Drafting Subsequent Employment Contracts that are Enforceable: A Return to Fundamental Principles

In contract, cases often seem to come down to basic, fundamental principles. Where those principles are not all carefully considered, an employment lawyer who thinks they just drafted the perfect contract for their client might wind up having given them a contract that is entirely unenforceable, which means that it has no legal effect.

Giving Something of Value, Called Consideration, is Required

One such fundamental principle is the payment of money in exchange for something else, such as a product or service. What each side gives is called their consideration. For a legal contract to exist, there must be consideration from both sides. For example, if I buy a television, I give consideration in the form of money, and the vendor gives consideration in the form of providing the television to me. The receipt is a written record of that contract. The key is that a valid contract can only exist if something of value is given by both sides. The vendor can give me a free television, but then there is not a valid contract unless I provide something to the vendor in return. This principle applies to employment law contracts as well.

There is a famous legal phrase called “peppercorn consideration,” which stands for the proposition that when creating a contract, consideration can be as small as possible – even as small as a peppercorn. The ensuing contract is valid as long as some form of consideration exists, no matter how small.

Where there is an existing contract and the parties wish to create a new contract with the same subject matter, both parties need to provide new, or “fresh,” consideration on top of what was already provided.  Consideration that was already contracted for is not fresh consideration and, with limited exceptions, will not be enough to make a contract valid.

New Consideration not Previously Given Must be Present in Each New Contract

A recent case from the Ontario Court of Appeal serves as a potent reminder of the importance of consideration. In Goberdhan v Knights of Columbus, Knights of Columbus had what the Court determined to be an employer-employee relationship with Mr. Goberdhan, the employee. The parties had three contracts between them: the original employment contract and two subsequent employment contracts. The employee then was let go and brought a lawsuit for wrongful dismissal.

The problem was that the two subsequent contracts contained mandatory arbitration paragraphs. The Court considered whether these clauses were enforceable. If they were, they would limit the employee to bring any legal disputes arising from his employment before an arbitrator and, as such, the employee’s civil law suit would be thrown out.

The Court upheld the motion judge’s decision that there was no valid arbitration clause. The two subsequent contracts were found to be unenforceable because, despite being new contracts, they provided no fresh consideration to the employee, such as additional payment. Rather, the contracts merely allowed the employer to insert new provisions favourable to it, such as the mandatory arbitration, while failing to provide new provisions favourable to the employee in return. The motion judge had correctly concluded that the employee did not receive any benefit from signing the subsequent contracts, other than continued employment. The motion judge rejected the counter-argument that the arbitration clauses were fresh consideration, saying that they really amounted to a detriment: “giving up his right to trial by jury, to participate in a class action, and to institute a court action were a detriment to [the employee].”

Takeaways from Goberdhan: Each New Contract Requires Fresh Consideration!

This case serves as a strong reminder to anyone drafting a contract that, without adhering to basic principles such as providing fresh consideration with each new contract, the contract will not be enforceable. This is important particularly when it comes to long-term employment, where contract terms like pay may be renegotiated with employment lawyers periodically. It also reminds employers that if they want to change any part of their contract with their employee, they must ensure that fresh consideration is provided and received by both sides. In affirming the motion judge’s decision, the Court also reinforced the concept that offering to keep the employee employed will not amount to fresh consideration.

Have questions about your contract? Contact Walker Law today!

Please note that this article is intended for information purposes only. It is not intended to provide legal advice. If you have any specific questions, please contact a lawyer.

Tags: Employment Litigation Law, Contract Disputes, Civil Litigation Law

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