A hallmark of “Contracts 101,” consideration (something of value in the eyes of the law, colloquially referred to as the “peppercorn rule”), is necessary for a legally binding contract. For most contracts, at least (as those tracking developments in this area since Rosas v Toca, 2018 BCCA 191 [Rosa] are aware). According to a recent B.C. Court of Appeal case, employers must provide fresh consideration to change an existing employment agreement. Although it is not yet clear whether Rosa applies in the employment context, going forward employers are well advised to ensure fresh consideration is provided when amending existing employment agreements.
Quach v Mitrux Services Ltd. et al, 2020 BCCA 25
Tri Quach (“Quach”) signed a one-year employment contract with Mitrux Services Ltd. and Ameri-Can Freight Systems Inc. The contract provided for a one-year term of employment at an annual salary of $138K (the “First Contract”).
Subsequently, after seeking legal advice, the employer asked Quach to agree to a month-to-month contract, and the parties signed a second contract. The contract provided for month-to-month employment, terminable upon four weeks’ written notice or payment of one month’s salary in lieu of notice (the “Second Contract”).
Shortly after, Quach was terminated. He sued for damages for wrongful dismissal on the basis of the First Contract. The employer alleged cause and advanced the Second Contract. Quach was successful at trial where the court found the Second Contract lacked consideration. The employer appealed.
On appeal, the employer argued the Second Contract was operative on the basis of (1) clause 2.2 of the Second Contract which provided the employer would waive the probationary requirements under the Employment Standards Act, RSBC 1996, c 113 (the “Act”) (for Quach’s benefit); and, (2) the employer promised to pay Quach $1,000 to cover the legal fees he incurred to draft the First Contract (also for Quach’s benefit). The BCCA upheld the trial decision in part and found the Second Contract was unenforceable due to a lack of consideration.
Writing for a unanimous court, Saunders JA. observed that in the context of employment contracts, consideration must be reciprocal. For employers, consideration consists of the employee’s services; for employees, consideration consists of pay and other benefits flowing on performance of services (para 12). Following Singh v Empire Life Ins. Co., 2002 BCCA 452, although employment contracts may be modified, “modification of a pre-existing contract will not be enforced unless there is a further benefit to both parties” (para 13). That benefit, the decision suggests, is consideration.
The court turned to the substance of the Second Contract. It noted that the evidence showed “the [First Contract] was concluded and replaced by an arrangement favourable to the employer and unfavourable to the employee.” For example, the alleged consideration set out clause 2.2 of the Second Contract was deficient (para 14). Clause 2.2 read:
2.2. In consideration of the termination of the prior Employment Agreement, the Employer agrees to waive probationary requirements as set out by the Labour Standards of BC and will adhere strictly to the terms of Termination of Employment.
The court found the clause “provides no consideration, although it pretends to do so.” The reference to “probationary requirements” may be a reference to the three month period during which an employee is not entitled to termination pay (pursuant to section 63 of the Act), however, observed Saunders JA., section 63 did not apply in the circumstances because the Act “establishes a floor of standards, and does not interfere with higher standards resulting from the common law, or contracts of employment” (para 15). In short, the clause did not benefit Quach and did not constitute consideration for giving up the First Contract.
The employer pointed to its promise to reimburse Quach $1,000 for the legal fees he incurred to draft the First Contract as evidence of consideration. The court rejected that assertion on the basis that the supporting evidence was “vague”: no reference is made to $1,000 in the Second Contract. The terms of the Second Contract were not settled when the employer offered $1,000, and, in any event, Quach never received $1,000 upon signing the Second Contract, or at any time thereafter (para 20).
In the result, the court found “[t]he Second Contract was premised upon the cancellation of the Fixed-Term Contract for consideration, but no consideration was provided (para 21).