HR Policies – ‘aspirational’ or part of the contract?

Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] FCAFC 177

The appeal was confined to a narrow issue of whether the employer’s policy formed part of the contract of employment or was merely aspirational.

The court (Allsop CJ, Rares J and Mckerracher J) found it was and had not been complied with. The consequence was that the repudiation of the contract by the employer without compliance with its policy was not dealt with by the trial judge and hence remitted for determination and any consequential damages.

Allsop CJ, Rares J and Mckerracher J:


  1. An important question is whether the contract of employment, as reflected in the accepted letter of engagement, also includes the Policy (as one of the Farstad policies). On its face, the Policy appears to bind both the employee and employer. The observation of the primary judge that this question is a vexed one is understandable. There is a considerable divergence of views in the handful of cases on the point.

The Approach to the Question

  1. One point that is clear is that whether or not a policy will be incorporated into a contract of employment will depend upon the parties’ intentions as objectively ascertained: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 (at [40]-[41]).
  2. In approaching the task of ascertaining the parties’ intention, the starting point will be the language of the contract. The language adopted is to be viewed in context, not in abstract isolation. Further, regard must be had to the purpose and object of the transaction.
  3. In Toll (at [40]), the High Court said (footnotes omitted):

This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

  1. The observations in Toll were directed both to the question of whether there is a binding contract and also to what it contains. The focus in the present analysis is on the latter question. As Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 (at [10]) (footnotes omitted):

In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: “presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.” Such statements exemplify the point made by Brennan J in his judgment in Codelfa:

The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.

  1. In McCormick v Riverwood International (Australia) Pty Ltd [1999] FCA 1640; (1999) 167 ALR 689 at first instance, Weinberg J (whose approach was upheld on appeal in Riverwood [2000] FCA 889; (2000) 177 ALR 193), set out the following principles (at [74]-[77]) :

74.In ascertaining the meaning of an expression contained in a contract such as the requirement that the applicant “abide” by all “Company Policies and Practices currently in place, any alterations made to them, and any new ones introduced”, the approach to be adopted differs from that taken in statutory interpretation. It must rest on the premise that the contract was made in good faith with the object of at least potential mutual benefit by due performance.

  1. The court approaches the task of ascertaining the meaning of the parties’ expressions from an objective point of view. In the case of a disputed clause in a commercial agreement “the essential question is what would reasonable business people in the position of the parties have taken the clause to mean”: Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VicRp 74; [1990] VR 834 at 840 per McGarvie J. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 Lord Diplock said:

… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.

  1. The parties may be bound by the meaning reasonably to be inferred in the circumstances, even if it does not conform to the interpretation advanced by either. It is not necessary that a statement should be subjectively intended to be a term of a contract in order to be one; it is enough if it can reasonably be so understood.
  2. In Cheshire & Fifoot’s Law of Contract (7th Aust ed, 1997) it is stated (p345) that: In interpreting the expressions of the parties, the court will consider them in their context. Except to the extent to which evidence is inadmissible, the court will as a matter of course take into account the objective background of the transaction, that is, its factual matrix, genesis and aim, and the common assumptions of the parties.



David Cormack – Brisbane Barrister & Mediator


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