“Business men know their own business best even when they appear to grant an indulgence…”1 Until recently, it was firmly established in Canadian law that every legally enforceable agreement had to be bargained over. Or at least, it had to have the appearance of being bargained over by the exchange of mutual promises between the parties to the agreement, called consideration. Consideration could be a promise to pay certain funds, perform certain obligations, or could simply be a place holder to make the promise binding – for instance, the promise to pay a peppercorn. Within the employment context, historically, employers were prohibited from unilaterally introducing a term into an existing employment agreement without offering something in return to employees – the offer of continued employment is not enough.
Earlier this year the British Columbia Court of Appeal in Rosas v Toca2 held that 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. To appreciate the significance of this ruling, one needs to understand that there are only three elements required to form a binding contract: offer, acceptance and consideration. The Court appears to have opened the door to enforcing agreements without consideration – if only a crack.
The Plaintiff, Ms. Rosas, discovered that she had won $4 million dollars in the lottery. Being a generous woman, on the day she deposited her cheque for the winnings, Ms. Rosas agreed to lend her friend Ms. Toca, $600,000, on Ms. Toca’s agreement to repay her within one year. Over the years Ms. Toca requested extensions of the time for repayment and Ms. Rosas granted these requests. Finally, matters came to a head and Ms. Rosas sued for the return of the funds she had loaned to her former friend. Ms. Toca defended the claim on several grounds including alleging that if the repayment date was a variation to the original contract, it was not enforceable as Ms. Rosas gave no new consideration for this variation.
The question before the Court was whether the various modifications to the original verbal loan agreement were enforceable without fresh consideration. In reviewing the law on the enforceability of modifications to subsisting contracts absent consideration, the Court of Appeal found that the law needed to adjust to the legitimate expectations of the parties to the modified contract, who believed themselves to be bound to the changes, or risk upsetting the realities of commercial life. In other words, while consideration is viewed by the court as demonstrative of the seriousness of the parties’ intentions to be bound by a modification, it is no longer an independent requirement for modification of an existing agreement.
The implications of the Court’s ruling are far reaching and it remains to be seen how the courts will apply it in other contexts. Employment contracts are substantially different than most other kinds of contracts – they are for an indefinite period of time and often an employee’s role, compensation, and title changes as they grow within the company, yet they continue to provide essentially the same promise in return to show up to work every day and to diligently and faithfully fulfill their role and responsibilities. Importantly, employers most often hold the cards in contract negotiations. In this context, courts have rebuffed attempts by employers to change the terms of the employment contract after-the-fact, finding that changes to commission structures, benefits, or the introduction of non-compete clauses were contractual modifications unsupported by new consideration and therefore unenforceable. Despite the expectations of both the employer and the employee at the time the changes were brought into effect, on severance the employee was entitled to the more robust commission and benefits packages or could walk down the street and set-up shop in competition with their former employer the next day.
While caution must be exercised in relying on the precedent of Rosas v Toca, it considered a debtor-creditor relationship rather than an employment contract, it may provide greater flexibility to employers seeking to navigate turbulent economic realities – as the Court held “circumstances change and contractual modifications may be desirable and beneficial to both parties.”3 Employer’s should take note of potentially greater flexibility now available to them in negotiations with employees. When companies face headwinds, changes to existing employment contracts may now present a new solution for coordinating responses both on the management and employee side of the business equation – don’t expect your employees will be satisfied to put it off for another year.