Maguire – A Tacit Promise of Forbearance

The starting point of this analysis starts with a 1935 decision of the Supreme Court of Canada in Maguire v Northland Drug. This case involved an agreement which contained a non-compete covenant which the employer sought to enforce. One later case has suggested that the fact that the disputed term was a non-competition covenant and not a termination clause may be regarded as a distinctive feature. This is not so stated in the initial decision.

At trial, the covenant was found unenforceable due to lack of consideration. The Manitoba Court of Appeal reversed, finding in favour of the employer. The Supreme Court found that there was consideration, yet set aside the covenant as being overly broad in its application of the restrictive covenant test.

Maguire was a druggist and had been employed for 11 months in Flin Flon, Manitoba at which time he signed a five year non-compete covenant. The covenant was under seal, which was not considered to be of any distinctive legal significance.

The employer’s general manager testified that he had visited Maguire, presented the contract to him and had stated that all branch managers were required to sign similar agreements. Maguire had testified that he had understood that his failure to sign this document would result in his termination. Maguire signed without protest. He was terminated three years later. The evidence to support the apparent theory of forbearance was summarized by the Supreme Court as follows:

There was ample consideration for the bond. Although the necessity of proving consideration for the covenant is not dispensed with by the presence of a seal in a case of this kind, sufficient appears from the evidence adduced at the trial to establish, that the employee was given to understand, and did understand, that his refusal to execute the covenant would lead to an early termination of his employment, and that the employer tacitly promised that if the bond were signed, the employment would not soon be terminated. On this mutual understanding the covenant was entered into, and thereafter the employer refrained indefinitely from exercising its legal right to issue the notice which, at the expiration of one month, would terminate the employment. This continuance of employment constitutes legal consideration, the adequacy of which will not be inquired into by courts: Gravely v. Barnard; Skeans v. Hampton.  ¹

One might expect that forbearance would come from direct evidence as opposed to a finding of a tacit understanding. In fact, there was no direct evidence on the subject. The employee’s apparent suspicion was just that. It is to be noted that the Court spoke directly on the issue that this continuance of employment, itself, would be sufficient consideration. “This” continuance presumably means continuance in these particular circumstances where there has been evidence, as found, of forbearance. As noted above, the covenant was found to be in restraint of trade and unenforceable, in any event.

Later cases have stated that direct evidence of forbearance should be before the court, which, with respect, makes much more sense.

Watson v Moore – Trial Judge Applies Maguire

The B.C. Court of Appeal considered this issue again in Watson v Moore Corp, a decision released in March of 1996. The trial judge had dismissed the claim and stated as follows, as summarized by the Court of Appeal:

After reviewing a number of authorities, …the learned trial judge observed that consideration for this type of agreement should not turn on whether the employer threatens to terminate the employment if the employee refuses to sign.  He then went on to hold:

...In my view, Maguire and Chapman are the controlling authorities here and they both support the proposition that continued employment is good consideration for the modification of an employment contract in a manner not otherwise beneficial to an employee.  There were several years of employment following the signing of the 1989 contract in this case.  That amounts to consideration and in the result therefore, the termination clause in the 1989 contract is an enforceable term of the contract between the parties.

This writer’s comments on Maguire are noted above. It is submitted that the trial judge had it wrong. That is not what Maguire stated. Rightly or wrongly, Maguire found that there was evidence of forbearance. It does not stand for the proposition that continued employment is adequate consideration. The quote above does reference “there were several years of employment following the signing of the 1989 contract in this case. That amounts to consideration….” The passage appears to suggest that the fact of continued employment is enough to show consideration. If so, it is submitted that this is not the law and the statement is wrong.

In Watson, Roxanne Watson sued for a common law wrongful dismissal remedy, to which claim the employer asserted the severance terms of an employment agreement. Ms. Watson had been employed for 25 years, initially as a receptionist and most recently as a sales executive in the last 15 years of her employment from 1978 to 1993.

In 1981 Ms. Watson signed her first employment contract which allowed for termination on two weeks’ notice. This severance provision violated the B.C. minimum employment standards minimum. It was replaced in 1987 by a second contract which required the Employment Standards Act minimum plus one week’s salary for every two years of completed service, which in this case, would be 17 weeks’ pay on termination. The agreement also included “an onerous non-competition covenant”.

In May of 1989, the company sent a “revised Sales Agreement” to Ms. Watson which made no changes to the termination provision. It slightly tightened the non-compete. The cover letter stated the revised agreement was given to her “in conjunction with the recent reorganization”.

There was no evidence found that the plaintiff was told she was required to sign the agreement.

In 1993, the plaintiff was terminated without cause and offered the contracted sum of 20 weeks’ pay. Her then annual income was $47,500.

At trial, it was found that continuing employment after the execution of the agreement was sufficient consideration to support a contract.

B.C. C.A. Continued Employment is not Enough

The Court of Appeal disagreed and stated that “I do not believe that continued employment, without something more, can amount to consideration in the circumstances of this case”. This, it is submitted, is the correct law.

In the Court of Appeal, the employer counsel argued that continued employment and forbearance from dismissal was sufficient consideration.

B.C. Court of Appeal on Maguire

The Court firstly concluded that, in this case, continued employment alone would not be consideration. Forbearance must also be proven to establish consideration. To show forbearance, the employer must show that it intended to dismiss its employee of he or she refused to sign an employment contract, which was not proven in this case. This decision is, it is respectfully submitted, exactly what should have resulted in Maguire.

The Court did refer to earlier decisions of Maguire v Northland Drug, and Baker v BC Insurance which were summarized as supporting the proposition that continued employment would be sufficient value to support the bargain. The Court concluded that in this case and similar decisions to the same effect, the judges “seemed prepared to accept without question that the employee would be terminated if he or she did not sign”. In essence, the Court acknowledged that in Maguire that there was accepted evidence of forbearance.

OCA Wolda…Tacit Does the Day

The issue of consideration was again considered by the Ontario Court of Appeal in Techform v Wolda, a decision released on October 1, 2001. The decision overturned the trial decision which found the relevant agreement unenforceable due to lack of consideration and duress.

Wolda had begun employment with the employer in 1981. He was hired as a mechanical engineer, although he lacked formal accreditation. In 1987 he developed a mechanical hinge which the employer used in auto assembly.

In 1989, Wolda submitted his resignation as he intended to move from Penetang to Toronto. The company offered to him a consulting engagement which was reduced to writing in September of 1989. This agreement did not speak to the issue of ownership of inventions. It was renewed annually until it was terminated by the company in 1997.

Towards the end of 1992, Wolda and one other employee invented a hinge known as a “Boxless Hinge” and presented it to company executives at the head office in Michigan, all of which was unknown to local management, a business decision that some may view as indiscreet.

Due to this event, a technology agreement was given to Wolda, which in essence, allowed the employer ownership of inventions. The consideration stated on the face of the document was continued employment. Wolda’s evidence was that he knew he would have to sign it or he would be let go. The precise evidence was that Wolda did not want to sign it, put it aside for a few days and called his boss to ask whether he wanted him to sign it to which the answer was yes. Wolda testified that “he saw no way out”. The company testified that had Wolda refused to sign, he would have received 60 days’ notice, this being the notice period set out in the consulting agreement. The employer did not testify that these words were actually spoken to Wolda. The actual recall of the company witness was minimal. Wolda’s testimony was really the only evidence.

The Court of Appeal reversed the trial judge on the issue of consideration and followed Maguire, holding that continued employment and “implied forbearance” for a reasonable period of time would do the trick quite well. As mentioned above, the Court noted that there was a distinction between Maguire and Watson, also cited above, in that Maguire involved a non-compete and Watson a termination provision.

In essence, the Court of Appeal in this case stated that the employer must show a prior intent to terminate which is then set aside, due to the execution of the new agreement and further a promise to refrain from termination for a reasonable time thereafter. These words convey this principle:

[26]        … Where there is no clear prior intention to terminate that the employer sets aside, and no promise to refrain from discharging for any period after signing the amendment, it is very difficult to see anything of value flowing to the employee in return for his signature. The employer cannot, out of the blue, simply present the employee with an amendment to the employment contract say, “sign or you’ll be fired” and expect a binding contractual amendment to result without at least an implicit promise of reasonable forbearance for some period of time thereafter.

The evidence in Wolda was somewhat thin in showing a factual background of forbearance, but nonetheless the Court of Appeal jumped through a few hoops to make this conclusion. Once again, a “tacit” promise was good enough to support the bargain:

In my view, we are obliged to apply the same reasoning to this case. (Referring to Maguire – ed) In portions of her reasons not dealing with consideration, the trial judge accepted evidence from the appellant that if the respondent did not sign the ETA his services would be terminated on 60 days' notice. In presenting the ETA to the respondent in the circumstances of this case, the employer must be taken to have tacitly promised to forbear from dismissing the employee for a reasonable period of time thereafter. That promise was in fact fulfilled. The appellant retained the respondent's services for a further four years and terminated those services only when he breached the ETA.

[29] In my view, therefore, there was consideration for the ETA

B.C. What is Forbearance ? We will not fire you right now – not enough

Krieser v Active Chemicals, a 2005 decision of the BC Supreme Court provides a good review of the case law on this issue.

The plaintiff was interviewed by the employer on May 17, 1988. The plaintiff asserted that he was not told anything about the requirement to sign an employment contract. He accepted the offer of employment and began work one week later. On June 3, 1988, he was presented with an employment contract, which recited as consideration for its terms the fact of his employment. The new contract contained a severance provision which limited his common law claim on termination to lesser sums. The only “consideration” he received was continued employment.

The court found that the offer of employment made on May 17 showed the plaintiff and the employer bound by common law entitlements. Hence the later terms limiting severance, all of which were to the employer’s benefit, were new restrictions. The court concluded that the mere fact of continued employment does not pass the mustard to show consideration and that there must be “forbearance or some other incentive to constitute good consideration”. A blanket statement, “we won’t fire you right now”, which was in effect what the plaintiff had alleged, would not be enough to show consideration. Madam Justice Neilson stated:

[32]           These statements convince me that it is not enough for the defendant to simply establish that it intended to dismiss the plaintiff if he refused to sign the Contract.  Some additional benefit must flow to the plaintiff from signing, beyond continued employment for an unknown period.  That benefit might be greater security of employment through forbearance for a specified time, or it might be a new term beneficial to the employee in the revised agreement, but adequate consideration requires something more than the bald promise that “we won’t fire you right now”.

The court found that there must be shown some material advantage given to the plaintiff to succeed on the consideration argument. For this reason, the employer’s mission to assert the termination provision failed and the plaintiff’s claim was set by common law standards.

A Dead Knell to Tacit Understanding ?

Singh v YM Sales is a 1999 decision of Madam Justice Pepall of the Ontario Superior Court. The court found that there was no evidence that the offending documents were agreed to at the time the plaintiff was hired.  The court agreed with the proposition that if the defence argues forbearance, it needs evidence to show that the plaintiff was so advised. The fact that the plaintiff had somehow believed that he might be fired will not cut it. This decision makes perfect sense. There needs to be direct evidence not a “tacit” understanding or mystical belief that termination will follow.

Did the OCA nix Forbearance as Consideration ?

Relying upon the Court of Appeal decision in Francis v CIBC, the Court of Appeal in its 2004 reasons in Hobbs v TDI Canada, stated that it is not permissible to present employees with changed terms of employment, threaten to terminate should they not agree and rely upon consideration of continued employment, should they do so. This note strikes a sharp spear into the forbearance argument as this is exactly what forbearance is, namely a threat to exercise a legal right such as termination, presumably legally, if you fail to sign this agreement:

The governing legal authority in the circumstances of this case is Francis v. Canadian Imperial Bank of Commerce 1994 CanLII 1578 (ON CA), (1994), 21 O.R. (3d) 75 (C.A.).  Francis makes it clear the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the new terms.

With respect, this may be a liberal interpretation of Francis, if this is read to suggest forbearance will not be adequate consideration. Francis is discussed elsewhere. It was not a case of forbearance.

The Court of Appeal in Hobbs did, however, state, that Maguire should be applied with scrutiny and that there should be clear evidence of “increased security of employment”:

  The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality of bargaining power between employees and employers.  Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, but once they have been hired and are dependent on the remuneration of the new job, they become more vulnerable.  The law recognizes this vulnerability, and the courts should be careful to apply Maguire and Techform Products only when, on the facts of the case, the employee gains increased security of employment, or other consideration, for agreeing to the new terms of employment.

This line of thought was continued again by the Ontario Court of Appeal in the decision of Braiden v La-z-Boy in which the court found the evidence of “sign or lose your job” would not be sufficient to show forbearance and that the employer must lead evidence of “enhanced security of employment”:

   I accept that if an employer provides consideration beyond mere continued employment, the employee may be bound by the modified terms of the agreement.  Techform is a case in which additional consideration flowed.  In Techform, the court found that the employer had implicitly promised the employee that it would forbear from exercising its right to terminate the employee for a reasonable period, thus enhancing the employee’s security of employment.

[60]         There is no such finding in the present case.  Indeed, there is no evidence on which such a finding could be made.  La-Z-Boy chose to lead no evidence.  The testimony of Messrs. Braiden and Douglas, which the trial judge accepted, was that he was given a choice:  sign or lose your job.  There is no evidence that he received anything that might be considered to amount to “enhanced security of employment”.  All that Mr. Braiden received for signing the Agreement was continued employment and, as previously stated, mere continuance of employment is not consideration.

The Ontario Court of Appeal repeated this proposition in 2017 that new consideration is required to support a variation to an existing contract. ² In the same case, the Court of Appeal did note that the law is different in the context of a new company buying the assets of the prior employer and then extending new contract terms to an employee of the vending company. This is not a variation but rather a new contract of employment. Further, the continuity of employment sections of the ESA do not apply to alter this conclusion.

The Alberta Court of Appeal in  Globex Foreign Exchange Corp v Kelcher in a split decision also stated that continued employment is not consideration:

[87]           I do not find it necessary to consider in detail the Ontario Court of Appeal cases discussed by Slatter J.A. since each turns largely on its own facts. The Ontario Court of Appeal takes the same view of Maguire as I do (and as did CA No 1): continued employment alone does not provide consideration for a new covenant extracted from an employee during the term of employment because the employer is already required to continue the employment until there are grounds for dismissal or reasonable notice of termination is given.

Of some note is the dissenting view of Slatter J.A. who opined that a tacit agreement should satisfy the test:

In Alberta, Maguire, Gestetner and Maier are the binding authorities. The facts of this appeal are not similar to those in Hobbs or Francis, and it is not necessary to express any conclusive opinion on those cases. The results in Francis and Braiden seem artificial, especially since those employment relationships continued for many years after the changes, and the decision in Hobbs was likely driven by the high handed conduct of the employer in that case. It follows that in most employment cases, the law in Alberta will recognize an implied “tacit agreement” to forbear from exercising the right to terminate the contract as being sufficient consideration to support any changes in an ongoing employment relationship.

Slatter J.A. in his dissent continued to offer the view that at the very least an employee who has been present with and accepted a contractual term in the course of employment should be estopped from denying the covenant, due apparently to his tacit acceptance of the term and although not stated, prejudicial reliance by the employer.

Consideration a Legal Fiction ?

The dissent continued to assert the position that consideration required for a contractual variation in an existing relationship is nothing but a legal fiction which should be revisited. This is discussed immediately below.

 Direct Words of Forbearance

Hence, it would appear based on the modern case law, that consideration will be seen where there are direct words of forbearance expressed. Hence should the employer state, for example:

1. Here are your new terms of employment (as they may be);
2. You may choose to reject these terms and if you do, your employment will be terminated, in which case the company will provide to you all statutory terms of notice and severance, as may be applicable and fair common law compensation;
3. Should you choose to accept these new terms, the company will refrain from terminating your employment at this time and will agree not to do so for a reasonable time period from this date forward, but in any event not less than {12 months}.

One might expect a few questions arising from such communication, such as (1) what is fair common law notice ? (2) how long is the time period of forbearance in paragraph 3 ? Based on the current case law, it would appear that these questions need not be answered specifically, but a certain time period would help the cause dramatically.

Alternatively the employer may give working notice of the variation. For example:

1. Harry, effective 12 months from now, your employment will be terminated. You may continue, however, your employment, should you agree to accept the new terms and conditions at attached.

Or:

2. Harry, here are the new terms and conditions of your employment effective 12 months from now. Have a great day.

In either case, in Ontario, severance pay will still be payable. These examples presume 12 months is the correct common law notice period.