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Employers beware: Fresh ‘consideration’ required when revising employment contracts

Goberdhan v Knights of Columbus is a recent Ontario Court of Appeal decision that highlights the importance of providing “fresh consideration” when getting an employee to sign a new or revised employment agreement.

The term “fresh consideration” essentially means to provide something of value in order to make the new contract binding and enforceable. This can be a raise or a bonus or some additional benefit in exchange for signing the new agreement. (For example, additional vacation time, or new or improved health benefits.)

Background

Throughout his employment with the Knights of Columbus, a fraternal benefit society, Neil Goberdhan signed three separate “field agent” contracts. The first was signed when he began his job, the second was signed about seven years later, and the third was signed six months after the second contract. Goberdhan’s employment was terminated less than a month after he signed the third contract.

Goberdhan sued for wrongful dismissal claiming severance pay, termination notice pay, outstanding wages and commissions, as well as punitive damages.

The Knights brought a motion to “stay” the wrongful dismissal action (a “stay” is an action taken by a court to stop a legal proceeding), relying upon mandatory arbitration clauses contained in the second and third employment contracts signed by Goberdhan. The motion judge dismissed this request, concluding that the second and third contracts were invalid due to a lack of fresh consideration and, as such, the mandatory arbitration clauses within them were also invalid.

The Knights appealed the order dismissing their motion for a stay.

The appellate court’s decision

One part of the Knights’ appeal was a challenge of the decision that the second and third contracts were invalid for lack of fresh consideration. The Knights argued that the decision was based on insufficient evidence and that the motion judge wrongly focused on the Knights’ failure to prove there was fresh consideration rather than on Goberdhan proving that the arbitration clause was invalid.

The Court of Appeal rejected this argument — the motion judge based his decision off of Goberdhan’s evidence, via his affidavit, that the contract was modified without consideration. There had been material modifications to the employment contract (e.g., the insertion of the arbitration clause), but Goberdhan did not receive a promotion, additional benefits, or anything else as consideration for signing the new contract.

The only thing Goberdhan received was his continued employment, as he had no choice but to sign the new employment contracts if he wanted to stay employed.

The Knights also argued that the changes to the contract(s), such as the addition of mandatory arbitration, were the consideration for the second and/or third contracts. The Court of Appeal found there was no error made by the motion judge, who determined that the addition of the arbitration clauses was not fresh consideration as those clauses resulted in Goberdhan giving up the rights to a trial by jury, to participate in a class action, and to initiate a court action – the removal of those rights was a detriment to Goberdhan, not a benefit.

As such, the Court of Appeal upheld the motion judge’s determination that the second and third contracts were invalid, and therefore the arbitration clauses contained within, were void for lack of fresh consideration.

Lessons for employers

If employers want existing employees to sign a new or revised employment contract, they need to provide fresh consideration for the new agreement to be valid.

This could be a promotion, a raise, an increase in other compensation, or even a one-time payment (such as a signing bonus).

Whatever is used as fresh consideration must provide some sort of additional benefit to the employee for signing the new agreement. If there is no fresh consideration, the new agreement will not be valid, and the employer will not be able to rely upon the provisions within the new contract.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.