In Sui v. HungryPanda Tech Ltd., 2024 BCSC 1856, the Supreme Court of British Columbia invalidated a termination clause in an employment agreement due to the employer’s failure to provide “fresh” or adequate consideration when presenting the employment agreement after the employment relationship had already been established through an initial letter of offer.
Let’s dive into it!
Key Points:
- Initial Offer: The plaintiff, Mr. Sui, accepted an employment offer via email, which outlined key details such as a fixed salary, the addition of a variable salary, a six-day working week, a three-month probationary period, and stock options. After Mr. Sui inquired about the possibility of increasing the stock options, HungryPanda Tech Ltd. (HungryPanda) revised the offer, adding an additional $30,000 in equity upon successful completion of the probationary period. The deadline for acceptance was extended by one day. Mr. Sui accepted this revised offer the same day.
- Subsequent Agreement: After this agreement was accepted, the employer presented a formal employment contract with additional terms, including a termination clause that limited notice to statutory minimums, which both parties signed.
- Termination and Lawsuit: Mr. Sui was later terminated without cause after 18 months in a high-level managerial role. The Employment Agreement contained a termination clause stating that the employer could terminate the employee’s employment at any time by providing statutory entitlements as per the ESA (Employment Standards Act). The clause also stated that it superseded any pre-existing agreements and replaced any common law rights to reasonable notice of termination.
Plaintiff’s Position
- Mr. Sui argued that the termination clause in the Employment Agreement was unenforceable due to a lack of “fresh” or new consideration as the agreement was signed after the initial employment offer. Further, he claimed the clause refers ambiguously to non-British Columbia laws, making it unenforceable.
- Mr. Sui argued that the initial offer via email formed a binding contract, and the later signed Employment Agreement was merely a modification with no fresh consideration.
- He requested eight months’ reasonable notice due to his senior role, non-compete agreement, and the difficulty of finding similar employment because of his specialized skills (Mandarin).
- He claimed the only arguable benefit in the new agreement was a vague clause regarding health benefits, which was not specific and did not represent a tangible benefit.
The plaintiff submits the onus is on HungryPanda to prove that it offered fresh and valid consideration for signing the Employment Agreement, and it has failed to meet that onus.
Defendant’s Position
HungryPanda, on the other hand, argued that:
- The termination clause was valid, as it was part of the Employment Agreement, which was supported by fresh consideration, such as the offer of additional equity and benefits.
- No binding contract existed before signing the employment agreement.
- Mr. Sui’s role did not qualify as senior management, and that a two to three-month notice period would be appropriate.
- It maintained the termination clause complies with BC law, despite minor wording errors.
Court’s Findings:
- A contract had been formed when Mr. Sui accepted the initial employment offer via email: The initial email exchange was deemed a binding contract. This is because the emails exchanged between the parties contained all necessary elements to form an employment contract, including job title, place of employment, start date, salary, pay periods, equity (stock options), and a three-month probationary term. Although some terms were absent, such as vacation entitlement and notice period for dismissal, these are addressed through statutory minimums or implied reasonable notice at common law. Therefore, the court determines that a contract was formed when the plaintiff accepted the defendant’s emailed employment offer.
- Poorly drafted Employment Agreement: The court notes that the Employment Agreement is poorly drafted, with issues like inconsistent clause numbering and redundant confidentiality provisions.
- Fresh Consideration: The subsequent Employment Agreement required fresh consideration for its modification of the original terms. The court found that HungryPanda failed to provide fresh consideration (such as a raise or new benefit), making the subsequent agreement and its termination clause unenforceable.
- The court awarded Mr. Sui a six-month notice period, considering his senior role and specialized skills, despite his relatively short service (18 months).
In summary, the court’s finding was that a contract was formed when the plaintiff accepted the defendant’s emailed employment offer. The court also determined that the Employment Agreement lacked fresh consideration, making certain provisions unenforceable.
Damages
The total damages were calculated as follows:
- Six months’ salary at $12,000 per month: $72,000
- Deduction for 14 days of working notice: -$5,523.29
- Deduction for earnings during the notice period: -$1,950.00
Total damages awarded: $64,526.71
The Dangers of Offer Letters Versus Employment Agreements
The case of Sui v. HungryPanda Tech Ltd. highlights the potential dangers of sending initial offer letters as opposed to formal employment agreements. Offer letters have typically served as a preliminary outline/introduction of employment terms; however, they lacked the comprehensive detail and legal precision of a formal employment agreement. As demonstrated by this case, using an initial offer letter can lead to significant risks for both employers and employees when it contains the necessary elements of a binding agreement:
- Binding Nature of Offer Letters: An offer letter can be deemed a binding contract if it contains the essential terms of employment, such as a job title, salary, start date, and key benefits. Employers may unintentionally create enforceable contracts through offer letters, even if they intend for the formal employment agreement to supersede the initial offer. This can limit their ability to introduce or modify terms later without providing fresh consideration.
- Ambiguity and Lack of Clarity: Offer letters often omit critical terms, such as termination clauses, restrictive covenants, or detailed benefits, which are typically included in formal employment agreements. This ambiguity can lead to disputes over the enforceability of terms, as seen in this case, where the termination clause in the subsequent agreement was invalidated due to a lack of fresh consideration.
- Risk of Unintended Obligations: Employers may inadvertently assume obligations that were not clearly outlined in the offer letter. For example, if an offer letter promises certain benefits or equity without specifying conditions or limitations, the employer may be held to those terms even if they intended to clarify or modify them in a later agreement.
- Employee Expectations: Employees may rely on the terms outlined in the offer letter and view subsequent agreements as mere formalities. If the formal agreement introduces less favourable terms (e.g., restrictive termination clauses), employees may challenge its enforceability, arguing that they did not receive fresh consideration for agreeing to the new terms.
- Legal Challenges: Courts may scrutinize the sequence of communications and agreements to determine whether a binding contract was formed at the offer stage. If a court finds that the offer letter constituted a binding agreement, any subsequent agreement that modifies the original terms without fresh consideration may be deemed unenforceable, as occurred in this case.
So, how to avoid the pitfalls of initial offer letters and the risk of being required to offer fresh consideration? A simple way is to discontinue the practice of sending out initial offer letters and instead, send only the full employment agreement, always remembering to provide the employee sufficient time to consider the employment terms (one calendar week at minimum).
Let’s move on and explore the other critical part of this case: Consideration.
What is Consideration?
In the Context of Employment Agreements
In employment contracts, consideration typically refers to what the employer offers in exchange for the employee’s acceptance of the terms of the agreement. Common forms of consideration include:
- Employment Itself: For new hires, the job offer (employment) is generally the consideration.
- Salary or Benefits: Payment, benefits, or other perks provided to the employee.
- Additional Benefits: For existing employees, “fresh consideration” is typically needed when amending or introducing a new employment agreement. This could include:
- A raise in salary.
- A promotion.
- New benefits or perks not already provided.
In the Sui v HungryPanda Tech Ltd. Case
Background: In Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga, 2021 SCC 22, the Supreme Court of Canada said: “A contract is formed where there is “an offer by one party accepted by the other with the intention of creating a legal relationship, and supported by consideration.”
The court found that adequate consideration was not provided for the new employment agreement that included the termination clause. This is because:
- The employment relationship was already established when the employee accepted the job via email.
- The employer did not offer anything new or of material value (like a raise, bonus, or benefit) when presenting the new agreement.
This lack of new consideration meant the new agreement, including its termination provisions, was unenforceable.
Determining Fresh Consideration
The court outlines a three-step process to determine if fresh consideration is required when an employment contract is amended:
- Did the contract contain new terms detrimental to the plaintiff?
- If so, what is required at law to provide adequate consideration for such changes?
- Has the defendant established adequate consideration on the facts here?
Key Takeaways for Employers
The case emphasizes the importance of ensuring that employment agreements or amendments are supported by fresh consideration, such as a tangible benefit or promise, especially if introduced after the employment relationship has commenced. Employers are advised to:
- Seek legal guidance when drafting or amending employment agreements.
- Discontinue the use of initial offer letters and send the full employment agreement instead.
- Or, for those employers who are in the midst of hiring negotiations, they could clearly state in preliminary communications such as emails, phone calls or messages, that employment is conditional upon signing a formal agreement. While this approach still poses some risk, this would assist in avoiding misunderstandings, especially regarding restrictive covenants or termination provisions.
- Offer employees sufficient time to review employment agreements before their start date and provide a reasonable period to consider any amendments. This allows employees to seek legal advice if necessary.
- Ensure full employment agreements are signed before the employee starts work.
- Provide fresh consideration if modifying an existing employment agreement, specifically if the terms would be less favourable than previous employment terms, to ensure enforceability.
- Draft clear termination clauses to avoid contradictions with statutory or common law rights. Ambiguities in these clauses can lead to legal challenges.
- Factor in any post-termination restrictions when determining reasonable notice. These clauses can significantly impact an employee’s ability to secure similar employment, extending the notice period.
- Be mindful of any earnings during the notice period, as these are subtracted from the damages owed. Offering working notice and promptly addressing termination can reduce liability.
Source: 2024 BCSC 1856 (CanLII) | Sui v HungryPanda Tech Ltd. | CanLII
