Consideration is a very important concept in contract law. Generally speaking, a contract is not enforceable unless some consideration – payment or other benefit – changes hands between the contracting parties.
In a recent case Rosas v. Toca, 2018 BCCA 191, BC Court of Appeal changed a well-settled notion that a variation of the existing contract is not enforceable without new or fresh consideration being granted in exchange for the variation.
In this case, Ms. Rosas loaned her friend Ms. Toca $600,000 so that Ms. Toca could buy a house. Although the original repayment term for this loan was one year, every subsequent year Ms. Toca told Ms. Rosas that she would repay her next year, and Ms. Rosas agreed. Eventually, when the loan was not repaid 6.5 years after the original repayment date, Ms. Rosas sued Ms. Toca in debt.
Ms. Toca defended the claim on several grounds. One of these grounds was that, if the revised repayment date was a variation to the original contract, it was not enforceable as Ms. Rosas gave no new consideration for this variation. Accordingly, the limitation period of 6 years applied to bar any claims Ms. Rosas had with respect to the loan.
The Court of Appeal provided a thorough analysis of the law of consideration in Canada and other jurisdictions. The cases which reformed the doctrine of consideration have focused on legitimate expectations of business parties and the seriousness of the parties’ intentions. The Court confirmed that such legitimate expectations of business parties need to be protected in order to provide commercial certainty. In general terms, the Court confirmed that, where the parties to a contract agreed to vary its terms, such variation will be enforceable absent duress, unconscionability, or other public policy concerns, which would render an otherwise valid contract term unenforceable. In other words, although a variation supported by consideration will continue to be enforceable for that reason, a lack of fresh consideration with respect to a contract variation will no longer be determinative.
With respect to the loan advanced by Ms. Rosas, the above finding meant that the parties had agreed to vary the terms of the original loan each time Ms. Toca told Ms. Rosas that she would repay the loan next year. Therefore, Ms. Rosas was able to advance her claim and recovered a judgment for $600,000 plus pre-judgment interest against Ms. Toca.
The above ruling shows a determined change to the doctrine of consideration which should provide greater certainty to the law and the commercial parties in general. Although the above case was decided in the debtor-creditor context, we will wait and see how the courts will apply it in other commercial cases.
This article was written with the assistance of Sarah Tradewell, Articled Student.