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By-Law Newsletter: What constitutes good consideration in contract law?

 

When parties enter a contract, the exchange of consideration must occur for that contract to be binding and enforceable. Similarly (subject to very limited exceptions), when contracting parties modify an existing contract, there must be fresh consideration in order for the updated contract to be enforceable. In other words, there must be a new benefit in exchange for the new promise.

What is consideration?

In Giacomodonato v PearTree Securities Inc., 2023 ONSC 3197, the Ontario Superior Court of Justice recently defined consideration to be understood as “a benefit to one party or some trouble, prejudice, or inconvenience to the other party.”

In contract law, the doctrine of consideration has traditionally been defined by the “Peppercorn Theory”, which says that a mere peppercorn can be sufficient consideration. In other words, even a very nominal benefit constitutes good consideration.

The Ontario Superior Court of Justice confirmed this principle in Giacomodonato:

Courts ensure that there is consideration for the contract, but the court is not concerned with the adequacy of the consideration. As long as there is some consideration for the amendments to the contract, the court leaves it to the parties to form their own judgment over its adequacy and to make their own bargain. The law does not require that the new benefits be in the form of money, or that the economic value of the new benefits provided to the employee equal or exceed the economic cost of the new terms of the agreement.

Despite this statement, the Ontario Court of Justice commented that the fresh consideration given in Giacomodonato could not be fairly described as a “mere peppercorn”.

Giacomodonato v PearTree Securities Inc., 2023 ONSC 3197

In Giacomodonato, an employee, Mr. Donato, sued his former employer, PearTree Securities Inc., for wrongful termination. Mr. Donato was successful at trial, but the parties disagreed about Mr. Donato’s damages.

Mr. Donato and PearTree had entered into two separate contracts at the commencement of Mr. Donato’s employment with PearTree. The second contract was a renegotiation of the first contract whereby Mr. Donato’s termination entitlements were established. Mr. Donato argued that the second employment agreement was not enforceable due to lack of consideration, and that the first contract should reign. Under the first contract, Mr. Donato would have been entitled to greater compensation upon termination.

The Ontario Superior Court of Justice disagreed with Mr. Donato, and held that there were two terms in the second employment agreement which constituted fresh consideration, including:

  • An additional two weeks of paid vacation; and
  • A $40,000 payment to offset the cost of Mr. Donato’s from his prior employment.

The Court made the following statement about the adequacy of consideration:

It is not role of the court to assess the adequacy of the consideration provided by PearTree or to assess whether or not the economic benefits obtained by Mr. Donato outweigh what he gave up. I observe, however, that neither two additional weeks of paid vacation nor $40,000 can be fairly described as a mere peppercorn. I find that the second employment contract is enforceable.

The Ontario Court of Appeal Decision – 2024 ONCA 437

Mr. Donato appealed the Ontario Superior Court of Justice’s trial decision, contending that the trial judge had erred in calculating his damages based on the second employment contract rather than the first employment contract.

The Ontario Court of Appeal held:

The trial judge did not err in finding that there was fresh consideration for the second contract. He correctly recognized that employers do not have the right to alter a contract unilaterally unless something “new and of benefit” (beyond continued employment) flows to the employee in exchange for their agreement to the amended terms.

Further, the Court of Appeal stated that Mr. Donato did not cite any authorities to support his argument that the trial judge was required to perform a “comparative analysis of the overall advantages and disadvantages of the first and second contract in assessing whether there was fresh consideration for the latter.” The Court of Appeal upheld the trial decision.

Takeaways

The Giacomodonato decision and principles therein have applications beyond the employment context. When entering a contract of any type, parties must consider whether there is good consideration so as to make the contract enforceable.

Despite the Court in Giacomodonato’s statement that neither form of consideration provided to Mr. Donato could be “fairly described as a mere peppercorn”, the court does not preclude the possibility that a mere peppercorn would be sufficient consideration.

Despite this, employers, in particular, should be mindful of the consideration they provide when changing the terms of an employee’s employment contract, especially when imposing more onerous contractual terms. While a mere peppercorn is theoretically sufficient, employers should be cautious not to create an unconscionable (and therefore unenforceable) contract, such as by attempting to unilaterally impose onerous changes on an employee with little or no notice, and/or with minimal consideration. Consideration comes in many shapes and sizes, and will not always take the form of a cash payment. Consideration is a crucial aspect of contract formation and validity, and its importance should not be overlooked.

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This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.

 

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