As contracts can be created expressly or by implication, the Court of Appeal held in Stack v Ajar-Tec Ltd that the process of contract formation may also be partly express and partly implied. It was not therefore fatal to the existence of a concluded contract that the parties had not agreed an express term about payment.
The company, which supplied audio-visual equipment, was set up in April 2005 with three shareholders. Mr Martin, one of the directors and the principal motivator behind the company, received a salary from the outset.
Mr Stack was also a director and shareholder who worked about 80 per cent of his time for the company to begin with. In 2009, after relations between the directors deteriorated because of arguments about money, Mr Stack’s appointment was terminated. He had not been paid for the work he did, nor was there any provision in the company accounts reflecting a liability to pay him. He had no employment contract although drafts had been prepared for him which he had not signed.
Tribunal and EAT decision
The tribunal judge held that it did not make sense for Mr Stack to be required to work for the company but not be paid, particularly when Mr Martin was paid for the work he did. The judge concluded therefore that there was an express agreement to the effect that Mr Stack would work for the company and an implied term that he would be paid for what he did. He concluded that Mr Stack was an employee and a worker and could pursue claims for constructive unfair dismissal and unlawful deductions from wages.
The EAT upheld the company’s appeal on the basis that it was not possible to have an express contract of employment with an implied term that one of the parties should be paid if there was no “consideration” (something of value exchanged by the parties to the contract) between them.
Court of Appeal decision
The Court of Appeal held that the EAT had made a mistake and that Mr Stack’s appeal was “well-founded”.
Crucially, it pointed to the finding by the employment judge that the contract was formed prior to the company being incorporated and could not therefore have contained a promise by the company to pay Mr Stack for his work. The correct question was whether the initial agreement between the three promoters was supported by consideration. As each of them had agreed to contribute different things to the venture, there was “ample consideration … to be found in the mutuality of the promises”.
However, did the agreement contain a term that Mr Stack be paid for his services? The employment judge concluded that it did, not least because it made no sense for Mr Stack to have given a positive, enforceable obligation to work for the company but with no reciprocal entitlement to be paid. Equally, he considered that it made no sense for Mr Stack to be rewarded through dividend income alone as Mr Martin was also entitled to receive this income in addition to being paid for his work.
The Court noted that if a contract can be created expressly or by implication, the process of contract formation may also be partly express and partly implied. It was not therefore fatal to the existence of a concluded contract that the three promoters did not agree an express term about payment. A term could be implied that Mr Stack was entitled to be paid in order “to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist."