In A Flash

Ontario Court of Appeal shifts the focus away from “adequacy” of consideration in employment agreements

In Giacomodonato v. PearTree Securities Inc., 2024 ONCA 437, the Court of Appeal upheld the lower court’s decision that there was fresh consideration for the plaintiff’s second employment contract and confirmed that courts are concerned with the existence rather than the adequacy of consideration. Therefore, the second employment contract was enforceable and governed the plaintiff’s entitlements on the termination of his employment.

Background

The  Employee was recruited by the Employer to serve as its President and Co-Head of Banking. The parties entered an employment contract in April 2016, and subsequently negotiated a second employment contract in July 2016. The employment relationship was ultimately terminated without cause in January 2018.

Decision of the Lower Court

While the Superior Court concluded that the Employee was wrongfully dismissed, at issue was whether damages should be assessed in accordance with the terms of the first or second employment contract.

The Employee sought to enforce the terms of his first employment contract, whereas the Employer took the position that it was merely an “agreement to agree” and that the second employment contract should prevail. However, the Employee disputed the enforceability of the second employment contract on the grounds that he was not provided with fresh consideration and that it was “materially worse” than his first employment contract. Among other changes, the second employment contract was no longer a fixed-term contract, expanded the Employee’s non-competition and non-solicitation obligations on termination, and altered his compensation structure.

Notwithstanding its finding that the first employment contract was enforceable and contained all the essential terms for an employment contract, the Court concluded that the second employment contract was valid, binding, and determinative of his entitlements on termination.

As for the issue of consideration, the trial judge agreed that employment contracts require consideration and cited the importance of this requirement in the context of the employment relationship. However, the trial judge commented in paragraph 48:

Courts ensure that there is consideration for the contract, but the court is not concerned with the adequacy of the consideration. As long as there is some consideration for the amendments to the contract, the court leaves it to the parties to form their own judgment over its adequacy and to make their own bargain. The law does not require that the new benefits be in the form of money, or that the economic value of the new benefits provided to the employee equal or exceed the economic cost of the new terms of the agreement.

The trial judge accepted that the additional two weeks of vacation and the $40,000 bonus to offset the cost of the Employee’s departure from his previous constituted sufficient consideration and were benefits that flowed to him under the second employment contract. Notably, the trial judge did not accept the Employer’s submissions that the inclusion of revenue from certain transactions in the calculation of the Employee’s variable compensation, improvements to the timing of payments of the variable compensation, or that clarity in the definition of the banking group constituted additional consideration of benefit to the Employee.

In finding that the second employment contract was enforceable, the trial judge concluded by stating that “it is not the role of the court to assess the adequacy of the consideration provided by [the Employer].” The Employee was awarded $718,103.05 in damages as well as partial indemnity costs of $830,761.75.

Decision of the Court of Appeal

On appeal, the Employee argued that the trial judge erred by calculating wrongful dismissal damages owed to him based on the terms of his second employment contract rather than that of his first. The Court rejected this submission and concluded that the Employee had not established that the second contract was unenforceable, which was required to prove that the trial judge erred.

The Court affirmed that the trial judge did not err in finding that there was fresh consideration for the second employment contract. While the trial judge recognized that employers do not have the right to unilaterally alter a contract unless something “new and of benefit” flows to the employee in exchange for their agreement to the amended terms, he correctly noted that “courts are concerned with the existence, rather than the adequacy of consideration.” The trial judge also stated that it was not the role of the Court to assess whether the benefits obtained by Mr. Donato outweighed what he gave up.

Takeaways

Employers must provide fresh consideration to employees when they seek to change the terms of employment. Both courts emphasized the importance of this requirement in the employment context due to the inequality of bargaining power between the parties. Continued employment does not constitute something “new and of benefit” to the employee.

However, this decision highlights that a court will not inquire into the sufficiency of the consideration, rather it is concerned with the existence of consideration. It also suggests that the court is not required to undertake a comparative analysis of two employment contracts in determining whether fresh consideration exists. Employers, therefore, retain the discretion to determine what additional benefit is to flow to the employee when the terms of their employment are varied.

If you have any questions about this topic or any other questions relating to workplace law, please do not hesitate to contact a Mathews Dinsdale lawyer.

The author gratefully acknowledges the assistance of Whitney Miller, an Articling Student, in the firm’s Toronto office.

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