Written By Denise D. Bright, Alexis E. Teasdale and Isabel Langlois
In a recent decision, Rosas v Toca, 2018 BCCA 191 [Rosas], the British Columbia Court of Appeal turned sharply away from traditional contract law principles by holding that parties may modify a contract without providing fresh consideration. In Rosas, the Court of Appeal held that when parties to a contract agree to vary its terms, the variation is enforceable without consideration, absent duress, unconscionability or other public policy concerns. While Rosas involved the modification of an informal loan agreement among friends, the Court of Appeal's decision, if widely adopted in British Columbia and elsewhere in Canada, could have significant implications on the enforceability of contractual modifications.
Background
In January 2007, Ms. Rosas lent $600,000 to her friend Ms. Toca. Ms. Toca used the loan to purchase a house. The friends agreed that the loan would be repaid without interest in one year. In the ensuing years, Ms. Toca repeatedly requested permission to delay the loan repayment, saying she would repay the loan "next year", "in a year", or "after a year." Ms. Rosas accommodated Ms. Toca's requests. In July 2014, Ms. Rosas commenced an action against Ms. Toca seeking repayment of the loan. The action was commenced more than seven years after Ms. Rosas originally advanced the loan to Ms. Toca.
The Supreme Court of British Columbia
The trial judge found that the agreement between the friends constituted a loan, rather than a gift, and that Ms. Toca was liable to repay the full amount to Ms. Rosas. The trial judge held, however, that Ms. Rosas' claim was statute-barred under the British Columbia Limitation Act, RSBC 1996, c 266 [Limitation Act]. Under the Limitation Act, the statutory limitation period of an action for debt was 6 years at the relevant time. The Court determined that the applicable limitation period ended in January 2014, six years after the initial loan was due in January 2008.
Absent fresh consideration, the trial judge refused to recognize Ms. Rosas' forbearance from seeking repayment as a binding modification to the original loan agreement. The trial judge determined that the due date was never extended and that Ms. Rosas "voluntarily abstained" from exercising her right and was consequently out of time.
The British Columbia Court of Appeal
On appeal, the British Columbia Court of Appeal considered whether fresh consideration was required to vary the terms of the existing agreement. The English decision Stilk v Myrick, (1809) 170 ER 1168 [Eng KB] [Stilk] had long enjoyed authority on the issue. Stilk sets out the rule that a party's performance of a pre-existing duty does not constitute fresh consideration. Canadian Courts have generally adopted the rule from Stilk that there must be additional consideration where a party is simply promising to do what they are already contractually obligated to do.
Chief Justice Bauman, writing for the unanimous panel of the Court of Appeal, reviewed the applicable case law and academic authority and noted the potential hardship created by the Stilk rule. Justice Bauman was persuaded that contracting parties' legitimate expectations and intentions to modify an ongoing contract ought to be protected. Justice Bauman proposed to modify the Stilk rule such that where parties agree to vary the terms of an agreement, the variation is enforceable without consideration, absent duress, unconscionability or other public policy concerns, which would render an otherwise valid term unenforceable. A lack of fresh consideration would no longer be determinative, although it may be a "valuable signal that the parties intend to be bound".
In Rosas, Justice Bauman found that the variations to the loan repayment date were neither unconscionable, procured under duress, nor voidable for being contrary to public policy. The modifications extended the due date and the start of the limitation period. Justice Bauman allowed the appeal and granted judgment for Ms. Rosas in the amount of $600,000.
Implications
Rosas represents a significant departure from the rule under Stilk. The decision in Rosas creates both unique flexibility for parties seeking to vary contractual terms and some potential pitfalls.
On the one hand, as Justice Bauman noted: "commercial actors in business transactions, friends and neighbours who make significant loans and agreements face similar realities: circumstances change and contractual modifications may be desirable and beneficial to both parties" (at para 181). Where parties have an existing contractual relationship, agree to vary the terms of their contract, and show an intent to be bound without fresh consideration, Rosas now supports the enforceability of the amended contract. On the other hand, parties ought to be cautious in providing acknowledgements, consents or forbearing on agreements at the request of the counterparty because such conduct may constitute a binding modification to an existing agreement notwithstanding an absence of fresh consideration. Consideration will continue to support the parties' intention to be bound but subsequent to Rosas, it is not necessary in certain circumstances.
While Rosas has received positive treatment by subsequent case law in British Columbia, scholars, practitioners, and the banking and commercial sector eagerly await to see the full implications of the decision.
Bennett Jones