Does Continued Employment Constitute Consideration? A Comment on Kohler Canada Co. v. Porter

August 1, 2003
Author: Sean C. Doyle
OBA Labour Relations Newsletter

The Ontario Superior Court recently considered the circumstances in which continued employment may constitute valid consideration for a post-hire employment agreement.

Background

Mr. Porter commenced employment with Kohler Canada in 1988, and by 1999 had assumed overall sales responsibility for central and western Canada. In 2001 he was first presented with – and ultimately signed – an employment agreement containing a covenant prohibiting competition against Kohler anywhere in North America for one year following the termination of employment. The stated "consideration" for the agreement was Mr. Porter’s "employment status with Kohler and the payment of salary during such employment". Mr. Porter subsequently resigned from Kohler in 2002, having accepted a sales position with Mansfield Plumbing Products. As a result, Kohler sought an interlocutory injunction restraining Mr. Porter from working from Mansfield on the basis that such employment contravened the employment agreement.

Continued Employment as "Consideration"

Molloy J. commenced her analysis on the enforceability of the employment agreement by considering the appellate jurisprudence on the validity of continued employment as consideration. In Maguire v. Northland Drug Company Limited,3 the Supreme Court of Canada determined that continued employment constituted valid consideration. In that case, an employee had been employed for 11 months when he signed an employment agreement containing a restrictive covenant. The Court noted that the employer was entitled to dismiss the employee upon the expiration of one months’ notice, and that it had tacitly promised the employee that it would not dismiss him if the agreement were signed. Moreover, the Court found that the employee understood that his refusal to sign the agreement would have resulted in the termination of his employment.

In Francis v. Canadian Imperial Bank of Commerce,4 the employee accepted a written offer of employment subject only to the receipt of a satisfactory reference. Approximately three weeks after accepting the offer – and on his first day of work – the employee signed a number of documents, one of which was an employment agreement limiting the period of reasonable notice in the event he was dismissed without cause. The Ontario Court of Appeal determined that the contract of employment was formed when the employee accepted the offer of employment and provided the satisfactory reference, and that the document containing the termination provision was void for want of consideration. Continued employment could not constitute consideration, the Court reasoned, because it was already contractually required to provide such employment pursuant to the initial contract. Moreover, the Court noted that nothing in the subsequent employment agreement contained any provisions detrimental to the interest of the employer such as to constitute fresh consideration.

In Techform Products Ltd. v. Wolda 5 the Ontario Court of Appeal determined that an employer’s tacit forbearance from dismissing an independent contractor could indeed constitute valid consideration for an amendment to the employment contract. In that case, the contract enabled the employer to dismiss the independent contractor upon providing sixty days’ notice, and the independent contractor later signed a subsequent contract assigning technology rights to the employer. The trial judge found that the independent contractor understood that his contract would be terminated if he did not sign the technology agreement, and accepted that the employer would have terminated him by providing sixty days’ notice if he did not sign the agreement. As a result, the Court of Appeal held, there was valid consideration for the agreement.

Applying the foregoing authorities to the instant case, Molloy J. determined that the restrictive covenant was void for want of consideration. In reaching this conclusion, she noted that there was no evidence that Kohler had a "present or prior intention" to dismiss Mr. Porter around the time that he was presented with the agreement, nor that it would have fired him as a result of his refusal to sign the contract. There was also no evidence that Mr. Porter believed that he would be fired for not signing the agreement. On this basis alone, Molloy J. distinguished the case from Maguire and Techform, in which the employment relationship would have been terminated had the subsequent agreement not been executed.

Perhaps most importantly, Molloy J. reasoned, Kohler would not have been entitled at law to dismiss Mr. Porter for refusing to sign the agreement because, having been employed for 13 years prior to that time, he would have been entitled to a significant period of notice, likely in the range of 12 months. With respect to the stated "consideration" of continued employment and salary payments, Molloy J. held that this was something to which Mr. Porter was already entitled under his existing employment, and consequently could not constitute fresh consideration. As Kohler had failed to establish a strong prima facie case, Molloy J. did not consider the remaining branches of the RJR-MacDonald test, and dismissed the motion.6

Conclusion

In Kohler Canada, the court reiterated that continued employment, on its own, does not constitute valid consideration. The cases suggest that in order for continued employment to qualify as consideration, there must be objective evidence that the employer intended to dismiss the employee – or that the employee believed he or she would be dismissed – if a post-hire agreement is not executed. Even here, however, it is likely that the evidence must demonstrate not only an intention to dismiss an employee, but that the employee would have received common law notice or damages in lieu if he or she did not sign the post-hire agreement.

[2002] O.J. No. 2418 (S.C.J.) (hereinafter, "Kohler Canada").
Loopstra Nixon LLP, (416) 746-4710, sdoyle@loonix.com.
[1935] S.C.R. 412 (hereinafter, "Maguire").
(1994), 21 O.R. (3d) 75 (C.A.).
(2001), 56 O.R. (3d) 1 (C.A.) (hereinafter, "Techform").
Even if valid consideration had existed, Molloy J. held that the restrictive covenant was void on the basis of its temporal and geographic restrictions.