In the recent decision of Sui v HungryPanda Tech Ltd., 2024 BCSC 1856 (“HungryPanda”), the Supreme Court of British Columbia invalidated a termination provision in an employment agreement by finding the employer had failed to provide “adequate” consideration for the agreement.
Consideration in HungryPanda
In HungryPanda, the plaintiff employee had initially accepted an email offer of employment from the employer. The email outlined the essential terms of employment, including salary and hours of work. The email stated, "After your confirmation, we will provide you with an official employment agreement for your signature." The email did not state that such agreement was a condition of employment. After some negotiation, the plaintiff accepted the offer via email. The next day, the employer sent the plaintiff the employment agreement, which included a termination provision that limited the plaintiff’s termination notice entitlements to the minimums required by applicable employment standards legislation as well as an entire agreement provision. The agreement was signed by both parties that day.
About 18 months later, the employer terminated the plaintiff’s employment without cause. The plaintiff sued for wrongful dismissal, seeking reasonable notice at common law - taking the position that the contractual termination provision was unenforceable. The Court agreed with the plaintiff, finding that the employment relationship was formed when the plaintiff accepted the position via email. In the Court’s view, the email exchange contained all the necessary elements to form an employment contract, such as job title, location, start date, and compensation. Therefore, the issue was whether there was new or “fresh” consideration for the employment agreement to validly amend the existing terms of the plaintiff’s employment.
The Court adopted a three-step test for determining the existence of fresh consideration:
- did the contract contain new terms which were detrimental to the plaintiff?
- if it did, what is required at law to provide adequate consideration for such changes to the employment relationship?
- has the defendant established adequate consideration on the facts here?
While it is well established that continued employment is not fresh consideration, the Court found that there must be some “material advantage” passing to or promised by the employer to satisfy the second and third elements of this test (the contractual termination provision being considered a detrimental term).
The Court ultimately determined that the plaintiff received no extra benefit from the employment agreement, as the additional promises made were either legally required (for example, expense reimbursement, vacation) or meaningless (for example, unspecified benefits). Thus, the agreement was unenforceable due to lack of fresh consideration, with the Court awarding the plaintiff damages in lieu of reasonable notice (6 months vs. the 2 weeks contemplated by the contractual termination provision).
Material Advantage or a Peppercorn?
HungryPanda is the latest British Columbia case dealing with consideration in employment agreements. The basic elements of contract formation are offer, acceptance, and consideration (i.e., the price for the exchange). Historically, the common law has not required courts to assess the adequacy of consideration, but rather its existence. This concept dates back to medieval England, where landlords could take rent in the form of a mere peppercorn, validating their lease. The principle was upheld by the UK House of Lords in its seminal case of Chappell and Co v Nestle Ltd, [1959] UKHL 1:
A contracting party can stipulate what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.
The so-called peppercorn principle has endured in Canada. In the recent case of Giacomodonato v. PearTree Securities Inc., 2024 ONCA 437 (“PearTree”), the Ontario Court of Appeal confirmed that courts “are concerned with the existence, rather than the adequacy, of consideration”. PearTree cited the Supreme Court of Canada’s decision in R.E. Lister Ltd. v. Dunlop Canada Ltd., 1982 CanLII 19 (SCC), in which the Supreme Court of Canada explained that the “adequacy of consideration supporting a contract has not been the subject of court scrutiny for several centuries”. See also:
- Rosas v. Toca, 2018 BCCA 191 at paragraph 180 (albeit a case not decided in the employment context), in which the British Columbia Court of Appeal recognized “the longstanding enforcement of contracts […] based on nominal consideration of $1.00 or a peppercorn”;* and
- Lancia v. Park Dentistry, 2018 ONSC 751 at paragraph 54, in which the Ontario Superior Court explained that, for an employer to validly reduce compensation, there is no need for monetary consideration of an equal amount to offset the change: “As long as there is consideration, contracts may be varied or superseded by new agreements”.
While the concept of “adequate” consideration has been mentioned in several British Columbia employment cases, we are unaware of a British Columbia case that delved into whether consideration (which existed) was also found to be inadequate or insufficient. Notably, the Court in HungryPanda did not engage in an “adequacy” analysis, as the Court found there to be no consideration. Similarly, the case which the Court in HungryPanda cites in support of the test on “adequate” consideration - Krieser v. Active Chemicals Ltd., 2005 BCSC 1370 – found there was no consideration where the signing of an employment agreement followed the acceptance of an offer without any new benefit to the employee. The Court in Krieser explained that there must be “some additional advantage”. Krieser derived this test from the British Court of Appeal’s decision in Watson v. Moore Corp., 1996 CanLII 1142. The majority in Watson did not mention the “adequacy” of consideration; rather, the majority explained that “inquiring into the sufficiency of consideration […] is impermissible.” In short, there is either consideration or there is not.
Accordingly, HungryPanda’s and Krieser’s use of the term “adequate” is a misnomer, to the extent the word “adequate” implies consideration can exist but still be inadequate and not amount to legal consideration. Given this misnomer, and the longstanding appellate authority maintaining the peppercorn principle, the test remains whether there is consideration rather than whether that consideration is adequate or sufficient (i.e., there can be no consideration that exists which is also inadequate). Further, the use of “material” in the phrase “material advantage” is arguably not intended to elevate the value or importance of the advantage, but rather is used to clarify that the advantage must be tangible or real.
Takeaways for Employers
At first glance, the HungryPanda decision has the potential to confuse the law of consideration through its apparent use of an “adequate consideration” test. However, HungryPanda should not read as taking peppercorns off the menu for employers. Rather, the longstanding doctrine of consideration – as affirmed by the Supreme Court of Canada and several appellate decisions – is that courts are concerned with the existence of, rather than the adequacy of, consideration.
Nevertheless, employers should be aware of and consider the following best practices to ensure the enforceability of employment agreements and amendments thereto:
- provide employment agreements to employees in advance of their start date so they have reasonable and sufficient time to review and seek legal advice if they deem it necessary to do so. For new agreements or amendments with existing employees, provide reasonable time for review, etc. and ensure that consideration is given for the new agreement or amendments;
- ensure employees sign employment agreements prior to starting work to ensure that the consideration for the agreement is the employment itself;
- if term sheets or emails are exchanged about the proposed terms of employment, make it clear that the employee’s employment is conditional upon the execution of a formal employment agreement (and ensure that onerous terms, such as restrictive covenants or termination provisions are identified so there are no surprises);
- when presenting an employment agreement (or an amendment), bring onerous provisions to the employee’s attention and consider having the employee initial them;
- continued employment is not consideration for changes to terms of employment;
- employers generally have an implied right to establish and amend workplace rules and policies without their employees’ agreement but it is helpful to have a express contractual term to this effect;
- instead of providing a formal amendment and consideration, employers can give advance notice of changes, with such notice being the equivalent of common law reasonable notice (or contractual termination notice, if applicable); and
- seek the assistance of legal counsel when drafting or amending employment agreements with particular attention paid to restrictive covenants and termination provisions.
*Note: This case held that there may be some circumstances where fresh consideration is not needed to amend an agreement; however, courts have so far not applied this exception in the employment context (see, for example, Matijczak v Homewood Health Inc., 2021 BCSC 1658).
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