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In the recent decision of Downey v. Ecore International
Inc., the Ontario Court of Appeal found that a confidentiality
agreement signed by a consultant on his first day of work was not
void for lack of consideration.
Paul Downey entered into discussions with Ecore in 1999 for
employment with the company. One of the key terms of his employment
was to be the signing of a confidentiality agreement, due to the
nature of Ecore's business and Downey's position. He then
asked whether he could instead provide services to Ecore as a
consultant through his company CSR Industries Inc., as it would be
more advantageous from a tax perspective, and a consulting
agreement was subsequently executed between Ecore and CSR. Although
Downey was not a signatory to the consulting agreement, he was
described within it as a "Key Person of the Consultant".
A couple of weeks later, on the first day of work, Downey executed
a confidentiality agreement in favour of Ecore, in his personal
capacity.
In 2011 Downey commenced an action against Ecore on the basis
that it allegedly owed him compensation for his assignment to the
company of inventions he had created. In response, the consulting
agreement was terminated. A central question in the resulting
jurisdictional motion was whether or not the confidentiality
agreement signed by Downey was invalid due to a lack of
consideration. The initial motions judge determined that it was
indeed invalid, as it was CSR rather than Downey who was a party to
the related consulting agreement and deriving compensation as a
result of the arrangement.
The Court of Appeal had a different view of the matter. Simply
put, it found that the confidentiality agreement formed part of a
single transaction between Ecore, Downey and CSR, constituted by
both the consulting agreement and the confidentiality agreement. It
came to that conclusion upon a review of each agreement, as well as
the evidence of initial employment discussions between Ecore and
Downey. When looking at the totality of the evidence of the
intentions of the parties as well as an interpretation of the
agreements, the court found that the true business reality of the
relationship emerged.
Importantly, the court also decided that the company's grant
of permission to Downey to access Ecore's proprietary
information in order to perform services under the consulting
agreement, had been independent consideration for signing the
agreement. In that respect, the court noted that the
"Background" preamble to the agreement stated:
"Employee will be granted access to confidential and
proprietary information of the Company as part of his employment.
Employee is entering into this Agreement to grant to the Company
protections regarding the Company's proprietary information.
The parties of [sic] this Agreement agree and intend to be
legally bound by the covenants as set forth in this
Agreement."
The court stated that," The mutual promises contained in
this provision constitute a quid pro quo that formed the
basis for the Confidentiality Agreement: Downey would be granted
access to Ecore's Proprietary Information, which was necessary
to allow him to perform the Services under the Consulting
Agreement, and the information so disclosed would be subject to
confidentiality protections in favour of Ecore."
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