Three things are generally required for a contract to be legally enforceable: an offer, acceptance of the offer, and an exchange of something of value (or “consideration”) between the parties to the contract. Consideration need not be an exchange of money, and courts will generally not inquire whether the consideration is adequate. Nominal consideration may be sufficient so long as it is “real” and has some value “in the eyes of the law” (see Van Kruistum v. Dool et al.). For example, a promise made by one party to another to forbear bringing a legal claim can constitute valid consideration.
Consideration can become especially important when considering the enforceability of changes to a contract. Parties often assume they can make such changes without exchanging anything new of value and that the changes will be as enforceable as the original contract. This assumption is likely incorrect in Ontario, although this is not necessarily true in other provinces.
A rule requiring fresh consideration of contract variations was enacted in Ontario in a case
The case of Gilbert Steel Ltd. v. University Construction Ltd. concerned a contract requiring Gilbert Steel Ltd. to supply fabricated steel to construct an apartment building. The contract specified a fixed price per ton. The plaintiff argued that the defendant later agreed verbally to pay extra costs arising due to an increase in the cost to the plaintiff of unfabricated steel. The plaintiff argued this constituted an enforceable change to the original contract. However, the defendant argued the change was unenforceable because it was unsupported by any fresh consideration.
The Ontario High Court of Justice referenced U.K. case law, which held that “there is no consideration if all the plaintiff does is to perform, or promise the performance of an obligation already imposed upon him by a previous contract between himself and the defendant.” In applying the principle, the Court stated that Gilbert Steel Ltd. had contracted to deliver the steel at a fixed price and “could not have done less without being guilty of a wrong.” They, therefore, did nothing more than they were already required to do and “without additional reward.” There was thus no fresh consideration, and the change to the contract was unenforceable.
The Court of Appeal ultimately agreed and observed that fresh consideration could not be found “in a mutual agreement to abandon the earlier written contract and assume the obligations under the new oral one.”
This cornerstone principle of the law of contract has since evolved in other provinces.
Obtaining a variance without duress does not require fresh consideration, finds New Brunswick Court of Appeal
The first of these significant cases was in New Brunswick in NAV Canada v. Greater Fredericton Airport Authority Inc. There, the New Brunswick Court of Appeal considered whether to apply the rule set out in Gilbert Steel. Under an agreement, NAV Canada provided aviation equipment to the Airport Authority. The Authority wanted to extend a runway and asked NAV Canada to move an instrument landing system. NAV Canada concluded that replacing the system with a different type would be better and asked the Authority to cover the cost. The Authority initially declined, but then NAV Canada refused to complete the work unless the Authority paid. The Authority said “under protest” that it would pay to ensure the job was done but later refused to pay.
As the New Brunswick Court of Appeal noted, the main issue in the case was the enforceability of “what amounts to a variation to an existing contract.” Its decision referenced how the common law in the U.K. had evolved to the point where a strict application of the rule (relied upon in Gilbert Steel) was no longer deemed appropriate. There, it was “no longer necessary to look for an exchange of promises or detriment on the part of the promisee to enforce a variation of a contract, so long as the promisor obtains some benefit or advantage.”
The New Brunswick Court of Appeal concluded 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.”
Absent public policy concerns, a fresh consideration is not necessary by the British Columbia Court of Appeal
About a decade later, the British Columbia Court of Appeal considered a similar legal issue in Rosas v. Toca. In that case, the plaintiff loaned money to the defendant that was repayable within one year. The defendant repeatedly requested extensions of the repayment time, which was agreed upon. Eventually, when the loan was not repaid, the plaintiff sued, and the defendant raised a limitation defence. At issue was whether the repeated promises from the defendant to repay the loan were enforceable.
The British Columbia Court of Appeal undertook an extensive review of the area of the law, including the decision in NAV Canada. It concluded that emphasis should be placed on the intentions of the parties. It stated that a variation to a contract agreed upon by parties “should be enforceable without fresh consideration, absent duress, unconscionability, or other public policy concerns.” It noted that the law should protect “the legitimate expectations of the parties in the case of a modification to a going transaction.”
Courts Have Reiterated That Gilbert Steel Remains the Law in Ontario
While the law in this area has now evolved in British Columbia and New Brunswick, the requirement that variations to a contract be supported by fresh consideration appears to remain the law in Ontario. This is evident from two recent cases of the Superior Court of Justice.
The case of Khan v. Shaheen Investment Inc. concerned whether parties to promissory notes had subsequently agreed that interest payable on the balance owing under those notes was compound as opposed to simple interest. The defendant argued in favour of the contractual amendment and, in doing so, referenced the Rosas case as standing for the principle that parties can vary an agreement without fresh consideration. The Court observed that, while the principle from Gilbert Steel had been subject to “some controversy,” it was still the law in Ontario.
In other words, the law still requires “fresh consideration for an amendment to an existing contract, although what constitutes such consideration remains flexible and open to interpretation.” The Court found no agreement to pay compound interest under the promissory notes had been proven.
A similar result was reached in RT Twenty-Sixth Pension Properties Limited v. Precise Parklink Inc. In that case, the Court considered whether negotiations to a contract had resulted in a valid amendment. It concluded that, despite the Rosas and NAV Canada cases, the principle from Gilbert Steel remained binding in Ontario.
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