Does Fresh Consideration Require an Improvement for the Contracting Party ?


Following the Waksdale decision by the Ontario Court of Appeal ( which overnight made most ESA only contracts null and void) many employers have revised their contracts for existing employees by substituting enforceable ESA termination clauses. They often  make no other changes to the agreement other than a nominal cash payment.

Where a nominal payment has been made, the employers have relied upon the fact that this was fresh consideration and therefore the new and improved ESA termination clause is enforceable.

The counter argument made by employee counsel is once the old ESA termination clause is voided the common law presumption of reasonable notice becomes the relevant termination provision. Therefore if the employee then signs a valid ESA termination agreement, the employee is giving up a significant benefit ( especially if their common law entitlement would vastly exceed the ESA minimums ) and in exchange is only getting a nominal cash payment. On any objective basis, the employee is worse off under the new agreement than they were under the common law regime of reasonable notice.

In a recent case of the Ontario Court of Appeal called Goberdhan v Knights of Columbus ( 2023 ONCA 327) the issue was the enforceability of a arbitration clause newly introduced by the employer  in an ongoing employment relationship.

The actual issue in the appeal was whether the arbitration clause was invalid because of a failure to provide fresh consideration.

This is what the Court said :

[16]      In our view this was a clear case where the motion judge was able to determine the question at issue – whether there was fresh consideration to support the contracts containing arbitration clauses – on the evidence before him. In this case, the motion judge was able to find on the evidence before him that there was no fresh consideration for the agreements containing an arbitration clause. This was not a proposition that was “merely arguable”. Accordingly, we did not accept the appellant’s first challenge to the motion judge’s decision.

[17]      Second, the appellant asserted that the motion judge’s conclusion that the second and third contracts were void for want of fresh consideration was based on insufficient evidence, and that he wrongly focused on the appellant’s failure to prove consideration rather than on whether the respondent had met his burden to prove that the arbitration agreement was invalid.

[18]      We did not accept this argument.

[19]      The respondent’s evidence on the motion with respect to lack of consideration consisted of the following: at para. 2 of his affidavit, he stated that his contract was modified without consideration. At para. 4 he stated that the second contract materially modified the employment relationship by altering the severance/termination pay he would receive, altered the terms of employment for cause and inserted an arbitration agreement, and that he had no choice to sign if he wanted to continue his employment. The respondent stated at para. 7 that he did not receive any additional consideration for the modification of his contract beyond continued employment, and at para. 8 that he never received a promotion nor was provided with additional benefits after signing an agreement.

[20]      The appellant submitted that these statements were insufficient in light of the changes to the contracts which themselves could constitute consideration, and that the respondent failed to meet his onus to explain why the various changes did not amount to fresh consideration.

[21]      We did not agree. The respondent’s statements were not bald or conclusory. They amounted to his evidence that the new contracts were not advantageous to him and that he had not received any benefit other than continued employment. The respondent’s evidence was not challenged by cross-examination, nor did the appellant put forward any evidence that there had been fresh consideration for the new contracts.  Instead, at the hearing of the motion the appellant pointed to the differences between the original contract and the later contracts, to argue that the changes constituted consideration. In particular, the appellant pointed to the addition of a provision for non-binding mediation and mandatory arbitration of disputes and the change from Connecticut to Ontario as the governing law.

[22]      These arguments were addressed by the motion judge, who concluded that the mediation and arbitration clauses were not fresh consideration: giving up the right to trial by jury, to participate in a class action, and to institute a court action were a detriment to the respondent, and that the change of law could not be considered a benefit without evidence (on appeal the respondent correctly pointed out that to the extent he was an employee, Ontario law would prevail in any event: see Employment Standards Act, 2000, S.O. 2000, c. 41, s. 3(1)).

[23]      The motion judge concluded that, on the evidence, the respondent “had no practical choice but to sign the new contracts if he wished to continue to work for the [appellant].” There was no error in his approach to and application of the evidence in determining that the second and third contracts, and accordingly the arbitration clauses that they contained, were invalid for lack of fresh consideration.

My Comments:

What I find fascinating about this case is that the Court seems to be weighing both the advantages and the disadvantages of the new contract and concluding that as the changes were an overall detriment to the employee, therefore there was no fresh consideration.

The Court also reinforces the concept that simply agreeing to continue the existing employment relationship is not in itself fresh consideration.

If this same analysis were applied to the ESA example I set out above, how could it be considered an  advantage to the employee to have given up their entitlement to common law reasonable notice in exchange for $500?

This case reminds me of a conversation I had with the late Mr Justice Randall Echlin many years ago. Randy always told me that as a lawyer drafting employment agreements he would always make sure that his agreements were at least a little better than the ESA minimums. His concern was that since the ESA was a statutory minimum guaranteed to all employees covered by the Act, what advantage ( in other words “fresh consideration” ) would flow to an employee who agreed to only receive what he was statutorily entitled to anyways?

Because of this conversation, I also adopted a practice that when drafting termination clauses for employers I made sure that the termination clause was at least a little bit better than the ESA.

I am proud to say none of those clauses that I drafted were even contested in court.

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