Consideration is required to form a contract and it is also required to amend one – but what constitutes consideration?
This is the second of a three-part, in-depth series on constructive dismissal by Stuart Rudner. Look for the next article in issue #401 of Canadian Employment Law Today.
In the last article, I discussed the first of two ways an employer can change the terms of an employee’s contract of employment without triggering a constructive dismissal: the unilateral imposition of amended terms upon the provision of reasonable notice. Now it’s time to look at the second way: amendment of the employment agreement through negotiation.
At first blush, this may sound simple. But the reality is many employers don’t do it properly. The end result is that the “improved” contract they think they have negotiated may not be enforceable.
There are many reasons an employer may want to change the terms of employment. It may want to introduce a term limiting the amount of notice to which the employee is entitled in the event of termination without cause. Alternatively, it may want to impose more stringent confidentiality, non-disclosure or non-solicitation clauses upon an employee that has become more central to the organization. In these types of scenarios the option of providing notice of the unilateral change may be impractical given the possible lengthy waiting period before the new terms come into effect. That would not be helpful if, for example, the employer is concerned about the employee leaving and soliciting clients.
A basic premise of contract law is that all contracts require “consideration” to flow from each party to the other. A contract involves each side giving and receiving a benefit. Without consideration flowing both ways, it’s just a gratuitous promise. “I will give you one million dollars” is not a contract no matter how much you would like it to be.
Consideration is required to form a contract and it is also required to amend one. The consideration can be a new benefit to the employee (for example, an improved medical plan), a salary increase or bonus or, in some cases, a promise not to terminate the employee. As long as there is a true quid pro quo, the amendment will be enforceable, assuming, of course, that all other contractual requirements are met.
Often the employer wants to establish a new employment contract but cannot or will not give something tangible to the employee in exchange. In that case it may be possible to provide consideration by agreeing, explicitly or implicitly, to forbear from terminating the employee. However, such forbearance must be bona fide. The court must be truly satisfied that either:
•the employer’s intention was to terminate the employee unless the employee agreed to the amendment; or
•in exchange for the employee’s agreement to the amendment, the employer agreed not to terminate the employee for a given period of time.
Otherwise the court may not be satisfied the employee received any consideration and the contract, or amended contract, will not be enforceable.
This issue has been addressed by the Court of Appeal of Ontario in, among other cases, Techform Products Ltd. v. Wolda. The court confirmed that:
“Where there is no clear prior intention to terminate that the employer sets aside, and no promise to refrain from discharging the employee for any period after signing the amendment, it is very difficult to see anything of value flowing to the employee in return for his signature.
“The employer cannot, out of the blue, simply present the employee with an amendment to the employment contract and say, “sign or you’ll be fired” and expect a binding contractual amendment to result without at least an implicit promise of reasonable forbearance for some period of time thereafter.”
In Techform the employer had Tiete Wolda sign an amended contract in which Wolda assigned all rights to inventions that he conceived while working for the defendant. The trial judge found as fact that if he did not sign the amended contract, his contract would have been terminated on 60 days’ notice.
But the trial judge held there was no real consideration flowing to the employee and the amended contract was therefore unenforceable. On appeal the Court of Appeal found the forbearance from terminating the relationship was proper consideration for the new contract which was therefore enforceable.
The facts in Techform were such that the court found a legitimate intention on the part of the employer to dismiss Wolda if he did not sign the new agreement. If such an intention cannot be shown to exist, then the forbearance argument will not stand up. Employers must be mindful of this requirement and of the possibility that sometime in the future they may have to prove such an intention existed. Internal memoranda or other documentation are quite helpful in this regard. Unsubstantiated evidence that “we really, really would have fired him” may not be quite as compelling.
If an employer is not prepared to terminate employees that do not accept the proposed changes, they can either proceed as discussed in the previous article (in issue #399 of Canadian Employment Law Today) and provide reasonable notice of the change, or they can find some other form of consideration to offer.
Improvements to remuneration, additional holiday or vacation time, or added benefits, can all meet this requirement. Simply putting the new contract on their desk and saying “sign here” will not cut it.
The next article will address the sometimes confusing issue of the employee’s duty to mitigate when she has been constructively dismissed.
For more information see:
• Techform Products Ltd. v. Wolda (2001), 2001 CarswellOnt 3461, 12 C.C.E.L. (3d) 184, (Ont. C.A.)
Stuart Rudner practices civil litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or via e-mail at [email protected].
In the last article, I discussed the first of two ways an employer can change the terms of an employee’s contract of employment without triggering a constructive dismissal: the unilateral imposition of amended terms upon the provision of reasonable notice. Now it’s time to look at the second way: amendment of the employment agreement through negotiation.
At first blush, this may sound simple. But the reality is many employers don’t do it properly. The end result is that the “improved” contract they think they have negotiated may not be enforceable.
There are many reasons an employer may want to change the terms of employment. It may want to introduce a term limiting the amount of notice to which the employee is entitled in the event of termination without cause. Alternatively, it may want to impose more stringent confidentiality, non-disclosure or non-solicitation clauses upon an employee that has become more central to the organization. In these types of scenarios the option of providing notice of the unilateral change may be impractical given the possible lengthy waiting period before the new terms come into effect. That would not be helpful if, for example, the employer is concerned about the employee leaving and soliciting clients.
A basic premise of contract law is that all contracts require “consideration” to flow from each party to the other. A contract involves each side giving and receiving a benefit. Without consideration flowing both ways, it’s just a gratuitous promise. “I will give you one million dollars” is not a contract no matter how much you would like it to be.
Consideration is required to form a contract and it is also required to amend one. The consideration can be a new benefit to the employee (for example, an improved medical plan), a salary increase or bonus or, in some cases, a promise not to terminate the employee. As long as there is a true quid pro quo, the amendment will be enforceable, assuming, of course, that all other contractual requirements are met.
Often the employer wants to establish a new employment contract but cannot or will not give something tangible to the employee in exchange. In that case it may be possible to provide consideration by agreeing, explicitly or implicitly, to forbear from terminating the employee. However, such forbearance must be bona fide. The court must be truly satisfied that either:
•the employer’s intention was to terminate the employee unless the employee agreed to the amendment; or
•in exchange for the employee’s agreement to the amendment, the employer agreed not to terminate the employee for a given period of time.
Otherwise the court may not be satisfied the employee received any consideration and the contract, or amended contract, will not be enforceable.
This issue has been addressed by the Court of Appeal of Ontario in, among other cases, Techform Products Ltd. v. Wolda. The court confirmed that:
“Where there is no clear prior intention to terminate that the employer sets aside, and no promise to refrain from discharging the employee for any period after signing the amendment, it is very difficult to see anything of value flowing to the employee in return for his signature.
“The employer cannot, out of the blue, simply present the employee with an amendment to the employment contract and say, “sign or you’ll be fired” and expect a binding contractual amendment to result without at least an implicit promise of reasonable forbearance for some period of time thereafter.”
In Techform the employer had Tiete Wolda sign an amended contract in which Wolda assigned all rights to inventions that he conceived while working for the defendant. The trial judge found as fact that if he did not sign the amended contract, his contract would have been terminated on 60 days’ notice.
But the trial judge held there was no real consideration flowing to the employee and the amended contract was therefore unenforceable. On appeal the Court of Appeal found the forbearance from terminating the relationship was proper consideration for the new contract which was therefore enforceable.
The facts in Techform were such that the court found a legitimate intention on the part of the employer to dismiss Wolda if he did not sign the new agreement. If such an intention cannot be shown to exist, then the forbearance argument will not stand up. Employers must be mindful of this requirement and of the possibility that sometime in the future they may have to prove such an intention existed. Internal memoranda or other documentation are quite helpful in this regard. Unsubstantiated evidence that “we really, really would have fired him” may not be quite as compelling.
If an employer is not prepared to terminate employees that do not accept the proposed changes, they can either proceed as discussed in the previous article (in issue #399 of Canadian Employment Law Today) and provide reasonable notice of the change, or they can find some other form of consideration to offer.
Improvements to remuneration, additional holiday or vacation time, or added benefits, can all meet this requirement. Simply putting the new contract on their desk and saying “sign here” will not cut it.
The next article will address the sometimes confusing issue of the employee’s duty to mitigate when she has been constructively dismissed.
For more information see:
• Techform Products Ltd. v. Wolda (2001), 2001 CarswellOnt 3461, 12 C.C.E.L. (3d) 184, (Ont. C.A.)
Stuart Rudner practices civil litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or via e-mail at [email protected].
