Fresh Consideration and Enforceability of Contracts – Basics [video]

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Fresh consideration in contracts is an important topic which is often ignored or misunderstood. It applies to a variety of contractual relations and a basic understanding will help a long way in keeping a track of your rights and obligations under a contract.

This lecture is taught by Amer Mushtaq, LL.B., M. Engineering , B.Sc. (Hons.), who is the Principal and Founder of Formative LLP.   Through his YouTube channel, YouCounsel, Amer shares practical advice from his years of legal experience to help anyone access justice and achieve their goals.  Subscribe today to learn more.

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Welcome everyone, this is Amer Mushtaq from You Counsel. Today we’ll talk about the enforceability of contracts when there is Fresh Consideration. It’s a very specific topic, it’s a niche topic in Contracts Law but it’s a very important one. Number one, the applicability of the Fresh Consideration is a significant issue with respect to the contract’s enforceability when there are changes to the contract, amendment, revisions, second contract, so on and so forth. And secondly this happens all the time, you will be facing the situation, you know, a number of times in your life when the contracts will be changed, especially with respect to your employment contracts. Whether you are an employee or you are an employer, there may be situations where your contracts may be revised, may be changed, may be amended, and you must understand what is the relevance of Fresh Consideration with respect to the enforceability of that contract. So we’ll explain that in the most simple terms possible so at least you get an understanding of what this issue is about, what is Fresh Consideration and why is it important so let’s get into it.

And we’ll begin with a disclaimer that this course is not legal advice, so if you have any specific questions you must contact a lawyer or a paralegal.

Okay, so there is a fundamental principle that I want you to carry from this lecture and it goes as follows, changes to Fundamental Terms of a contract will be unenforceable absent Fresh Consideration. So if there are changes and I’ve underlined Fundamental Terms and Fresh Considerations, so I’ll talk about both of these things. But if there are changes being made to a contract any contract and those changes are fundamental, are basic changes in that contract, Fundamental Terms is a specific term in contract law which means that the changes are significant with respect to that contract. So if those changes are made there has to be a Fresh Consideration and if there is no Fresh Consideration, those changes, that new contract will not be enforceable, so they have no value.

Okay so what is consideration, what is Fresh Consideration? I would like you to check out our other lecture, which talks about the contract basics and we explain that in more detail. But essentially a “consideration” is the exchange of value between two parties. So in that lecture we explained that you have a legally binding contract when there is an offer, there’s the acceptance of that offer, and there is an exchange of value between parties, which is called consideration. What you want to understand is that it’s an exchange, so that means both parties must get some value out of that contract that is what makes the contract binding. So if only one party is getting a benefit and the other side is not getting a benefit that’s not a contract, that may be considered a gift but it’s not a contract. So consideration is the value that flows from one party to another and the other party to the first party. So it has to be an exchange, there has to be some value. And a Fresh Consideration then is that if you are making any changes to your existing contract there has to be fresh value, not the value that was in the previous contract, but there has to be something new that is being exchanged between parties, so that’s Fresh Consideration.

Now all of this will be easier to understand if we give you an example, so we picked the employment law situation, which is most common and will help you understand this Fresh Consideration and the changes in that context.

So let’s say you have an employment contract, either you’re an employer or an employee, but there’s an employment contract. Let’s say you are an employee and you go to an interview, they like you, they send you an email or a text message saying, “listen, we would like to offer you this position as the production manager and your salary is $100,000, you’ll get benefits, please confirm whether you accept this.” It could be in any form – phone call, email, text message, Instagram, Twitter, whatever the mode of communication is – that’s an offer, and if you say “yes” then you have accepted that offer, and that’s your employment contract. Essentially what you have agreed to is salary, benefits, and what you’re going to work and that’s a complete contract. Let’s say that in that basic contract there was no terminations clause, the employer did not say “if we let you go you will be entitled to ‘X’ amount of money or no money or whatever the clause is.” there was no clause at all. All it talked about was salary and benefits and that’s it. So very, very basic concept of a contract, so you got that offer you accepted it, now you have a binding contract.

Now you go to work, the next day, the next week you start working, you show up there and H.R. calls you and says, “by the way you have to do some paperwork, come on in” and then they give you this paperwork which also contains an employment contract, but it is different than what you had received in that email or in text messages. And no you look at it and it has maybe three pages maybe four pages, it has all kinds of clauses like Restrictive Covenants, Non-Solicitation, Non-Competition, so let’s leave that aside for a second, and assume that there is a clause for termination now. And the clause says, “if we let you go without cause your rights are limited to what are in Employment Standards Act.” E.S.A. is Employment Standards Act, so your rights are limited. You have no idea what this says but you do notice that there is a change, or at least in addition of the terms that were previously offered to you.

Now this in law is a new contract because this specific clause, the termination clause is actually a fundamental clause. What happens to you on termination was something that you had not negotiated, was not discussed with you, and was not part of the employment offer that was made to you. You have already started working, you showed up on work that day, so that means you have started to perform your side of the contract. And now the employer says, “by the way here’s a little bit of paperwork you have to do.” and you realize that it’s not just paperwork but these are fundamental changes to your initial contract.

Now, that fundamental change: what are the implications? Number one, this is a new contract, this is not the old contract because the terminations clause did not exist in the old contract, and so this is really a new contract, this is a revised contract, this is a second contract, whatever you want to call it. And you notice that there’s no Fresh Consideration in this contract.

So what will be the Fresh Consideration? Now the employer is asking you in that contract that not only that we want you to work $100,000 and have these benefits, but by the way we want you to agree that you will have much lesser rights or different rights on termination than you could have gotten based on your initial contract because there was no termination clause or rights or differences. So what is the employer asking? The employer is asking another value from you, right? Your agreement to a lesser right or a different right on termination is the consideration that is flowing from you to the employer, now what is flowing back to you? Nothing.

The employer is not saying that by the way for this particular consideration we offer you another $5,000 in salary or we offer you signup bonus or something. If there is no Fresh Consideration then this new contract is unenforceable. And why this is important is because it happens all the time, sometimes because the H.R. people don’t understand this, sometimes employers don’t understand this, sometimes employees don’t understand this. That the contract is the one that you have agreed to initially and if there are any changes later on after that initial contract has been accepted, then there has to be a Fresh Consideration. If there’s no Fresh Consideration that new contract is not enforceable. So that’s sort of one scenario where you show up at work and then you are asked to accept or sign the documents for the new contract.

And in other situations you are already working for an employer for let’s say two years, three years, four years, five years, and then employer comes back and says, “oh by the way we only had a contract on email, now we’re sort of organizing and making things better so here is like a proper contract that we want you to sign. Nothing has changed for you, you have the same position, you have the same salary, we’re not changing anything except that you sign this contract.” And in that contract there are all these clauses that did not exist in the prior contract, they are absolutely unenforceable, because there is no Fresh Consideration. If an employer has to change the terms of your employment contract during your employment, then they have to offer you some Fresh Consideration, whether it’s respect to termination or other matters.

Let’s say you were a production manager, you were hired as a production manager and now the employer wants you to become, you know, a marketing manager. Which is something that you may not have any expertise in, you may not have any background or it’s fundamentally different than what you used to do. That is a fundamental change in the terms of an employment contract and that also gives rise to requirement of Fresh Consideration, and if there’s no Fresh Consideration than that contract will not be enforceable. So these are sort of some of the things that you want to keep in mind.

What is it that you want to carry from this lecture? At least you want to get a basic understanding of what is a Fresh Consideration, if you have more than one contract or being asked to sign more than one contract, then you want to be alert to this issue and you can raise it with your lawyer, or research it a bit more so you can get a better understanding of whether that contract is enforceable or not.

So with respect to an employer, I always advise my corporate clients that they must provide full terms of the contract in the initial contract. There’s no thing that the offer is made by an email or a phone call, the employee has accepted it, and when the employee starts working the employer puts a larger contract on the table and asked the employee to sign. No absolutely not. The employer should ensure that employee has accepted an employment contract before starting to work. Once they’ve started working, they have started working on a contract that they had agreed to by that time, so anything that’s offered to them later is a fresh contract, requires Fresh Consideration and will be unenforceable. So you must make sure as an employer that you have your contacts in place properly, and if you’re asking employees to sign new contracts there must be Fresh Consideration.

For employees you want to keep in mind that if you have multiple contracts in that employment context, you want to make sure that you review them carefully. If you need to see a lawyer, go see a lawyer, but you want to understand that those contracts, which lack any Fresh Consideration will not be enforceable. So hopefully this gives you a good understanding of what is the role of Fresh Consideration with respect to changes in employment and contracts, any contracts. And if you have any comments any questions please contact us and we’ll be happy to speak more about this topic. Thank you for watching.

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