Show Some Consideration

| John J. Connolly

"Man washing car"

Most law students spend several weeks in a first-year contracts class studying the concept of consideration. Consideration, in essence, is what a contracting party receives in exchange for promising to do something. A promise without consideration is not an enforceable contract. If A promises to wash B’s car next Tuesday and fails to do so, B cannot sue A on Wednesday, because A’s promise lacked consideration. But if A promises to wash B’s car and B promises to give A $20, or $1, or a glass of water, the promise is enforceable and B can sue if A fails to perform. Courts generally do not examine the adequacy of consideration, only its existence.

Because consideration can be minimal, many lawyers forget about it after that first year of law school. But it remains a necessary element of most contracts, and it recently arose in a peculiar way in a Connecticut case involving a dispute over an employment contract. See Thoma v. Oxford Performance Materials, Inc., 153 Conn. App. 50 (2014).

The plaintiff in the case, Lynne Thoma, was an employee of a manufacturing company. During her employment the company obtained new financing, and the investor insisted that Ms. Thoma enter into an employment agreement. This “first agreement” gave Ms. Thoma a fixed salary plus benefits for a 24-month period with automatic 12-month renewals. The company could fire her without cause on 60 days’ notice, but it would then be obligated to pay her salary for the remainder of the term plus six months. The first agreement also included a noncompete provision for the period of Ms. Thoma’s employment plus six months thereafter.

The company almost immediately decided it did not like certain terms of the first agreement and it required Ms. Thoma to enter a second agreement, which by its terms stated that it superseded any prior agreements. The second agreement did not discuss salary or severance, but it expressly stated that Ms. Thoma was an at-will employee. It also included a noncompete provision with apparently inconsistent terms: one section stated that she would not compete “during the period of her employment” and the other said that if she was terminated she would “continue to comply” with the noncompete provision.

The company fired Ms. Thoma about 16 months after the parties executed these agreements. Ms. Thoma sued, claiming that the company breached the first agreement by firing her without notice before her term ended and by failing to pay severance. The company claimed that the second agreement allowed it to fire her without notice at any time and did not require severance payments. But the trial court found, and the appellate court agreed, that the second agreement was not enforceable because it lacked consideration.

On the surface, that may seem puzzling because Ms. Thoma worked for the company and drew a salary for many months after executing the second agreement. But those salary payments were not consideration because the first agreement already obligated the company to make those payments.

Rather, the company argued principally that the second agreement contained consideration because it shortened the noncompetition period by six months. But the Connecticut courts concluded that the noncompetition provisions in the second agreement were ambiguous, and thus should be construed against the company, which drafted the second agreement. This part of the decision is a bit puzzling. Construing the ambiguous noncompetition provisions against the company ordinarily would mean enforcing the shorter noncompetition period, which would be a benefit to the employee compared to the first agreement and thus might constitute consideration. But the Connecticut courts explained that the construction-against-the-drafter rule could not be used to benefit the drafter by establishing consideration where it otherwise would not have existed.

The question of consideration actually does arise with some frequency in employment litigation, because employers often change the terms of employment during their employees’ tenure. In many jurisdictions, continued employment alone constitutes consideration, at least for at-will employees; i.e., because the employer could have fired an employee who didn’t agree to the new terms, continued employment constitutes a benefit to the employee that serves as consideration. See, e.g., Summits 7, Inc. v. Kelly, 886 A.2d 365 (Vt. 2005). To be clear, not all jurisdictions adhere to this rule for all modifications of employment terms; for instance, some courts analyze the length of continued employment before finding consideration for a mid-employment noncompetition provision – an exception to the ordinary rule that courts do not examine the adequacy of consideration. See, e.g., Socko v. Mid-Atlantic Sys., Inc., 2014 Pa. Super. 103 (2014).

Ms. Thoma’s salvation was that she was not an at-will employee when she signed the second agreement. Because she already had a right to continued employment for the remainder of the term set forth in her first agreement, she received no benefit by her continued employment after signing the second agreement. The company had to find consideration in some other provision of the second agreement, and according to the Connecticut courts it could not do so.

Let’s go back to the car wash. If A promised to wash B’s car and B promised to pay A $20, it’s an enforceable contract. But if B promised to return $20 that he previously borrowed from A, no contract. B still owes the $20, but A does not have to wash B’s car. In legal terms, A’s promise lacked consideration because B’s return promise was something B was already obligated to perform.

I know you are thinking: will this be on the exam? Yes, but after that you can forget about it. Just like the company’s lawyers.