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Contract of employment

The employment relationship between the employer and the employee is governed by the contract of employment. There is a distinction between a ‘contract of service’ (or contract of employment) in which the relationship is between employer and employee, and a ‘contract for services’ in which the relationship is between employer and independent contractor. In relation to senior employees (such as directors), the contract of employment is often described as a ‘service agreement’. Although the distinction between a contract of employment and a contract for services is an important one, recent developments mean that the distinction is becoming less so because of the extension of ’employment’ rights to ‘workers’, which is a wider category of persons.

A number of rights and obligations apply to the employer and employee under the contract of employment, in addition to certain statutory rights (the most important of which is the right not to be unfairly dismissed).

A contract of employment need not be in writing and may be oral. However, an employer is under a statutory obligation to provide the employee with written details of the main terms of employment. Service agreements are commonly reduced to writing because of the need to include certain express terms such as restraints of trade or powers of attorney, which must be in writing. The ordinary common law principles relating to the validity and formation of contracts apply to contracts of employment and each of the elements required for a valid binding contract must exist. There must be an offer of employment by the employer, accepted by the employee on the basis of an intention to create legally binding relations. There must also be valid consideration, usually in the form of remuneration paid to the employee in exchange for his agreement to carry out work for the employer..

Each party must have capacity to enter into a contract of employment. A company’s power to enter into a contract of employment may be limited by its memorandum. An employee of the company is assumed to have entered into the contract in good faith and the company deemed to have had capacity to contract.

A contract of employment is illegal if it necessitates an act that is contrary to statute or public policy. For example, a contract of employment that is devised to defraud HM Revenue and Customs is illegal at inception and unenforceable by the employer or employee in any respect.

A Calderbank offer.

This is contractual in nature, does not carry Part 36 rewards benefits, can be withdrawn at will and is preferred by many defendants for good reason. It will still potentially be relevant as to costs for it is an effort to settle. The key explanation for a defendant using a Calderbank is Mitchell v James. What purported to be a Part 36 offer from the defendant was invalidated by a term in the offer seeking to limit costs liability. Part 36 is dedicated to settling the claim, not the costs of the claim.