Material Change
A substantive change in an existing employment contract cannot be effected without supporting consideration. Typically the court will look to these issues to determine if the revision is one which meets the test of a new enforceable contract term:
1. When was the original employment agreement formed?
2. If there is an existing contract, is the change being made material?
3. If so, is there fair consideration to create the new bargain?
First Day of Employment - Contract Fails
Trusty Francis sued CIBC for wrongful dismissal, which involved an employment contract which on its face, limited the severance claim to three months’ notice. Mr. Francis was successful at trial before Mr. Justice Hoilett and awarded 12 months’ notice.
Mr. Francis joined the Bank’s employ a few months shy of age 33. Following two interviews, he received an offer of employment in writing dated June 9, 1978 which was accepted. There was no reference to a termination term. When he presented himself for his first day of employment, he was met with a welcoming “Employment Agreement” which contained the limiting term. The Bank presented no evidence respecting the manner of its delivery to him.
The Court of Appeal, in its decision released on November 23, 1994, concluded that new or additional consideration was provided to support a variation of the existing agreement and hence agreed with the trial judge that there was no consideration to support the variation. This decision has become a touchstone for the argument of lack of consideration in later cases.
When was the Contract Formed – a Wrinkle on the Need for Fresh Consideration
On remarkably similar facts, a contrary decision was reached by the B.C. Supreme Court in Bern v AMEC., released in June of 2007. The plaintiff asserted that following a verbal agreement to commence employment which was made on May 25, 1987, he began work on June 8, 1987 and was then presented with an employment agreement, containing the usual limiting term. This became the controversial issue.
His evidence was that the need to sign an employment agreement was discussed at the May 25 meeting, but it was not presented until June 8, 1987.
In 1998, Bern was sent to work for a US affiliate. His employment with the Canadian company was terminated and there was no guarantee of returning to work with the Canadian company. He did rejoin the Canadian company one year later at which time no contract was signed.
In 1993 the company suffered an economic slowdown. By a letter agreement dated July 8, 1993, Bern entered into a work sharing plan, one term of which contained a limiting severance provision, given his return to work as a full-time employee, which was effected in April of 1994. The same agreement was repeated on February 25, 1999 due a second slow period.
It would be an obvious conclusion that the 1993 agreement is supported by consideration, given the evident forbearance and other terms which benefited the plaintiff.
It is remarkable, however, that the trial judge also found that the 1987 agreement was supported by consideration. There was some evidence offered at trial that the benefits plan was explained to the plaintiff when the agreement was presented on the first day of employment. It would be a stretch to see this as fresh consideration. The reasoning provided was as follows:
[35] The argument that the 1987 Agreement purports to alter an oral contract of employment and fails for want of consideration cannot be, in my view, maintained. I conclude that it is clear that the contract of employment was not completed during the oral discussions of May 1987. The plaintiff acknowledges that he left that meeting understanding that there would be an employment agreement to sign. The contractual relationship between the parties did not crystallize until the plaintiff reviewed all the terms of the contract, including the details of benefits and signed the 1987 Agreement. The plaintiff did not begin performing his duties of employment until that point in time.
This decision is, with respect, nonsense, but there you have it. Clearly the time to put all the terms on the table is when the offer is made and accepted, not the first day of employment.
Baker v BC – No Consideration – Contract Fails
Baker v BC Insurance was a 1992 trial decision of Madam Justice Prowse. In 1981 the plaintiff bought a general insurance business. In the spring of 1984 the defendant bought the business. The plaintiff’s employment continued with the new buyer. The plaintiff agreed that at all times through his employment, he was bound by an employment contract, at times its terms were verbal and at times in writing. On August 12, 1991, there was a material change implemented, allowing the employer to terminate on 90 days’ notice. The next day, he was terminated. The trial judge found that there was no consideration to support the agreement and awarded 12 months’ notice.
On appeal, the employer took no issue with the failure of consideration and argued a new point, which was not successful. This decision is referenced as it is cited in later decisions.
Limiting Provision a New Term Requiring Consideration or Part of Former Agreement Requiring None ? OCA
Hobbs v TDI Canada is a December 2004 decision of the Ontario Court of Appeal. As noted, it overturned the trial decision of Mr. Justice Peter Jarvis, who had dismissed the plaintiff’s case.
From March 1994 to December 31, 1999, Hobbs was employed by Urban Outdoor, a supplier of billboard and transit advertising. His salary ranged from $120,000 to $150,000 annually. Urban Outdoors lost its largest client, Toronto Transit Commission to TDI in November of 1999 and was required to lay off several employees. Hobbs, however, was retained and assigned to a division known as Cieslok Outdoor.
TDI began recruiting staff, including former Urban Outdoor employees. It also approached Hobbs and met with him three times through to December 15, 1999. Hobbs was verbally given terms of a commission plan and a verbal offer of employment on December 16, 1999. On each occasion he replied by asking for written terms.
On December 22, 1999, Hobbs was given a letter dated December 16, 1999, and setting out a start date of January 4, 2000, an annual draw against commissions and a statement that “details on the rates, calculation and payment of commissions shall be provided to you in a separate document”. Hobbs’ objection that the letter did not specify the commission rates as had been discussed previously was met with the rejoinder, in effect, “trust us”. Hobbs signed the letter agreement that day, deleted the non-competition clause and gave notice to his then employer the same day.
On January 10, 2000, TDI gave Hobbs a new agreement known as a “Solicitor’s Agreement”, told him that its terms were non-negotiable and he had no choice but to sign it, if he wanted to be paid. Hobbs signed this agreement on January 12, 2000, which was one day prior to his first paid draw.
The Agreement did set out the commission rates which had been orally agreed, but it also allowed the employer the right to alter same at any time with impunity. Also it stated that commissions were payable only if the employee was employed when payment was received by the employer. Other terms were included which were prejudicial to Hobbs and not discussed previously.
Various issues arose with respect to the commission calculation. Hobbs was told that he must earn his complete annual draw, not prorated monthly, prior to commissions being paid and all his sales were collected.
Hobbs gave notice to TDI on May 12, 2000 that he would leave the end of that month. By that date, Hobbs had earned commissions of $76,043. He had but received his monthly draw of $5,000 per month and a monthly car allowance of $300 per month. The commission sum of $76,043 represented commissions for all contracts sold by Hobbs which had been billed by the end of May. Contracts actually sold by Hobbs totaled $3.1 million which would have generated total commissions of $153,321. Many of these contracts were billed after Hobbs’ departure.
TDI, a US based company with a local office, paid Hobbs his draw to his last date of active employment of $24,423, and relied on the Solicitor’s Agreement to rationalize this position. It was undisputed, that failing his resignation, Hobbs would have received all his commissions.
At trial, Hobbs’ claim failed. The trial judge concluded that the letter of December 16, 1999 and the Solicitor’s Agreement were “best viewed as one contract in two instalments executed over a very short time”. On appeal, sanity prevailed. The trial judgment was set aside and a commission claim was awarded.
The reasoning of the Court of Appeal was threefold to show that the second agreement was discrete and hence required fresh consideration.
Firstly, there was no reference in the initial letter of December 16, 1999 to the need to execute a second agreement.
Secondly, the Solicitor’s Agreement could not be regarded as a second part of the original contract as it contained terms which were at odds with the commission structure which had been agreed.
Thirdly, the second terms were given to Hobbs after he had been hired.
For these reasons, the Solicitor’s Agreement was a term, amending the existing contract and not part of it. Hence the amendment required consideration to be effective.
The Court of Appeal cautioned trial judges in the application of Maguire and to look for real consideration to support the effectiveness of a new contractual term. This decision spoke to the inequality of bargaining power expressed by the Supreme Court referenced in the interpretation section above.
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.
Inherent Vulnerability
The Ontario Court of Appeal noted that in Braiden v La-z-Boy that in the employment context, recognition must be given to the inherent vulnerability of the employee’s circumstance which provided added momentum for the new consideration to support the enforceability of a limiting term:
The requirement of consideration to support a change to the terms of an 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 job, they become more vulnerable.
[50] Recognition of this vulnerability is now so firmly embedded in the jurisprudence that it need hardly be recited. In Ceccol v. Ontario Gymnastic Federation 2001 CanLII 8589 (ON CA), (2001), 55 O.R. (3d) 614 at paras. 47 - 48 (C.A.), MacPherson J.A. summarized the jurisprudence in the following terms:
In an important line of cases in recent years, the Supreme Court of Canada has discussed, often with genuine eloquence, the role work plays in a person’s life, the imbalance in many employer-employee relationships and the desirability of interpreting legislation and the common law to provide a measure of protection to vulnerable employees [citations omitted].
These factors have clearly influenced the interpretation of employment contracts. In Wallace, Iacobucci J. said, at pp. 740-41:
The contract of employment has many characteristics that set it apart from the ordinary commercial contract. Some of the views on this subject that have already been approved of in previous decisions of this Court (see e.g. Machtinger, supra) bear repeating. As K. Swinton noted in “Contract Law and the Employment Relationship: The Proper Forum for Reform”, in B.J. Reiter and J. Swan, eds., Studies in Contract Law (1980), 357, at p. 363:
… the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.