Devil's In The Detail Or Employment Contracts Redux*: The Twelve Most Common Avoidable Drafting Errors

Aim at perfection in everything, though in most things it is unattainable. However, they who aim at it, and persevere, will come much nearer to it than those whose laziness and despondency make them give it up as unattainable. - Philip Dormer Stanhope, 4th Earl of Chesterfield, Letters to his Son.

The fundamental legal relationship between employer and employee is one of contract. As lawyers, we encourage our clients to have written agreements in order to avoid misunderstandings and disagreements regarding what the parties intend. Despite these good intentions, case law is replete with examples of drafted agreements where parties have dramatically different interpretations of their respective rights. The purpose of this paper is to outline the twelve most common avoidable drafting errors and to propose possible "fixes" where an error has occurred.

Error #1 - Lack of consideration

While arguably less of a "drafting" error than a procedural error, claiming an agreement is not supported by "consideration" is the most common technique used by employees to avoid the scope and ambit of an employment agreement. Consideration is the simple legal principle that each party to a contract must give and receive something in order to make a contract binding.

If an employee was already working for an employer at the time of the employment agreement, no "fresh consideration" can be said to exist for the offering of a written employment agreement. The old legal adage "past consideration is no consideration" often serves to defeat employers' expectations.

Traditionally, the court has held that the right to continued employment was consideration enough for the enforceability of a written agreement executed after the start of employment. Occasionally, courts have held that where an employer has the legal right to terminate employment, the employer's decision not to exercise the right to terminate the employee is sufficient consideration for the enforceability of the agreement.

The vast majority of contemporary courts, however, have now implicitly and explicitly rejected "continued" employment as sufficient consideration or have restricted the applicability to very narrow circumstances.

A relatively modern analysis of the doctrine is found in Hobbs v. TDI Canada Ltd., where Allan Hobbs was actively recruited by TDI Canada Ltd.1 While interested, Hobbs made it clear that he would not resign from his current employment without a firm written offer. A simple offer was drafted, which covered start date, job title, advance on commission, statutory holidays, vacation and benefits. Although the parties had negotiated a commission structure, the offer letter merely advised that rates, calculation and payment terms would be provided in a separate document. A detailed confidentiality agreement was also included. Both the offer and the confidentiality agreement were signed by Allan Hobbs. Mr. Hobbs started employment on January 4, 2000 and was subsequently presented a document entitled "Solicitor's Agreement." Mr. Hobbs was explicitly advised that the terms and conditions were "non-negotiable" and that if he wanted to be paid the commissions he had already earned, he had "no choice" but to sign the agreement.

A dispute arose regarding when commissions would be paid. TDI Canada relied on the restrictions in the "Solicitor's Agreement" and refused to pay anything but the basic draw and car allowance until the clients had paid TDI Canada in full. Allan Hobbs resigned on the basis that TDI Canada's conduct was not pursuant to his original understanding of the commission terms and ultimately sued for the commissions he felt were owing to him, approximately another $53,000 on top of the roughly $24,000 already paid to him.

Although TDI Canada was successful at trial on the basis that it was clear that Allan Hobbs would have been fired had he refused to sign the agreement, the Court of Appeal disagreed. Relying on a 1994 decision, Francis v. Canadian Imperial Bank of Commerce,2 the Court concluded bluntly:

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.3

In addition to the outstanding condition of $52,778.81 in commission and interest, TDI Canada was liable to pay over $85,000 in legal costs.

In my opinion, the best attempt to resolve the inherent tension between the depression-era decision of the Supreme Court of Canada in Maguire v. Northland Drug Co.4 and the more modern Ontario Court of Appeal case of Francis, is Madame Justice Molloy's analysis on an interim injunction application in Kohler Canada Co. v. Porter:

The principles of law set out in Techform and Maguire are, of course, applicable and binding upon me in this case. However, the facts of the case before me are strikingly different from those before the courts in Techform Products Ltd. and Maguire. In this case, there is no evidence that Mr. Porter thought he would be fired if he did not sign the employment agreement presented to him ... nor is there any evidence that Kohler said anything to him about termination. ... Kohler would not have been entitled at law to dismiss Mr. Porter for refusing to sign the agreement. Having been employed by Kohler for 13 years prior to that time, Mr. Porter would have been entitled to a significant period of notice, likely in the area of 12 months or so. ...

In the case before me, there was no consideration flowing to Mr. Porter in exchange for his promise to give up the right to work for any competitor of Kohler for a one year period post employment. The stated consideration of continued "employment status with Kohler and payment of salary during such employment" are things that Mr. Porter was already entitled to under his existing employment relationship with Kohler.5

In short, while an employer is entitled to take the position that "in order to continue the employment relationship, you must sign this agreement or you will be terminated", the threat of termination must be accompanied by an appropriate termination package or severance offer. Failing to provide such an offer will leave the contract effectively signed in the face of an illegal threat of termination and, for policy reasons, unenforceable. From a practical perspective, however, employers are rightfully reluctant to threaten to terminate their productive employees and provide a package (or working notice) simply to obtain a signature on a contract.

A promotion, an increase in salary, a signing bonus, a new bonus plan, or a new stock option agreement may all be valid consideration for a new employment agreement.

In some cases, an offer of employment after the employee has resigned and after the employer has accepted the resignation may be sufficient consideration.6

An excellent illustration of the role of additional consideration is found in the Ontario Court of Appeal decision of Clarke v. Insight Components (Canada) Inc.7 Mr. Clarke had commenced employment in July 1995. The employer instituted a company-wide policy in December 2000 that all senior management levels would be subject to a termination clause that only provided for statutory minimums. In April 2001, Mr. Clarke was promoted to Managing Director for Canada with an enhanced compensation package. Several weeks later, he signed a written memorandum regarding the terms and conditions of employment which contained the termination provision. The trial judge found as a fact that when Mr. Clarke accepted the position of Managing Director, he was completely aware of the company-wide policy that required this termination provision and that it already formed part of his employment package. In short, the written memorandum simply confirmed what Mr. Clarke already knew and had accepted. Although the Court of Appeal is somewhat vague on point, the written contract could be justified on two inter-related bases:

i. The written contract simply confirmed the verbal terms and conditions of employment already agreed to by the parties; and8

ii. The enhanced remuneration and promotion constituted fresh consideration for the written agreement.9

The ideal situation is to ensure that all contracts of employment are executed well before the commencement of employment. This ideal is rarely achieved.

Where a contract has been executed after the commencement of employment, it may be appropriate to have the employee "re-fresh" the agreement in circumstances where there is true consideration (i.e., a promotion, bonus or salary increase that was not previously agreed-upon).

Although slightly beyond the scope of this article, the court may invalidate a contract that was entered into after the commencement of employment where the agreement was clearly overly-favourable to the employee. This was the case in Waddilove v. 1748960 Ontario Limited.10

The employee, Tyler Waddilove, was the former General Manager of the Muncey-Delaware Nation Paradise Bingo Hall. He entered into an agreement, after the commencement of employment, with the directors of the employer, who just happened to be his father, father's employee and his father's good friend. The new employment agreement purported to provide Mr. Waddilove a fixed seven-year term and the right to receive payment of the balance of the term if terminated. There was a clear concern regarding corruption and collusion:

Against this backdrop and under a veil of secrecy, the plaintiff drafted his employment contract removing terms from the template which protected the interests of the defendant, and enlisted his father, his father's close friend and his father's employee to execute the contract on behalf of Paradise Bingo. The remaining board member, Velma, who was the vice president and a signing authority, was unaware of the existence of the contract and did not sign the contract. To suggest...