Lottery Winner Loan Case Sets Precedent, B.C. Court Reforms Centuries-Old Consideration Doctrine

In its May 18, 2018 decision, Rosas v. Toca (Rosas), the British Columbia Court of Appeal (Court of Appeal) permitted a contract to be varied without the exchange of fresh consideration. If adopted more broadly, Rosas may have wide-ranging implications.

BACKGROUND

In January 2007, the plaintiff won over C$4-million in the lottery. After depositing the proceeds, she loaned C$600,000 for one year to the defendants to help them buy a home.

Every year, the plaintiff asked for full repayment and every year, the defendants said they could not repay the loan, but would do so “next year”. From 2008 to 2013, the plaintiff accepted those assurances without requiring any compensation. However, in July 2014, the plaintiff brought an action against the defendants for the seven-year overdue C$600,000 loan. The defendants responded that the entire amount was a gift, or otherwise that the claim was barred by the six-year limitation period under British Columbia’s former Limitation Act.

SUPREME COURT DECISION

The British Columbia Supreme Court dismissed the plaintiff’s claim, holding that it was barred by the limitation period. The trial judge found that the C$600,000 was an interest-free loan for a one-year period. However, because no fresh consideration had been given to the plaintiff when she agreed to wait for repayment, no new or varied agreement had been entered into between the parties. Agreeing to repay the loan was a pre-existing contractual duty, the trial judge held, that cannot constitute valid consideration. Consequently, the plaintiff’s abstention from exercising her rights was purely voluntary and the limitation period ran from the loan’s original due date of January 2008.

COURT OF APPEAL DECISION

Writing for a unanimous Court of Appeal, Chief Justice Bauman reversed the trial judge’s decision, granted judgment for C$600,000.

For centuries, the rule has been as described by the trial judge: promising to carry out a pre-existing contractual duty cannot constitute valid consideration to support a new or varied contract. However, in its decision, the Court of Appeal held that where the parties are in a contractual relationship, a variation should be enforceable without fresh consideration absent duress, unconscionability, or other public policy concerns that would render an otherwise valid term unenforceable. On that basis, the Court of Appeal concluded that the parties had repeatedly varied the loan agreement by extending the repayment date by a year, meaning the limitation period did not begin to run until January 2013.

The English Court of Appeal held in a 1989 case that a “practical benefit” rather than fresh consideration may support a contractual variation. The Court of Appeal recognized that only a handful of Canadian courts had suggested that this approach be adopted, and further that no Canadian court had adopted the English Court of Appeal’s reasoning and gone on to find a promise to be enforceable due to a “practical benefit”. In deciding that reform was necessary, the Court of Appeal largely relied on academic and juristic commentary—much of it from outside Canada, including from New Zealand and Singapore—suggesting that the focus in determining whether a variation is enforceable should be on the parties’ intentions and legitimate expectations, not on whether something of value had been exchanged.

The Court of Appeal went beyond the English Court of Appeal’s ruling that a contract variation may be enforceable if there is a “practical benefit”. It held that neither consideration nor a practical benefit is necessary to validly amend a contract. The Court of Appeal held that when a party alleges that a contract has been varied, it is sufficient for that party to establish a pre-existing contractual relationship, certainty of terms in the alleged variation and proof of a mutual intent to be bound. Consideration may still support an enforceable variation, as it signals that the parties intend to be bound, but it is not necessary.

Rosas could signal a change in the long-standing doctrine of consideration, which would have implications in a range of contractual circumstances.

For further information, please contact:

Joe McArthur                            604-631-3383
Joshua Hutchinson                    604-631-4178

or any other member of our Litigation & Dispute Resolution group.

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