Is It Time to Reconsider Consideration as a Legal Fiction ?

The dissent of Slatter J.A. in the 2011 decision of the Alberta Court of Appeal in Globex Foreign Exchange Corp v Kelcher raises an interesting issue as to whether the search for consideration in an ongoing employment relationship is nonsensical.

This dissenting opinion asserts that consideration defies reason in this context. An employee, the decision argues, should be estopped from denying the contract, due apparently to his or her tacit acceptance of the term and although not stated, presumably with evidence of prejudicial reliance by the employer.

The dissent continued to argue that consideration required for a contractual variation in an existing relationship is nothing but a legal fiction which should be revisited:

An appropriate approach to varying existing contracts by “going-transaction adjustments” was set out by Swan in Canadian Contract Law: 

• 2.144 The results in cases like Foakes v. Beer and Gilbert Steel seem to serve no purpose other than to encourage trickery and sharp practice - a consequence recognized by the prompt legislative reversal of the result in the former. The effort to reconcile the results in [the leading cases] leads to great uncertainty and creates a very serious risk that those without access to good legal advice will be unfairly, unnecessarily and unpleasantly surprised.
• 2.145 More recent cases . . . show that the real problem which the law has to deal with is not the doctrine of consideration but whether the enforcement of the promise will catch one of the parties by surprise. It is both unnecessary and unrealistic to expect an employer to threaten its employees with dismissal if they do not agree to a modification of their employment contracts. It is, however, reasonable to expect the employer to make sure that its employees know the terms of the contracts that govern them and equally reasonable to expect the employees to tell the employer if the terms offered by the employer are unacceptable: if that means that the employee has to resign, he or she is protected by the law of constructive dismissal if the modification is unfair or unreasonable. It may be assumed that an offer by the employer to give an annual pay raise is acceptable to an employee so that nothing more is required of the employee to make his or her right to the increase effective. On the other hand, the employer should be entitled to expect that its employees have accepted some disadvantageous change from the fact that, after the employer made reasonable efforts to inform its employees of the change (and gave them time to consider it), the employees nevertheless stayed with the employer. Such an attitude to the problem of adjustments in the employment relation would not only reflect what has generally been accepted as the law but would also acknowledge that the important question is not whether there was or was not consideration or some legalistic ritual like a formal threat to dismiss an employee whom the employer would very much like to retain, but whether the employee was fairly informed of the terms governing his or her employment.

 In this case none of the employees were “caught by surprise”. They knew exactly what terms their employer was proposing for them, they agreed to them, and both the employer and the employees thereafter conduct their affairs as if the “going-transaction adjustment”, in the form of the non-solicitation clause, was binding. Invoking the law of consideration after the fact is the invocation of a legal fiction in aid of a particular result.

 [137]      It is true that there might be a power imbalance between an employee and an employer demanding non-competition covenants: Elsley v. J.G. Collins Insurance Agencies at p. 924; Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701 at para. 92. It must be remembered, however, that outside the human rights context the employer is under no obligation to hire anyone, retains the right to terminate the employee at any time, and is entitled to do so if it becomes dissatisfied with any of the terms of employment. That termination is not a breach of the agreement: Merrill Lynch Canada Inc. v. Soost. Termination on notice is a covenant in the agreement that may be exercised by either the employer or the employee at any time. Further, when a longtime employee leaves and immediately commences soliciting the customers of his former employer, the balance of power is singularly reversed; the employer at that point is very vulnerable to the employee.

This issue of consideration as a legal pretense is not without logical support. This is particularly evident in the cases referenced in the section immediately above in which it is the employee who asserts a beneficial promise made by the employer for such benefits as an enhanced severance scheme or improved post-retirement benefits. The traditional analysis employed of the application of a contract model and hence the need for consideration vividly makes no sense when analyzed from the opposite view.

The employees are thus expected, in the application of this traditional model, to prove some additional indicia of consideration, apart from continued employment. Should the required evidence really be “I told the company I was ready to immediately tender my resignation but decided to remain employed, given these promises”? This could be the only form of consideration, forbearance to resign. A claim of propriety estoppel remains a long shot, at best. ¹

The decided cases would mean, as noted in the above dissent, that any improved employment benefit given in the course of employment does not create a contractual obligation. Does this mean a salary increment or an improved bonus or benefit plan is not a binding obligation? This is illogical.

Slatter J.A speaks in the context of the usual case of the employee seeking to deny an offensive contractual term that such an employee should be estopped from doing so, presumably given detrimental reliance shown by the employer. The same argument would be difficult for an employee to make in the reverse  context.

The motivation for the search for consideration in many of the employment cases is found in the context of an employer seeking to enforce a one-sided agreement in a context of a continuing employment relationship in which the employee lacks bargaining power. There is an inherent unfairness in this setting which, it is submitted, is the unstated real underlying motive to strike the contract. The tool of consideration is a blunt instrument which has a harmful reciprocal impact when used in the opposite context when it is the employee who seeks to enforce a benefit provided in the same context.

The dissenting decision suggests that the application of an estoppel is a more appropriate concept. That argument is most effective from the employer’s perspective as it is on the right side of an unfairness argument. There is no reference to the prejudice which must be shown to support this plea which presumably would be some form of draconian action should there have been visible opposition to the new term which had been proposed.

Bhasin

As noted above, the decision of the Supreme Court in Bhasin may well offer the best argument to deal with this conundrum.

Unconscionable Term ?

A further argument, one much more difficult to achieve, is the submission based on unconscionability, as reviewed here.

The degree of unfairness must be manifest as discussed subsequently but it does appear to be a much more logical test.

This was the reasoning used in Daley v Golden Child Care. The court referred to the text, Harris on Wrongful Dismissal, noting that the employment relationship creates a “special relationship” and hence a presumption that a contract was the product of undue influence, one which must be rebutted. An unfair notice provision may, in the court’s discretion may be set aside, comparable to a penalty clause. The court in Daley stated as follows, referring to Dolden:

[31]   In Dolden v. Clark Simpkins Ltd. (1983), 3 C.C.E.L. 153. Macdonald J. at 163 cited  Harris, Wrongful Dismissal, (Toronto: Richard De Boo, 1978) at 98 - 100 and stated:

The Court is extremely reluctant to uphold an agreement that appears unjust, such as a manifestly one-sided severance clause .... An employer-employee relationship leads to a “special relationship”, and hence a presumption that a contract between such parties was a product of undue influence, unless that presumption is rebutted on the facts. An inadequate notice provision in respect of termination of employment is tantamount to a penalty provision which the Court may consider void, in the exercise of its discretion in order to relieve against such provision when the clause results from an inequality of bargaining power.

The court found that the one month’s notice which was provided for in the employment contract and which was given to Dolden was not reasonable in the circumstances of the case.  In Daley, the eight weeks’ maximum notice provided in the employment contract similarly, was determined as not reasonable and was not enforceable.