not have a contractual foundation.