January 1, 2002 By: Janice B. Payne
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Continued Employment May Constitute Consideration

Generally, changes made to a pre-existing contract will not be enforced unless there is a further consideration granted which supports the modification in the form of an added benefit to both parties. Traditionally, continued employment did not constitute adequate consideration. However, in overturning a lower court decision that had found an employment agreement invalid for lack of consideration and duress, the Court of Appeal in Techform Products Ltd. v. Wolda (2001), 56 O.R. (3d) 1, granted ownership of an invention to a company that employed the creator as an independent contractor. The court found, at least in the circumstances before it, that forbearance on the part of the employer from termination along with continued employment constituted valid consideration.

Facts

Tiete Wolda was employed by Techform Products Limited, a manufacturer of automotive parts in Penetanguishene, Ontario, as a mechanical engineer from 1981 to 1989. In 1989, Wolda resigned in order to move to Toronto with this his wife. At that time, Techform asked Wolda to work as a consultant on special projects for two days a week. Wolda signed a one yearrenewable consultancy agreement and became an independent contractor. The agreement stated that it could be terminated by either party on 60 days written notice. The agreement did not address the ownership of inventions. The agreement was renewed annually until 1997.

In 1992, Wolda and another Techform employee invented a “Boxless Hinge”. They had worked on the invention on their own time and without Techform's knowledge. Wolda tried to market the product to Techform's head office in Michigan. As a result of Wolda’s actions, Techform became concerned and prepared an employee technology agreement (ETA). The ETA required that the employee promptly inform the company of all inventions and that they assign all rights to Techform.

Techform presented the ETA to Wolda. After reviewing the ETA, Wolda decided that he did not want to sign it. He called his supervisor asking if the supervisor wanted him to sign it. The supervisor replied affirmatively. At that point Wolda knew that if he did not sign he would be terminated pursuant to his consultancy agreement. The supervisor testified at trial that if Wolda did not sign the ETA, Wolda would have been given his 60 days notice. At the time, Wolda was in his fifties and supporting two children. He saw no alternative but to sign the ETA. Wolda did tell his supervisor that he did not agree with the ETA and that it did not apply to him since the ETA referred to employees and not independent contractors. Nonetheless, despite these objections, Wolda signed.

In 1996, Wolda invented the 3D Hinge. Wolda billed 1,000 hours of work and received assistance from Techform employees in developing the invention. Despite this, Wolda demanded from Techform an increase in his hourly rate and a royalty of two cents to be paid to a charity on each hinge sold. Techform was outraged by Wolda’s demands and terminated him. Techform then commenced the action for a declaration that it owned the patent to the 3D Hinge.

At trial, the judge ruled that the ETA was not binding on Wolda since continued employment could not amount to consideration and in any event the ETA was entered into under duress. The Court of Appeal rejected both findings.

Decision by the Court of Appeal

Justice Rosenberg, writing for the court, noted that generally a modification to a pre-existing employment agreement will not be enforced unless there is a further benefit to both parties. The Court stated that it is a fundamental principle in the context of employment contract amendments, that in return for a new promise from an employee, the employer must give something in return to the employee that the employee was not already entitled to under the original contract. In this case, the ETA set out that as consideration that Wolda was to continue as an employee of Techform. The Court of Appeal stated that ordinarily such consideration will not be adequate since continued employment represents nothing more of value flowing to the employee than what was given under the original contract.

Nevertheless, relying upon the decision of the Supreme Court in Maguire v. Northland Drug Company Limited, [1935] S.C.R. 412, Justice Rosenberg held that there was adequate consideration given by Techform for the ETA. Justice Rosenberg stated that continued employment along with implied forbearance on the part of the employer to dismiss an employee for a reasonable period of time after the signing of the agreement will constitute adequate consideration. The court found that Techform in presenting the ETA to Wolda in the circumstances of this case, was tacitly promising not to dismiss Wolda for a reasonable period of time after signing the agreement. In fact, Techform kept Wolda on for a further four years until he breached the ETA by making his demands. The Court also found that in the circumstances before it there was no duress.

Implications For the Future

It is clear from this decision that an employer cannot simply present to an employee an amendment to the employment contract, require an employee to sign it or be fired and at the same time expect the agreement to be binding. What is necessary for the agreement to be binding, is a clear intention to terminate the employee prior to the agreement being signed and a promise not to fire the employee for a reasonable period of time afterwards.

It is perhaps too early to tell how this decision will impact employment relationships in the future. Moreover, it may be possible to distinguish the decision. Strictly speaking, the decision dealt with an individual who was an independent contractor, not an employee. Secondly the term sought to be enforced in this case, the ownership of inventions, is generally not viewed as a term that goes to the heart of the employment relationship.

Would continued employment and forbearance from termination constitute adequate consideration for an amendment that deprived an employee of its common law right to reasonable notice?

The decision leaves this question unanswered. It is not clear under what circumstances a court will find that the employer has impliedly promised not to dismiss an employee for a reasonable period of time. In addition, it is not clear what will constitute a reasonable period of forbearance from termination. How is such a period to be calculated? Will it be based on same factors used to calculate the reasonable notice period? These questions will have to be addressed before employers can safely rely on continued employment and implied forbearance to amend employment contracts.

Accordingly, employers that want to amend employment contracts should still provide additional consideration in the form of an added benefit along with continued employment.

(Originally published in the Executive Employment Newsletter – Volume IX, No. 3, 2002)

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law