THE CANADIAN EMPLOYEE COMPETITION BLOG

The British Columbia Court of Appeal radically altered the law of consideration last year in Rosas v. Toca. The Court held that, absent duress, unconscionability or other public policy concerns, a mid-contract variation will be enforceable as long as the parties agree to the variation. Against Rosas stand judicial presumptions of an inequality of bargaining power between employers and employees and public policy favouring employee mobility. It is argued here that these presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants entered into without fresh consideration.

Courts routinely have required fresh consideration to enforce restrictive covenants agreed to by employees after work has commenced. However, the British Columbia Court of Appeal’s radical alteration of the law of consideration may open the door to enforcement of such covenants in Canada and elsewhere, even in the absence of fresh consideration.

In Rosas v. Toca, 2018 BCCA 191, the Court, after reviewing developments in the law of consideration in Canada, the UK, the US and elsewhere, articulated the test for enforceability of mid-contract variations as follows:

When parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid term unenforceable. A variation supported by valid consideration may continue to be enforceable for that reason, but a lack of fresh consideration will no longer be determinative.
(at para. 183)

While the subject matter in Rosas was not a restrictive covenant, notably the Court relied in part on a dissenting judgement from the Alberta Court of Appeal, wherein the minority would have enforced non-solicitation covenants executed after two employees had commenced work and absent fresh consideration. The dissenting Justice in that decision, Globex Foreign Exchange Corporation v. Kelcher, 2011 ABCA 240, opined that the “primary purpose” of consideration:

…is to draw a line between gratuitous or morally based promises, and legally enforceable obligations. It was never intended to provide an easy escape mechanism for parties who have second thoughts about the covenants they agreed to, and that they intended to bind them.
(at para. 134)

The dissenting Justice continued:

In this case none of the employees were “caught by surprise”. They knew exactly what terms their employer was proposing for them, they agreed to them, and both the employer and the employees thereafter conducted their affairs as if the “going-transaction adjustment”, in the form of the non-solicitation clause, was binding. Invoking the law of consideration after the fact is the invocation of a legal fiction in aid of a particular result.
(at para. 136)

Against these pronouncements in Rosas and Globex stand judicial presumptions about inequality of bargaining power in employer-employee relationships and public policy favouring mobility of employment. It is argued here that these judicial presumptions are so pervasive in the approach of Canadian courts to employment cases and restrictive covenants that the courts should not extend Rosas to enforcement of restrictive covenants, but for now the matter is an open question.

Background

The headnote from the B.C. Court of Appeal provides a concise summary of the factual background to Rosas and the trial court decision that was under appeal:

The appellant won the lottery and loaned $600,000 interest-free to her friend. Approximately one year after the loan was formed, the appellant’s friend told her “I will pay you next year”, and the appellant agreed to the extension on payment and declined to bring suit. This request was repeated for several years, but the loan was never repaid. Eventually, the appellant brought a claim against her friend. At trial, the judge found that the original term of the loan was for one year, and, based on the original repayment date, the limitation period had expired. The judge held that the subsequent promises from the friend to repay a year later were unenforceable for lack of consideration as the friend was already under an obligation to pay. The appellant’s claim was therefore dismissed as statute-barred.

The Decision

The Chief Justice indicated the Court’s intention to overturn the decision in the introductory paragraph, writing:

It has been famously said that “hard cases make bad law”; sometimes, however, hard cases make new law. Or, at least, they very much encourage the court to do so lest we give credence to Mr. Bumble’s lament in Oliver Twist: “If the law supposes that…the law is a ass”.
(at para. 1)

From here, the Court traced the evolution of the law of consideration in Canada, the UK, US and elsewhere in arriving at its reformulation of the law regarding mid-contract variations.

The Globex decision, which pre-dates Rosas, is the most recent significant Canadian decision to address enforceability of restrictive covenants obtained without consideration after commencement of work. No Canadian courts have returned to this question as of yet to consider Rosas. In the writer’s view, there is ample reason to expect the courts may not enforce such covenants, given the exceptions noted in Rosas for duress, unconscionability and “other public policy concerns.”

Canadian courts have repeatedly recognized an imbalance of bargaining power between employers and employees. This recognition has led the judiciary to insist on consideration as a pre-requisite to enforcement of important modifications to employment contracts. As stated by the Ontario Court of Appeal:

The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality in 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.

Hobbs v. TDI Canada Ltd., 2004 CanLII 44783 (ONCA), at para. 42

The same Court later relied on this statement of the law in another decision, refusing to enforce a severance clause introduced by the employer nine months after the commencement of employment and without fresh consideration.⁴

While the presumption of an inequality of bargaining power does not rise to the same level of concern underlying duress and unconscionability, the presumption is so widely accepted in Canadian law that, in the writer’s view, the courts will be wary of enforcing restrictive covenants entered into without consideration. Given Hobbs and other decisions, it would not be a leap for the courts to postulate that an employee who has already been hired will be vulnerable and feel little choice but to agree to a restrictive covenant provided by the employer after the commencement of work.

A further public policy concern which will influence the debate is the express promotion by the courts of employee mobility. Under Canadian common law, restraints of trade are contrary to public policy, being an interference with individual liberty and employee mobility. The Supreme Court of Canada⁵

has endorsed the following statement of Lord Macnaghten in the seminal decision of the House of Lords in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535:

The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule.
(at p. 565)

However, recognizing the freedom to contract, restraints of trade found to be reasonable will be enforced.

The confluence of these concerns about unequal bargaining power and the protection of employee mobility was at the forefront of a Supreme Court of Canada decision refusing the application of notional severance to employee restrictive covenants. In Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, the Court refused to apply notional severance to a covenant prohibiting competition in the “Metropolitan City of Vancouver.” At the time, no such legal entity existed and the employer argued for the substitution of several individual municipalities for that term.

The Court refused the invitation, noting that the application of notional severance to restrictive covenants would provide no incentive to employers to draft such clauses in a reasonable manner:

Not only would the use of notional severance change the terms of the covenant from the parties’ initial agreement to what the court thinks they should have agreed to, it would also change the risks assumed by the parties. The restrictive covenant is sought by the employer. The obligation is on the employee. Having regard to the generally accepted imbalance of power between employers and employees, to introduce the doctrine of notional severance to read down an unreasonable restrictive covenant to what is reasonable provides no inducement to an employer to ensure the reasonableness of the covenant and inappropriately increases the risk that the employee will be forced to abide by an unreasonable covenant.

For these reasons, the doctrine of notional severance does not apply in respect of restrictive covenants in employment contracts.
(at paras. 41-42)

Here, we see the Court recognizing the leverage employers have when negotiating restrictive covenants and also acting to preserve employee mobility by incenting employers to draft reasonable restrictive covenants at the outset of employment.
It is unlikely the courts will want to provide motives to employers to hold off on presenting restrictive covenants until after employment has commenced. An application of Rosas to uphold such covenants in the absence of consideration would encourage some employers to delay bringing forward such clauses, anticipating they will have more leverage once employment has commenced than during the contract negotiation stage.

Conclusion

Inevitably, the courts will be faced with the question of enforceability of a restrictive covenant entered into by the parties without fresh consideration. The presumption of unequal bargaining power, while not raising the spectre of illegitimate pressure as do duress or unconscionability (doctrines specifically mentioned in Rosas), nonetheless has a significant influence on the courts when interpreting and ruling on employment contracts. That influence will be magnified, it is suggested, when coupled with the public policy of protecting employee mobility.

In the writer’s view, these concerns put the application of Rosas to restrictive covenants in doubt. However, we are at the early stages of this development in the law, which likely will play out over time not only in Canada but elsewhere. The evolution of the law in this area promises to be interesting, given the interplay of the various policies at stake and the wealth of jurisprudence and academic commentary on reform of the doctrine of consideration.

In the interim, those tasked with drafting such covenants are best to continue to include consideration in exchange for the agreement to be bound. At the same time, counsel tasked with persuading a court to uphold a covenant agreed to without fresh consideration have a new weapon in their arsenal in light of Rosas.