A valid contract requires both parties to receive consideration – that is some benefit that they receive in exchange for entering into the contract. In the employment law context, this means that an employment contract will not be valid or enforceable if it is entered into after the employee commences employment and does not provide for the employee to receive some benefit that they were not already receiving.
The Courts have held that the need for fresh consideration is especially important in the employment context, where there is generally an inequality of bargaining power between employees and employers. Once an employee has been hired and is dependent on the remuneration of the job, they become more vulnerable and should be protected from being forced to agree to new terms.
For instance, the Courts have found that employers are not permitted 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.
This principle was applied in the recent Ontario Court of Appeal decision of Goberdhan v. Knights of Columbus, in which the Court declined to enforce an arbitration clause contained in an employment contract that was found to lack fresh consideration.
The Goberdhan decision is significant because generally, the Courts will enforce arbitration clauses whenever the legal dispute “arguably” falls within the scope of the arbitration clause. A Court will only decline to do so when it is clear that the arbitration clause is unenforceable or that it does not apply.
The Goberdhan decision was a somewhat rare example of a Court declining to enforce an arbitration clause on the basis that the employment contract containing the clause was void for lack of fresh consideration.
The lower court decision
The employee, Neil Goberdhan, commenced a claim for wrongful dismissal against Knights of Columbus, the company that he had worked for for 8 years. The contracts between the parties stipulated that Mr. Goberdhan was an independent contractor, while Mr. Goberdhan claimed that he was in fact an employee.
Mr. Goberdhan signed three contracts with the company during his tenure, the second and third of which contained a mandatory arbitration clause requiring the parties to submit disputes to arbitration rather than through the Courts.
After Mr. Goberdhan commenced litigation against the company, the company brought a motion to stay (i.e. suspend) the lawsuit pursuant to section 7 of the Arbitration Act, 1991.
The lower Court found that the second and third contracts lacked fresh consideration, and were invalid. Accordingly, the Court found that arbitration clauses were invalid for the same reason, and dismissed the company’s motion to stay the lawsuit. By doing so, the Court allowed Mr. Goberdhan to continue his lawsuit in the Courts.
The Court of Appeal decision
The company appealed the decision. The Court of Appeal accepted that a motion to stay a lawsuit in favour of arbitration should only be dismissed in a “clear case”, and further, that where the validity or enforceability of the arbitration clause is arguable, but not clear, the lawsuit should be stayed in favour of arbitration, and the issue should be resolved by the arbitrator.
However, the Court of Appeal found that “this was a clear case where the motion judge was able to determine the question at issue – whether there was fresh consideration to support the contracts containing arbitration clauses – on the evidence before him.”
Both the lower Court and the Court of Appeal rejected the company’s arguments that Mr. Goberdhan received fresh consideration for the second and third contracts as a result of the jurisdiction and dispute resolution clauses contained in the contracts. Both Courts found that Mr. Goberdhan did not receive a benefit as a result of those clauses.
Accordingly, the Court of Appeal dismissed the appeal and upheld the decision to dismiss the company’s motion to stay the proceeding.
Takeaways
Because of the Courts’ approach towards arbitration clauses, it is more common for stay motions to be successful rather than unsuccessful. Generally, where it is arguable that an arbitration clause is valid and enforceable, the Courts will stay the litigation in favour of arbitration, and will allow the arbitrator to make a final determination about the enforceability of the clause.
However, the Goberdhan decision was an example of a Court not only finding that an employment contract was invalid due to a lack of consideration, but also finding that such a determination was clear enough to allow the Court to disregard the arbitration clause and allow the litigation to continue through the Courts.
This case stands as an example of the need to properly draft employment contracts and ensure that proper consideration is given to the employee. Failing to do so could mean that an otherwise enforceable employment contract is of no force and effect.
By Alex Minkin
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