A Reconsideration of Consideration: The Enforceability of Unilateral Post-Contractual Modifications

As all first-year law students learn in their contracts class, the doctrine of consideration is a central feature of contract formation. The doctrine of consideration stands for the idea that “to be enforceable, a promise must be purchased in the sense of being given in return for something of value provided by the promisee.”[1] What follows from the strict application of this doctrine is the “pre-existing duty rule,”[2] whereby a promise to do that which one is already duty-bound cannot serve as valid consideration to support a contract.

An example of the pre-existing duty rule occurs in the English case Stilk v. Myrick.[3] In this case, when two members of his crew deserted, a ship captain, unable to recruit replacements, promised to increase the pay of the remaining crew members. The crew members’ contracts, however, included a provision that they would undertake to give their full effort in times of need or emergency, irrespective of the circumstances. This fact led the court to conclude that the captain was not required to pay his crew the increased wages because the crew had not provided any additional consideration to the captain in exchange. The crew was already bound under contract to perform the services at the original price, even in the event of death or desertion by other crew members.

The principle articulated in Stilk that unilateral post-contractual modifications—i.e., those that are unsupported by consideration—are unenforceable had been widely accepted, including by the Ontario Court of Appeal,[4] and had “achieved the status of orthodoxy”[5] in contract law. However, it is argued that the principle is “overinclusive”[6] in the sense that it bars enforceability of post-contractual modifications between two willing parties who believe and intend the modification to be enforceable. This perceived problem persuaded courts in a number of common law jurisdictions to move away from the principle set out in Stilk.[7]

One such example is the 1989 English case Williams v. Roffey Bros & Nicholls (Contractors) Ltd.[8] The facts can be stated briefly. The plaintiff was a subcontractor hired by the defendant, a general contractor, to perform carpentry work. When it appeared evident that the plaintiff would not be able to complete the work by the deadline, the defendant, concerned about a penalty clause in the main contract, made an oral offer to pay an additional sum if the plaintiff completed the work on time. The defendant failed to pay the additional amount and the plaintiff sued.

Under the traditional Stilk principle, the plaintiff would not be entitled to the additional pay because he was already contractually obliged to meet the deadline. However, the court in Roffey held that practical benefits received by the promisor, in this case timely completion of the contract, can serve as consideration to support a promise absent fraud or economic duress.[9] Though the court believed that their ruling served to “refine and limit”[10] the Stilk principle, commentators have pointed out that the practical benefit concept was “hopelessly misconceived.”[11] While the court intended to find a way around Stilk without obviating its application, promisors would only vary the terms of a contract if a practical benefit was expected to be received, and, thus, Roffey did practically limit the Stilk principle exclusively to cases where the promise was coerced through economic duress.[12]

Interestingly, Roffey was conspicuously ignored by Canadian courts until 2008[13] when the New Brunswick Court of Appeal sought to “build upon”[14] that decision. Writing for the court, Robertson J.A. proposed an “incremental”[15] change to the law of post-contractual modifications to be more in line with modern commercial realities and the legitimate expectations of parties to a contract. As a result, he concluded the law ought to be that “a post-contractual modification, unsupported by consideration, may be enforceable so long as it is established that the variation was not procured under economic duress.”[16] According to Robertson J.A., this is the default position for unilateral post-contractual modifications; there is no need to search for consideration or resort to such concepts as practical benefit.

Though the decision was described as “important,”[17] in light of scathing criticisms that the court in NAV Canada went far beyond a so-called incremental change and that a decision of that nature is better left to the legislature or a final appeals court,[18] it remained an open question whether the NAV Canada case stood out as an outlier or whether it had staying power as a more modern approach to post-contractual modification. This question appears to have been answered by the recent British Columbia Court of Appeal decision in Rosas v. Toca.[19]

In Rosas, the plaintiff won a substantial sum of money in a lottery and, in 2007, agreed to loan $600,000 to her friend, the defendant, to be repaid interest free in one year. Instead of repaying the loan, the defendant asked the plaintiff to extend the repayment date by another 12 months. This occurred repeatedly from 2008 until 2013. In 2014, the plaintiff commenced an action to recover the loan. One of the arguments advanced by the defendant was that the action was barred by the statute of limitations. This necessitated a ruling on whether each forbearance agreement was an enforceable modification to the original contract. If so, then the limitation period would be renewed, and the action would not be statute barred. Under the Stilk analysis, however, the action would be barred by the limitation period. While the plaintiff agreed to forbear for another year, the defendant’s obligation to repay the loan already existed under the original contract and thus the modifications would be, according to the Stilk framework, unenforceable for lack of consideration.

Bauman C.J.B.C., writing for the court in Rosas, underwent an extensive survey of the judicial and academic history of the pre-existing duty rule and felt it appropriate to follow along the lines of NAV Canada in reforming the law in this area. Bauman C.J.B.C. ultimately concluded: "When parties to a contract agree to vary its terms, the variation should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid term unenforceable. A variation supported by valid consideration may continue to be enforceable for that reason, but a lack of fresh consideration will no longer be determinative."[20]

The fact that another appellate court has joined the New Brunswick Court of Appeal in its advancement of the law indicates that judicial thinking in this area may be shifting away from the Stilk principle. Further, it is not the case that Rosas is only of academic interest, as practitioners themselves have referred to the decision as “significant,”[21] potentially having “wide-ranging implications,”[22] and they “eagerly await to see the full implications of the decision.”[23] One can imagine that these implications may range from the employment law realm to the banking law realm and beyond. Though while Rosas has received positive treatment in subsequent cases,[24] being a very recent decision, it has yet to be adopted in Ontario. Whether this will happen down the road, and indeed whether this issue will one day warrant the input of the Supreme Court of Canada, remains to be seen. But, without a doubt, the legal community will be watching.

[1] John D McCamus, The Law of Contracts, 2d ed (Toronto: Irwin Law, 2012) at 215.

[2] Ibid at 243.

[3] (1809), 170 ER 1168 [Stilk].

[4] See Gilbert Steel Ltd v University Construction Ltd (1976), 12 OR (2d) 19 (CA).

[5] McCamus, supra note 1 at 250.

[6] Ibid.

[7] See e.g. Antons Trawling Co Ltd v Smith (2002), [2003] 2 NZLR 23 (CA).

[8] (1989), [1990] 1 All ER 512 (CA) [Roffey].

[9] See ibid at 522.

[10] Ibid.

[11] Rick Bigwood, “Doctrinal Reform and Post-Contractual Modifications in New Brunswick: NAV Canada v. Greater Fredericton Airport Authority Inc.” (2010) 49:2 Can Bus LJ 256 at 267.

[12] See McCamus, supra note 1 at 254.

[13] See M H Ogilvie, “Of What Practical Benefit is Practical Benefit to Consideration?” (2011) 62 UNBLJ 131.

[14] NAV Canada v Greater Fredericton Airport Authority Inc, 2008 NBCA 28 at para 27 [NAV Canada].

[15] Ibid at para 28.

[16] Ibid at para 27.

[17] McCamus, supra note 1 at 255.

[18] See Bigwood, supra note 11 at 265–69.

[19] 2018 BCCA 191 [Rosas].

[20] Ibid at para 183.

[21] Andrew Nathan, “B.C. Court of Appeal Adopts a New Approach to Contractual Amendments” (4 July 2018), BLG (blog), online: <blg.com/en/News-And-Publications/Publication_5335>.

[22] Joe McArthur & Joshua Hutchinson, “Lottery Winner Loan Case Sets Precedent, B.C. Court Reforms Centuries-Old Consideration Doctrine” (24 May 2018), Blakes Business Class (blog), online: <https://www.blakesbusinessclass.com/lottery-winner-loan-case-sets-precedent-b-c-court-reforms-centuries-old-consideration-doctrine/>.

[23] Denise D Bright, Alexis E Teasdale & Isabel Langlois, “British Columbia Court of Appeal Reforms Fresh Consideration Principles” (12 October 2018), Bennett Jones (blog), online: <https://www.bennettjones.com/Blogs-Section/BC-Court-of-Appeal-Reforms-Fresh-Consideration-Principles>.

[24] See e.g. De Vries v Canada, 2018 TCC 166.

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