Canada: Consider This: A Fresh Look At The Legal Need For Consideration

Written with the assistance of Samantha Breslauer, Articled Student.

It has been famously said that "hard cases make bad law"; sometimes, however, hard cases make new law. Or, at least, they very much encourage the court to do so lest we give credence to Mr. Bumble's lament in Oliver Twist: "If the law supposes that ... the law is an ass".

Rosas v. Toca, 2018 BCCA 191 per Bauman C.J.B.C. at para. 1

The B.C. Court of Appeal may recently have offered an answer to a question that has always vexed employers: why must employers provide their employees with something in exchange for a minor contract modification? The short answer is that they may no longer have to.

The doctrine of consideration has been a central concept in the common law of contract for a very long time. In the employment context, employers have historically been restricted from unilaterally introducing a term into an existing employment contract without offering their employees something tangible in return. An offer of continued employment has never been considered by the courts to be sufficient consideration.

In a unanimous judgment released on May 18, 2018, the B.C. Court of Appeal took a fresh look at the legal need for consideration when deciding whether a loan made by a lottery winner to a friend had to be repaid.

The facts in Rosas v. Toca, 2018 BCCA 191 were relatively straightforward. Enone Rosas, a nanny, won $4.163 million dollars in the lottery in January 2007 and made an interest-free loan of $600,000 to her friend, Hermenisabel Toca, so that she and her husband could purchase a home. The original term of the loan was for one year.

Ms. Rosas and Ms. Toca did not see one another for most of 2007 as Ms. Rosas frequently travelled. They rekindled their friendship in early 2008. The friendship, however, eventually waned and, after 2013, they did not see each other socially.

In July 2014, Ms. Rosas brought a civil claim seeking repayment of the loan she had extended Ms. Toca more than seven years earlier.

One of the key issues at trial was whether Ms. Rosas' claim was statute-barred because it was out of time. Under the former B.C. Limitation Act, there was a six-year limitation period applicable to an action in debt. If the loan to Ms. Toca was repayable within a year, the limitation period would have started to run in January 2008 and would have expired in January 2014, just over half a year before Ms. Rosas brought her claim for repayment.

To deal with the limitation defence, Ms. Rosas argued that the parties entered into multiple forbearance agreements to extend the timeline to repay the debt. She testified that each year until 2013, Ms. Toca would come to her and say words along the lines of "I will pay you back next year" and, because Ms. Rosas had no real need for the money, she would always agree to extend the time for repayment.

There were no negotiations around the forbearance — just the requests each year from Ms. Toca to which Ms. Rosas agreed. Importantly, Ms. Toca did not make any payment on the loan or provide anything to Ms. Rosas in exchange for extending the term of the loan.

At trial, this was considered by the judge to be fatal to Ms. Rosas' case. Without any additional consideration, the trial judge held, any forbearance agreement was invalid and Ms. Rosas had "voluntarily abstained" from exercising her rights. The judge concluded that in the absence of a valid forbearance agreement, the claim for repayment of the loan was filed outside the limitation period and therefore statute-barred.

Decision of the B.C. Court of Appeal

The issue before the Court of Appeal was thus whether Ms. Rosas was statute-barred by operation of the limitation period from recovering her money.

Writing for the Court, Chief Justice Bauman considered the historic rule around the need for consideration to be an unsatisfactory way of dealing with the enforceability of modern "post-contractual modifications". He stated that the law has to adapt to present day reality as existing contracts often have to be varied to respond to situations which the parties may not have anticipated at the time of their initial agreement. The Chief Justice held that a variation of an existing contract, unsupported by consideration, should be enforceable if the variation is not procured in circumstances of duress or unconscionability or the like:

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. In this way, the legitimate expectations of the parties can be protected. To do otherwise would be to let the doctrine of consideration work an injustice.

Takeaways

Rosas v. Toca is a watershed case which has the potential to change how parties interact with one another in a commercial setting, including in the employment context. The full ramifications of the B.C. Court of Appeal's decision remain to be seen.

In the interim, employers and their advisors may wish to consider there is still a need to offer employees something concrete in return for the variation of an existing employment contract.

It would be prudent, however, to proceed with caution because the approach in Rosas v. Toca is predicated upon the absence of factors such as duress and unconscionability and the relationship between employer and employee is widely recognized as a relationship where, generally speaking, the parties occupy unequal bargaining positions and there is an inherent imbalance of power.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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