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  • Writer's pictureLee McMillan

Tripartite Commercial Relationships and Fresh Consideration

In order to be enforceable, contracts in common law jurisdictions must be supported by some form of consideration flowing to and from each of the parties to the agreement. Underlying the doctrine of consideration is the classic premise that all persons act in their own self-interest, and agreements which do not advance one or more parties’ self-interest should not benefit from the court’s powers of enforcement.


While most commonly understood as money, goods, or services, consideration can take many forms and is in fact a much broader concept than the average person would be led to believe. The Court in Chappell & Co Ltd. v. Nestle Co Ltd., ([1960] AC 87) famously remarked that:


“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.”


A modern definition of consideration might be found in Fridman’s The Law of Contracts in Canada, 6th ed. (Toronto: Carswell, 2011) where he describes consideration as anything that holds some value in the eyes of the law:


“What is meant here by the expression “value” must not be taken in a literal, entirely materialistic sense. In most instances of course, it will be money or money’s worth that is involved. But it is not so exclusive. Consideration means something which is of some value in the eyes of the law.”


One qualification of course is that consideration must be ‘new’ or ‘fresh’ to support the enforceability of a contract or an amendment to a contract. The Ontario Court of Appeal summarised this rule succinctly in Braiden v. La-Z-Boy Canada Limited, (2008) ONCA 464, at paragraph 51 where it ruled that:


“A promise to do something that a party is already bound to do is not consideration”


The above principle has no doubt saved countless employees from taking on additional tasks or from sacrificing existing rights (i.e. their right to work for a competitor by signing a non-compete agreement) without at least receiving some sort of compensation or benefit flowing in their direction.


However, the principle of fresh consideration as reaffirmed in Braiden, while useful, is perhaps at risk of becoming outdated. As the web of modern commercial relationships becomes increasingly complex the common law has been slow to adapt. The problem with the Braiden principle is that it is arguably constrained by the doctrine of privity of contract, and may only be applicable as between the parties to a single contract. But what if three or more parties sign overlapping, seemingly superfluous agreements?


To illustrate, what were to happen if say, an employee of an investment firm were to sign a personal services agreement with its firm’s client that mirrored that of the client-firm contract? If the client wished to sever ties with the firm would it not still be bound to honour its obligations to the employee directly? The client, with its basic understanding of the doctrine of consideration might argue that by signing the personal services contract, it didn’t in fact receive anything more than what it would have received if the contract had never existed in the first place. Was the employee not already bound to perform the said duties pursuant to its employment contract with the firm, and to the ultimate benefit of the client? The employee was likely to fulfill its role as an advisor in any event, either as a representative of the firm or as an independent contractor.


While in substance this argument is overwhelmingly true, upon closer inspection there is a host of possible benefits that the client could have or did in fact receive by contracting with the employee directly. For example, one counter argument might be that, in engaging the employee directly, the client gained the right to litigate directly against that employee using the law of contract as opposed to say, indirectly through the doctrine of vicarious liability or through a claim for breach of fiduciary duties. Another benefit might be the existence of a 2-3 term of contract in the personal services agreement while a similar term was absent from the client-firm agreement. The client arguably benefited from 2-3 years of the employee’s services: a stable, predictable commercial relationship.


While seemingly of trivial benefit, these kinds of nuances seem to fit squarely within Fridman’s definition of consideration as being anything that has “some value in the eyes of the law”. Furthermore, privity of contract seems to preclude the client from invoking the terms of a third party agreement (i.e. the firm’s terms and conditions disallowing its employees from entering into personal services contracts) in the hopes of voiding its contract with the employee.


In this vein S.M. Waddams distinguishes between three types of possible pre-existing obligations in his text ‘The Law of Contracts’ 6th edition. At page 98 he states that “pre-existing obligation[s] may be statutory, by contract with a third person [i.e. the firm], or by contract with [the client]”. According to Waddams, only those pre-existing duties which “spring from statute or from agreement with [the client]” have been denied enforcement by Canadian courts in accordance with the principle of fresh consideration. Thus, in the example above, although the employee may have pre-existing obligations towards the firm, those obligations cannot be invoked by the client in an attempt to void its direct contract with the employee on the basis of a lack of fresh consideration.


Despite Waddams’ comments, very little Canadian case law from the 21st century deals with the issue of fresh consideration when there are three or more parties involved in a commercial relationship.


Conclusion

Clients and solicitors alike should be alive to the host of issues that arise wherever three or more parties are engaged in what could be called a tripartite commercial relationship. Clients should be clear about what parties they are engaging and avoid contracting with too many parties to their potential detriment.


Lee McMillan is the founder and managing lawyer of Calgary Litigation, He specializes in civil litigation, employment law and class action law. Contact Lee today for an affordable one hour phone consultation.

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