A recent decision of the Court of Appeal for Ontario could have significant implications on the legal requirement for fresh consideration in employment contracts.
When a company offers a new contract to an existing employee, there needs to be fresh consideration provided to the employee in order for the new contract to be enforceable. The requirement for consideration is satisfied when an individual is offered employment in exchange for signing a contract, but that won’t work if they already have a job. Consideration means something “new and of benefit”, beyond continued employment, that flows to the employee in exchange for their agreement to the new contract. The Courts will not enforce a new contract if it was signed under duress or under the threat of termination.
Often, fresh consideration in exchange for signing a new contract takes the form of:
- a signing bonus,
- an increase in pay, or
- some other new benefit.
However, there is no recognized “minimum” amount of consideration that is necessary for the contract to be enforceable, and some have opined that if the employee is giving up substantial rights, the consideration provided would have to be commensurate with that. However, the Court of Appeal’s decision emphasizes that Courts are only concerned with the existence, rather than the adequacy, of consideration.
Trial Decision
In the case of Giacomodonato v PearTree Securities Inc., Mr. Donato brought a wrongful dismissal claim against his former employer PearTree. One of the issues was the enforceability of a second employment contract that Mr. Donato signed a few months after commencing employment and the signing of the first contract. The second contract contained a termination clause that, if enforceable, would significantly limit Mr. Donato’s entitlements upon termination, and therefore his damages in the lawsuit.
Mr. Donato took the position that the second contract was unenforceable because it did not provide him with fresh consideration. He argued that the second contract was materially worse for him than the first, citing that the second contract:
- contained a termination clause which significantly limited his entitlements upon dismissal;
- expanded the non-competition and non-solicitation clauses; and
- made numerous changes to his compensation structure, which lowered his overall earnings.
However, the trial Judge found that since the second contract provided Mr. Donato with additional paid vacation, this amounted to fresh consideration. In addition, the trial Judge found that a $40,000 bonus provided to Mr. Donato also constituted fresh consideration, even though it was not referred to in the text of that contract and the parties disputed its connection to the contract.
Accordingly, the Court found that the second contract was enforceable, which limited the damages payable to Mr. Donato at trial.
The Court of Appeal Decision
Mr. Donato appealed the trial decision to the Court of Appeal. He argued that the trial Judge erred in finding that there was fresh consideration for the second contract, stating that when considering the overall advantages and disadvantages of the first and second contract, there was no fresh consideration.
The Court of Appeal disagreed with Mr. Donato and found that the trial Judge was correct in finding that there was fresh consideration for the second contract. The Court of Appeal found that Courts are only concerned with the existence, rather than the adequacy of consideration. It is not the Court’s job to determine whether the consideration was valuable enough for the employee to agree to the changes in the new contract, or whether the new contract leaves the employee better or worse off overall. Just the increased vacation entitlement in the second contract would have been enough to constitute fresh consideration, even though there were many other changes in the second contract that made Mr. Donato worse off overall.
Conclusion
This decision could have a significant impact on the way Courts interpret the need for fresh consideration. Courts will not engage in a detailed analysis of the ways that a new contract will be to the benefit and detriment of the employee. If there is something that is new and of benefit to the employee provided in exchange for signing the new contract, that will constitute fresh consideration, even if other parts of the contract leave the employee worse off overall. The enforceability of the contract will not depend on the sufficiency of the consideration that is provided.
Our firm works with employers to update their employment contracts and ensure that fresh consideration is provided. If your employment contracts have not been updated in some time, there is a good chance that the termination clauses and other sections you seek to rely upon will no longer be enforceable, and that your company can save itself from significant future liability by updating its contracts.
If you are an employee and you are presented with a new employment contract to sign, we can help you review it and determine whether or not it is in your interest to agree to the new terms.
If you have any questions about your situation or if you would like to get legal advice, please feel free to contact us.
